Chapter 1
Introduction

1.1 The Book's Focus and Objectives

I feel obliged to make it clear, right from the outset, exactly what this book is about and, just as importantly, what it is not about. My primary focus is on how best to deal effectively with the risks to a Contractor's profitability that sit within the various departments engaged on ‘EPC Projects’ for major construction work (where EPC stands for ‘Engineering, Procurement and Construction’). My usage of the term ‘construction work’ in the previous sentence is intended to cover building, civil engineering and industrial engineering work of every kind, as envisaged in the ICMSC's ‘Global Consistency in Presenting Construction Costs’.1 However, I have not attempted to distinguish in this book between different types of construction work or industries, since I consider that the same basic risks apply to all EPC Projects (and also to Design-Build Projects).

Within this book I set down where I have observed poor management or outright mismanagement occurs at the manager and department levels on lump-sum EPC and Design-Build overseas projects (i.e. construction work outside the home country of the Contractors involved). Such poor performance results in large financial losses for the Contractors and, sometimes, embarrassing consequences (such as loss of reputation). This book also deals with major risks that can be imposed on projects that originate from outside the Contractor's own Project Management Team, such as the acceptance by the Contractor of onerous contractual provisions that really should have been avoided.

As the sub-title of this book indicates, my focus is very much about how Contractors can manage risks better and thereby stop certain types of losses occurring on their EPC/Design-Build Projects. I am fully aware that the materialisation of a major risk can have other dire consequences for a Contractor that go beyond money, but most other risks can be insured against or overcome by the application of good public relations efforts. The one risk that cannot be insured against in the contracting business is going bankrupt because of financial mismanagement. Of course, insurance coverage for a company's management personnel is readily available to protect them against allegations of mismanagement (through Director and Officers Liability Insurance, for example, as explained by Construction Executive).2 However, such insurance does not offer compensation to the Contractor for the company's losses that occur through financial mismanagement.

In the course of writing this book, I received a few negative comments from some people about the ‘secondary’ subject matter (managing risks effectively to stop losses). They mainly agreed with the concept of advising Contractors as to how best to deal with the risks attaching to construction projects, but thought that my focus on ensuring profitability was too commercial in today's climate. I even received one comment that ‘business is about much more than just making a profit’, which was said as if making losses was a virtue. However, I make no excuses whatsoever for concentrating on how Contractors should make more money and ensure their profitability by managing risks better. If anybody does not believe that making a profit is critical to businesses, they should try asking the views of the stakeholders of Carillion plc, including the tens of thousands of workers who lost their jobs when Carillion's business folded. It seems that close on 30 000 suppliers and subcontractors were still owed roughly £2 billion by Carillion at the time of its collapse.3

I have deliberately not attempted in this book to cover the risks inherent in ‘reimbursable’ construction contracts (sometimes referred to as ‘cost-plus’ contracts). Had I not adopted that path, I believe it would very much have confused my message as to where losses occur on lump-sum EPC/Design-Build Projects. The simple fact is that many of the risks that could lead to substantial losses on lump-sum contracts are usually opportunities to make more money under the reimbursable contract situation.

I have also not attempted to deal with too many other aspects beyond managing the major project risks encountered by construction companies when undertaking EPC/Design-Build Projects (i.e. I have as much as possible avoided dealing with the corporate risks). Most certainly therefore, this book does not attempt to provide advice as to ‘How Best To Run Your Construction Company’. Instead, my primary objectives in writing this book were simply to show:

1. what I have found to be the major loss-making risks for lump-sum EPC/Design-Build Projects;
2. whose responsibility I consider it is for preventing those risks from materialising into problems; and
3. the best mitigation methods I suggest should be adopted to prevent those risks materialising.

A large proportion of the publications I have read about how Contractors should implement sound risk management dealt predominantly with corporate risks, with the subject matter treated in a very generalised fashion. Most writers had not divided the subject up into digestible chunks or split the responsibilities clearly between the different Departments accountable for the required task inputs. Nearly all such publications also tended to concentrate on the various theoretical approaches available for assessing the overall risks of taking on a new Project. Very little had been written as to what the typical risks are in respect of the specific workloads of each individual Department, or how the complement of various Managers should best work together to handle those risks during Project implementation. As a result, I considered those publications were generally not specific enough to be truly useful for a Contractor's Corporate Managers, Project Managers and Department Managers. This book was therefore written in an attempt to fill the gaps and resolve the shortcomings I had observed.

It will be seen that there is a distinct lack of academic and theoretical content in this book, which was another deliberate decision I made. This was because my intent was to present a document that contained predominantly practical content that could be applied with immediate effect in the workplace on a daily basis. It is not that I object to applying academic principles to Project Risk Management – far from it. It is just that the aim of this book is to focus on practical matters. Anybody wishing to research the various theoretical approaches that can be applied to Project Risk Management can do so by following the references I have supplied within this book (and which I believe would help them to undertake further worthwhile detailed research of their own).4

I do not pretend that the advice in my book is intended to be a balanced document equally reflecting the interests of both parties to an EPC or Design-Build Contract (i.e. both the Employer and the Contractor). On the contrary, I have written primarily for the benefit of Contractors. I have therefore deliberately avoided mentioning situations where the Employer could take advantage of the Contractor. Having said that, nowhere do I make any suggestions that amount to the Contractor ripping off the Employer; but putting the Contractor into a legitimately stronger position, most certainly ‘yes’. The purpose of my book is simply to show where managing the risks better will prevent unnecessary losses for the Contractor. Of course, nothing prevents a member of the Employer's Team from reading this book, learning where the Contractor is most likely not to be managing risks properly, and then using that knowledge to defeat the Contractor's claim for extra time and/or money. The way for Contractors to overcome that problem is for them to sharpen up their Project Risk Management capabilities.

I included the term ‘Design-Build’ in the title of this book, since I consider that there are only subtle differences between how EPC Projects and Design-Build Projects are set up and run. The reality is that the risks I cover in this book can apply equally to both types of Project since, under each of the different arrangements, the responsibility for the design work (as well as the procurement and construction work typical to all construction Projects) falls to the Contractor. I have therefore opted in later chapters not to repeat the term ‘Design-Build’ unless I felt it was particularly necessary to do so.

In an effort to deal with most of the major problems that could be encountered, I have taken into consideration the worst-case contractual scenario I can think of in respect of the risks that a Contractor could possibly face in undertaking an EPC Project. That is where the Contractor is required to submit a lump-sum bid for an overseas Project in a developing country for a specialised process plant (such as an oil refinery), in the situation where the Invitation to Bid documentation issued by the Employer comprises only:

1. an incomplete Conceptual Design;
2. an outline Functional Specification that requires finalisation during the bid negotiation phase (i.e. no detailed specifications are provided);
3. a preliminary Plot Plan (i.e. not a fixed layout) that likewise needs to be firmed up in the bid negotiation period;
4. a mixed complement of loosely coordinated technical and administrative requirements that contain many references to third-party standards that sometimes conflict...