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International MarineContractors Association

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AB

Identifying and Assessing Risk in Construction Contracts An IMCA Discussion Document

July 2006

AB

The International Marine Contractors Association (IMCA) is the international trade association representing offshore, marine and underwater engineering companies. IMCA promotes improvements in quality, health, safety, environmental and technical standards through the publication of information notes, codes of practice and by other appropriate means. There are two core activities that relate to all members: Competence & Training Safety, Environment & Legislation The Association is organised through four distinct divisions, each covering a specific area of members’ interests: Diving, Marine, Offshore Survey, Remote Systems & ROV. There are also five regional sections which facilitate work on issues affecting members in their local geographic area – Asia-Pacific, Central & North America, Europe & Africa, Middle East & India and South America.

IMCA Risk Discussion Document

This document was prepared for IMCA by its Contracts Workgroup, under the direction of the Overall Management Committee and IMCA Council.

www.imca-int.com/contracts

The information contained herein is given for guidance only and endeavours to reflect best industry practice. For the avoidance of doubt no legal liability shall

attach to any guidance and/or recommendation and/or statement herein contained.

Identifying and Assessing Risk in Construction Contracts An IMCA Discussion Document

July 2006

1 Introduction ........................................................................................................... 1

2 This Document ...................................................................................................... 3

2.1 Risk ....................................................................................................................................................................... 3

2.2 Contracting ......................................................................................................................................................... 3 2.3 Profitability .......................................................................................................................................................... 4

2.4 Risk Management ............................................................................................................................................... 4

2.5 Where Does Control of Risk Lie? ................................................................................................................. 4 2.6 Risk Identification ............................................................................................................................................... 5

2.7 Target Audience for this Document .............................................................................................................. 6 2.8 Main Risk Areas .................................................................................................................................................. 6

3 Contractual Risks ................................................................................................... 8

Appendices

1 Risk Areas ............................................................................................................. 11

Performance Risks ........................................................................................................................................................ 12 Financial Risks ................................................................................................................................................................ 14

Political Risks ................................................................................................................................................................. 15

Technical Risks .............................................................................................................................................................. 16 Geographical Risks ....................................................................................................................................................... 17

Operator Risks .............................................................................................................................................................. 18

2 IMCA Competition Law Guidelines .................................................................. 19

The publication of this document by IMCA is intended to assist and promote industry dialogue and efficiency and its adoption is not mandatory. IMCA Risk Discussion Document 1

1 Introduction

The handling of risk in construction contracts varies considerably. This depends on the nature and location of the work, the operator and contractor involved and the prevailing contracting climate. Each of these varies over time and there are also outside influences such as banks, governments and the insurance market.

In recent years, operators and contractors have remarked that the balance and handling of risks in some contracts was not ideal and this document aims to promote dialogue between all parties to try to improve this situation.

IMCA is an international trade association representing offshore, marine and underwater engineering companies. IMCA members are upstream contractors in general, but several of them are integrated contractors completing downstream projects as well, so the intent of this document is to cover oil and gas contracting in general.

IMCA is widely recognised for collecting good practice from several parties and publishing generic guidelines of relevance throughout the industry and around the world on many issues relating to performance in the industry on, for example, safety, the environment and other aspects.

Amongst IMCA’s objectives are to:

strive for the highest possible standards with a balance of risk and cost;

achieve equitable contracting regimes; and

promote co-operation across the industry.

In publishing this document, IMCA believes it will serve the long-term interests of all participants in the oil and gas industry and promote dialogue between the parties about risk in pursuit of the above objectives. This, in turn, will improve relations, increase efficiency and reduce overall costs.

The document is not intended to represent an exhaustive analysis of all risks which are covered by contracts in the oil and gas industry. It is a short discussion document intended to highlight issues. The subject is huge and there exists already a vast knowledge base about risk and risk management in the public arena, published by academics and the industry with input from operators and contractors. In addition, each operator and contractor probably has its own department responsible for this subject and its own strategy, perhaps in a formalised document and approach. This document is not intended to replace this regime; rather, it is intended to supplement it.

Each contract, project and client/contractor relationship is unique. This document does not present a preconceived single solution or recommendation for or against contract styles such as EPIC (engineering, procurement, installation and construction) or ‘lump sum’. It aims at commenting on some of the issues that may need to be addressed in various contracting situations.

This document is about:

identifying risk;

identifying the financial consequences of the risk becoming a reality;

helping the contracting parties to achieve their appropriate risk balance;

trying to avoid parties accepting risks they don’t understand; and

dealing with unknown risks.

The document can be used by operators and contractors to identify areas where risk may threaten the integrity of a contract. Parties to a contract often do not realize that the person who manages the risk under a contract may not necessarily be the person who carries the financial consequences of the risk becoming a reality. The risks should be allocated to the party best to assume the risk.

This document does not contain contractual clauses and does not form a standard contract. It is published as an aide for operators and contractors alongside their in-house risk approaches. A trade association cannot make compliance with its publications mandatory and remain within the bounds of competition law. IMCA

The publication of this document by IMCA is intended to assist and promote industry dialogue and efficiency and its adoption is not mandatory. 2 IMCA Risk Discussion Document

recognises the requirements of competition law and these are reflected in the IMCA Competition Law Policy which is reproduced in Appendix 2.

The document has been developed by the IMCA Contracts Workgroup in conjunction with other IMCA members who also contributed to the development of the related document ‘IMCA Contracting Principles’. IMCA documents often evolve and any reader is welcome to provide suggestions for additions. This document should generally be considered to be ‘work in progress’. It is intended as a document to help dialogue between the parties to understand, mitigate and manage risk appropriately to the benefit of all the parties. Its aims are to:

improve dialogue;

improve risk apportionment and understanding in contracts and projects;

improve efficiency and project delivery;

improve operator/contractor relations;

save money;

avoid litigation;

increase opportunities;

facilitate the development of alternative solutions; and

sustain the industry.


2 This Document

2.1 Risk

Risk is sometimes poorly understood by the main contracting parties and also those outside.

The effect of this is a danger:

to operators, in that they embark upon or frame a development uninformed of some of the risks involved;

to contractors, that they adopt risk that they do not understand and lose money, perhaps becoming bankrupt, thus reducing the global pool of contractors capable of doing work;

to both parties, that if the risk is poorly understood and allocated, it is likely to be incorrectly assessed, mitigated, insured and managed, resulting in poor project delivery;

to those further down the supply chain, that if the two main players cannot deal with risks well themselves, sub-contractors are likely to manage this poorly too;

to those outside (such as banks, national oil companies, etc.), that they will take poorly informed decisions that make the risk environment worse;

to all parties, in that a lack of understanding of risk leads to inefficiency where each pays more and makes less out of the venture.

2.2 Contracting

During the contracting process:

1 an operator wants to achieve a goal;

2 the operator does not want to take the risk of doing the work itself. This could be for a variety of reasons: it does not have the skill, personnel, equipment, time, desire, etc.;

3 contractors offer to do the work on the operator’s behalf. Why? The contractors are established to have the skill, personnel, equipment, time, desire etc.;

4 however, the capability of the bidding contractors varies. They may all be able to complete the work, but some can accept more of the risks than others. This depends on their skill, personnel, equipment, time, desire etc., as well as their risk acceptance profile. These behaviours may be amongst the distinguishing factors between bidders to help decide who is awarded the work, but all parties need to understand the risks which they are accepting and know how the contract is dealing with them. An operator’s best interests are not necessarily served by contractors competing on criteria such as acceptance of excessive risk.

A large number of contracts are completed under the lump sum/turnkey regime. The reason for this is that the operator wants to know at the outset what the budget and schedule is and then should be required to have no management or other role during the project. It relies on a well-defined scope of work and a competent contractor. The intent is that the operators define what they want, the contractor builds it and hands it over in working condition to the operator who inserts the key, turns it on and then owns and operates a successful facility. This idyllic model is easily spoiled by various frequently seen events:

1 the scope is not well-defined at the outset;

2 the contractor under-performs;

3 during the project, the operator interferes with:

the scope, or

the management, etc.;

4 unforeseen events.

It is not possible to have a lump sum without the turnkey element – the two are inseparable. The contractor cannot estimate the costs and run his own project whilst maintaining budget and schedule control if the operator interferes. The upstream and downstream construction industry has


not always been as successful at leaving the contractor to deliver lump sum turnkey facilities as, for example, the ship building industry.

Contractors are not bankers or underwriters. The risks of funding projects, changes in foreign exchange rates and insuring projects should be understood and taken by the most appropriate party. The operator may be better placed.

One of the aims of this document is to avoid erosion of the profit margin through incorrect understanding and apportionment of risk.

2.3 Profitability

Contractors generally aim to make a certain percentage profit margin. The industry has reported that profit margins have been low or negative for several contractors on several projects in recent years. Some contractors have accumulated several loss making projects such that their whole annual result has been negative and this viability-threatening situation for several contractors has been one of the drivers for this document. A number of operators have commented on this unsatisfactory state of affairs as well.

Clearly, features in the commercial process such as competitive bidding impact on profit margins, but this model has served the industry well. During difficult commercial times, contractors are presented with the difficulty of bidding too high and missing the award. If this occurs, their expensive facilities (offices, workforce, fabrication yards and vessels) will be idle. If there is a large incentive to keep these facilities active (at almost any cost) then bids can be submitted too low with no (or negative) profit margin in desperation to win work. The work is later completed at a loss and the situation can only get worse for all parties. This situation is unsustainable.

Nearly all of the risks discussed in this document have the capacity of eroding profit margin and moving the project from a profit making into a loss-making venture.

In the hypothetical case of a contractor with a project target profit margin of 5%, it should be noted that it takes only a small swing in the contract price of 5% to erode 100% of its margin. Further, it should be noted that the contractor only has recourse to the project duration (a few years at most) to achieve its return. The producing life of the facility that the contract was put in place to deliver clearly has a longer time for the operator to break even plus the opportunity to charge more highly if necessary/appropriate/possible for its products later in the facility’s life. Of course, a 5% swing in the contract price for the operator is simply 5%, not 100% of his profit.

2.4 Risk Management

Risk management is the process by which the likelihood of risk occurring or its impact on a project is reduced. It has five steps:

1 Identify the potential sources of risk on the project.

2 Determine their individual impact and select those with a significant impact for full analysis.

3 Assess the overall impact of significant risk.

4 Determine how the likelihood or impact of risk can be reduced.

5 Develop and implement a plan for controlling the risks and achieving the reductions.

2.5 Where Does Control of Risk Lie?

One way of classifying the risk is by identifying where control of the risk lies. This may change during the life of the project.


There are five classifications of risk according to where control lies:

1 External: Unpredictable

These are risks beyond the control of the individual or operator and are totally unpredictable. They arise from external influences such as third parties, acts of god, etc.

2 External: Predictable but Uncertain

These risks are also beyond the control of individuals or companies. They are expected, but to what extent? There is usually data to determine a norm or average, but the actual impact can be above or below this norm. Bad weather is an example.

3 Internal: Technical

These are risks arising directly from the technology of the project work, of the design, construction or operation of the facility.

4 Internal: Non-Technical

These are within the control of individuals or the operator and usually arise from a failure of a project team to achieve its expected performance. They may result in schedule delays, cost over-runs or an interruption to cash flow.

5 Legal: Civil and Criminal

Risks under civil law can arise from contractual arrangements, patent rights etc. Risks under criminal law can arise under statute, e.g. the UK Health & Safety at Work Act.

2.6 Risk Identification

2.6.1 Timing of Risk Identification

Risks need to be identified early enough to do something about them. Project risks should be considered from the earliest conceptual stage. For example, risks from environmental loading are key drivers in choice of conceptual design and so are considered on day one. This document indicates that risks should be considered throughout the process from conceptual screening through more detailed front end engineering and design (FEED), the bid process, award and project execution. A risk inventory can run through from phase to phase, so nothing is lost between phases when the contracting parties may change. It can continue right through into the production phase where it may have an influence on maintenance, for example.

The key message is that the earlier the risk is identified the better.

2.6.2 Who Retains the Risk?

After the risks are identified, it is critical to see which parties retain this risk in practice and through the contract clauses. Limiting values and circumstances may need to be defined.

2.6.3 Risk Importance

A conventional risk analysis can be used to rank the importance of the risks in descending order from: High risk + high value, through high risk + low value or low risk + high value, to low risk + low value.


2.7 Target Audience for this Document

The target audience for this document is:

Operators: – Operator during conceptual development, bidding, construction – Operator during production – Partners

Contractors: – Prime contractors – Sub-contractors – Vendors

Others: – Finance community – Host governments/national oil companies – Insurance market/brokers.

The key targets are the operators and prime contractors during conceptual development, bidding and construction. The other stakeholders in the list can influence the risks and their allocation and need to be aware of the issues.

2.8 Main Risk Areas

The main areas of risk in these contracts are:

Contractual

Performance

Financial

Political

Technical

Geographical

Operator

Contractual risks may include:

Operator group and contractor group property and personnel

Project works (including both operator and contractor supplied items)

Pollution

Third parties

Consequential losses

Warranty obligations

Unlimited liability/damages at large

Insurance cover

Force majeure and suspension

Delay

Variation orders

Free access to worksite

Intellectual property rights

Termination by operator for convenience

Operator’s obligation to pay contractor.


Performance risks may include:

Scope, nature and duration of work

Schedule interactions

Size

Safety and environmental performance

Weather

Soil and foundations

External influences

Operator and influences at time of bid.

Financial risks may include:

Profitability

Value of contract (size)

Balance sheet debt

Off-balance sheet debt

Level of exposure

Foreign currency exposure

Terms of payment

Operator creditworthiness

Insurance.

Political risks may include:

Interference

Disturbance

Confidentiality

Permits and licences.

Technical risks may include:

FEED quality

New technology

Weather

Soil and foundations.

Geographical risks may include:

Location of the work

Operator risks may include:

Operator areas of influence

Insurance

Problems which impact the operator and can impact the contractor.

There will always be overlaps between these areas. The contractual risks are a function of the wording of the contract whereas the other risks evolve from elsewhere but the contract will be used where necessary to deal with them. For this reason the contractual risks are explored in slightly greater detail in section 3 below, whereas the other topics are explored in Appendix 1.


3 Contractual Risks

C.1 Operator group and contractor group property and personnel

The contract should define the costs of loss of or damage to the parties’ respective groups’ property and personnel of whatsoever nature, irrespective of cause (including negligence).

C.2 Project works (including both operator- and contractor-supplied items)

The contract should define the responsibility for loss of or damage to the project works if such loss or damage is caused by an act or omission on the part of the contractor group whilst the project works are in the care, custody and control of the contractor group.

C.3 Pollution

The contract should define the responsibility for the effects of pollution and contamination of whatever kind emanating from the contractor groups’ spread and onshore facilities, operator’s facilities, the work and the facilities of others (third parties).

C.4 Third parties

The contract should define the legal liability for third parties’ losses caused by each, including in circumstances where a contractor is required to perform work in an area of close proximity to any existing facilities.

C.5 Consequential losses

The contract should define the indemnities for each party’s group’s respective indirect or consequential losses howsoever caused or arising (including negligence) – whether or not foreseeable at the date of the contract.

C.6 Warranty obligations

Warranty obligations and defective performance liabilities (including post termination for default) and all other implied liabilities should be expressed in the contract in terms of magnitude, time and remedy.

C.7 Unlimited liability/damages at large

The contract should define or limit the contractor group’s total cumulative liability under the contract and at law, in order to enable him to assess his overall exposure resulting from, for example, liability for delay, damage, rework, re-performance and/or replacement and default (whether or not such actions are carried out by a third party).

C.8 Insurance cover

The full details of the insurance policy terms, conditions, limits and exclusions (and any alterations) should be available to all parties and define the cover available or not for the project.

C.9 Force majeure and suspension

In the event that the contractor is prevented from performing the work due to force majeure or suspension by the operator, the contract should define whether the contractor has the right to remove any vessel from site once a maximum period agreed in the contract has been exceeded.

C.10 Delay

The contractor’s liability for delay and liquidated damages should be defined and should be the operator’s sole financial remedy under both the contract and at law.

C.11 Variation orders

The contract should define the contractor’s obligations to perform the operator instructed variation orders taking account of contractor’s other existing commitments, any change to the risk profile of the workplace and a mutually agreed adjustment to price and schedule where appropriate.


C.12 Access to worksite

The contract should define the access to the work site and remedies in the event of delay or additional costs incurred as a result of restricted access to the work site by the operator or any party (other than a member of the contractor group), including intervention by an action group whether or not such intervention is defined as force majeure.

C.13 Intellectual property rights

Intellectual property rights (IP) in terms of the party who developed those IP before or during the project should be clearly identified.

C.14 Termination by operator for convenience

Should the operator terminate the whole or part of the work for its convenience then the contract should define the entitlement to payment for all work performed, materials including cancellation costs relating thereto and all vessel and equipment costs and termination fee.

C.15 Operator’s obligation to pay contractor

Payment by the operator to the contractor is a material term of the contract and time critical.


Appendix 1

Risk Areas

The main areas of risk in these contracts are:

Contractual (C) (this is discussed in section 3 above)

The following areas of risk are discussed in this appendix below:

Performance (PE)

Financial (F)

Political (PO)

Technical (T)

Geographical (G)

Operator (O)

The risks are grouped, numbered and annotated as shown in the brackets above for ease of cross reference.


Performance Risks

PE.1 Scope, nature and duration of the work

The scope and nature of work should be defined in the contract. The contractor should have sufficient time and information to assimilate the detail in the bid phase. Particular difficulty occurs with contracts where:

there is insufficient time or information available to understand the detail;

the information is insufficiently developed at bid stage (poor FEED see T.1);

the project depends on the contractor developing a new solution during the project for which he cannot quantify the resources (groundbreaking projects see T.2);

the information available is wrong;

the bid scope is outside the knowledge of the operator and/or bidder (eg very large turnkey projects).

The operator also has to perform in order for the contractor to perform. This issue is discussed further under O.3.

If there is a danger of any of these risks occurring, the contract should define how the parties will deal with the situation.

PE.2 Schedule interactions

The parties should understand the schedule and what happens if the schedule changes. The effect of schedule changes which are operator initiated (change of scope, delivery of information/materials/ components/approvals/permits etc, variation orders) and contractor initiated (delay) should be defined in the contract. This includes interaction with long lead time items.

PE.3 Size

The probability of a problem described in items PE.1 and 2 in this performance risk register occurring is increased on large projects.

PE.4 Safety and environmental performance

The contractor is expected to complete the work with certain operator/own/industry safety performance targets. If these targets are not achieved there will probably be other knock-on effects on the project performance. Any targets, other than the contractor’s own ones, should be defined in the contract such that there are no surprises.

PE.5 Weather

Weather risk needs to be assessed on a case-by-case basis. For example, some vessels are able to accept a different level of weather risk than others. This may be a competitive edge issue if contractors have, for example, larger equipment which can operate in worse weather conditions. But for each contractor there will be a limit, beyond which the responsibility for weather risk should be identified.

PE.6 Soil and foundations

The soil and foundations (site conditions) risk is generally borne by the operator. This follows the principle that the risk cannot be fully measured by the contractor prior to the commencement of work and so unknown costs could be out of proportion to the contractor’s reward.

PE.7 External influences

Many of the risks discussed in this document may be outside the control of the contractor. Such risks may prevent the contractor performing and include:

Access (see C.12);

Interfaces with operator and interfaces with other contractors;

Political risks (see PO.1-4);

Risks of interference and disturbance (see PO.1 and PO.2).


PE.8 Operator and influences at time of bid

If there is incomplete information at the time of bid, it will impact negatively on the performance of the contractor. If the contract is re-bid or negotiated over an extended period before award, both the operator and contractor may have a lack of continuity in the bid process and amongst personnel. Both can impact negatively on contractor performance.


Financial Risks

F.1 Profitability

Contractors generally aim to make a certain percentage profit margin. This is the most critical outcome of the contracting process for the contractor. At the end of the contract the contractor only has the financial result. By comparison, the operator acquires an asset with a lifetime expectation of positive returns and with some element of control over these returns.

F.2 Value of contract (size)

See PE.3.

F.3 Balance sheet debt

The terms of payment and any deposits, performance bonds, bank guarantees, and parent co guarantees etc should be understood.

F.4 Off-balance sheet debt

The terms of payment and any deposits, performance bonds, bank guarantees, and parent co guarantees etc should be understood.

F.5 Level of exposure

See F.2. This is related to size but also to payment method, cash flow, etc

F.6 Foreign currency exposure

Many contracts are in countries which are not the home country of the contractor. In addition, components, supplies and sub-contractors can also come from further countries. These facts can combine to mean that the contractor could have a currency exchange risk for the project. The operator is often better placed to cope with this risk. This is because:

the materials etc which are paid for with foreign currencies may have been designated by the operator;

the operator is probably operating in the local country of the work (which the contractor may not be) and so will be set up to deal with its currency;

the operator (generally being a larger capitalised company) can get better currency terms and perhaps has access to the host government to negotiate terms.

Swings of a few percent are regular and should be considered in the light of F.1 above.

F.7 Terms of payment

The payment terms should reflect the progress of the work and be cash neutral. It is noted that host governments in some overseas projects are obstacles in this area and it is clearly an operator matter to address this with the relevant government. See F.3 and F.4 above.

F.8 Operator creditworthiness

Some operators are now smaller companies than the main contractors. Understanding whether the operator has the financial backing to continue to pay the contractor is important. For some overseas projects the parent operator may have sufficient creditworthiness but the project may be operated via a separate subsidiary with smaller credit.

F.9 Insurance

See C.8. The financial integrity/security of the underwriters is critical.

F.10 Materials

The implications of material cost fluctuation, e.g. fuel or steel prices, should be understood by both parties.


Political Risks

PO.1 Interference

PO.1.1 Before award – Some host governments interfere with the normal business process (operator/contractor relationship) by insisting on certain contract styles. These include EPIC contracts, lump sum bids, specific contract and payment terms, local content and local legislation/standards. This can add considerable uncertainty and risk to bids. Host governments can frustrate the award process as well, making the cost of bidding higher (due to protracted negotiations), the risk of interference with other projects for the contractor higher, the prospect of frustrated bidding (a bid submitted which costs money to prepare and where eventually no award is made), and stimulating general negative effects on contractor cash flow. The contractor has little opportunity to influence these aspects which should be clarified in the bid stage and the operator is generally better placed to influence these aspects positively.

PO.1.2 During contract – The same broad points as in PO.1.1 apply. In addition, the host government may delay payment, change laws and taxes, change local standards, and interfere with local content or, be a cause of delay where local content is late or of unacceptable quality. The contractor has little opportunity to influence these aspects which should be clarified in the bid and the operator is generally better placed to influence this positively.

PO.2 Disturbance

The contractor needs a secure environment to complete his work on site. Local disturbance can negatively influence schedule. The operator has the best opportunity to influence local stability and provide security to the contractor’s workforce and spread. Similarly, the operator has the best opportunity to influence the completion of local work and ensure no interruption to the supply of materials, personnel and third party provided items to the contractor. The parties should work together with other operators in the region, host governments and security personnel to aim at secure working. Again, the contractor has little opportunity to influence these aspects which should be clarified in the bid and the operator is generally better placed to influence this positively.

PO.3 Confidentiality

There is a risk that confidentiality may be breached which is a ‘political’ risk. The contractor has little opportunity to influence this so it should be clarified in the bid and the operator is generally better placed to influence this positively.

PO.4 Permits and licences

Permits and licences may not be issued in time by the authorities, or may be required by the authorities at a time when they cannot be procured by the contractor. The operator is usually closer to the authorities and may be better placed to influence the issue of permits and licences.


Technical Risks

T.1 FEED quality

The contractor may be asked to bid on the basis that he has studied the FEED (front end engineering design) and accepted it. There may be insufficient time to complete this study in full depth in the bid period. FEED may have errors and in a complex bid these may be impossible to find. It is also inequitable to ask the bidders (effectively) to be the auditors of the FEED which is, in part, what occurs in a bid where the contractor is asked to accept the FEED. The risk of FEED being inaccurate needs to be understood and the possible effects of this clarified. This process often needs only to be done once with the successful bidder, not with all bidders.

T.2 New technology

In ground-breaking projects the bidder may be asked to carry out designs and activities during the project that have not been completed before. The bidder may be unable to envisage that a piece of technology will be unsuccessful. Both parties should understand this situation and work towards understanding the risks, their implications and the costs of solutions. Then the risks should be apportioned.

T.3 Weather

See PE.5.

T.4 Soil and foundations

See PE.6.


Geographical Risks

G.1 Location of the work

The geographical location will determine the magnitude of weather, political and operator risks. Most of these issues are discussed under ‘Political Risks’ above and include:

politics;

stability and changes to law/tax;

local legislation/standards;

governing law;

security of vessels and personnel;

material supply interruption;

hindrance to mobilisation of spread;

interruption to supplies for spread;

hindrance to movement of personnel (crew change);

late delivery of the work from or by third parties;

project logistics;

quality of operator supplied materials;

permits and licences.


Operator Risks

O.1 Operator areas of influence

The paragraphs above discuss operator risks and the operator’s influence on:

the bid;

award schedule;

intellectual property;

credit worthiness;

interference;

supervision;

approval regime and timing;

timely provision of information;

local content;

logistics;

contracting regime;

FEED quality;

scope of work clarity;

cash flow for project work and variation orders;

permits and licences.

O.2 Insurance

If the operator decides to self insure all or part of the project there is sometimes no policy wording. Without it, there is a risk that a claim will lead to dispute rather than payment. In the case of a claim, the contractor has recourse only to the operator (who may be claim averse) rather than to an insurer, who recognises that paying claims is an integral part of his business. This can lead to souring of the contract relationship. If recourse is to the project manager, whose job is to keep the project within budget (and whose bonus may depend on it) the claim handling may be particularly complicated and the project manager may not be well versed in claims handling which is a discipline that insurers particularly retain. An insurance wording should exist and be available for all parties. See also C.8.

O.3 Problems which impact the operator and can impact the contractor

Some project problems impact the operator. If these occur, an operator problem should not be passed on to the contractor. However, such problems often impact the contractor’s performance, despite being outside his control. Examples are late delivery of third party materials or information, poor quality third party materials, poor quality information, late approval, late delivery or deficiencies in permits and licences, late payment and poor interfaces. Each of these eventualities should be understood by the parties.


Appendix 2

IMCA Competition Law Guidelines Introduction

These guidelines are compiled for members in accordance with the Association’s constitution. They will be circulated to all members. Policy

The Association, its regional sections and all committees will comply with all applicable competition law (competition, antitrust and similar laws) including those of the United States of America, the European Union, the United Kingdom and other countries in which the Association is active.

All meetings will start with this as agenda item 1. General

1. The Constitution and section objectives are written to comply with competition law. 2. Membership is open to all companies active in the offshore, marine or underwater engineering industries.

Any action in rejecting a membership application or current member is reviewed for compliance with competition law.

3. The Association has a formal document retention and disposal policy. 4. The Association has a formal complaints procedure Rules for Meetings

Members should comply with the following guidelines when meeting:

1. Agendas of all meetings should be reviewed for compliance with competition law. 2. Items not on the agenda will not be allowed if they raise issues which violate competition law. 3. All participants have the right to question any topic or discussion that might violate competition law. Any

participant has the right to state their objection and leave a meeting if they feel that any topic or discussion violates competition law.

4. Minutes of all meetings should be accurate and should not be doctored or incomplete. 5. Minutes of all meetings should be reviewed for compliance with competition law. Minutes should also

include statements to show compliance with competition law. 6. All meetings should be scheduled and no unscheduled, informal, ad-hoc or side sessions should be held. The following guidelines should be adhered to by all members during any meetings:

1. Do not discuss current or future prices. 2. Do not discuss what is a fair profit level. 3. Do not discuss an increase or decrease in price. 4. Do not discuss standardising or stabilising prices. 5. Do not discuss pricing procedures. 6. Do not discuss cash discounts. 7. Do not discuss credit terms. 8. Do not discuss controlling sales. 9. Do not discuss allocating markets. 10. Do not complain to a competitor that its prices constitute unfair trade practices. 11. Do not discuss refusing to deal with a company because of its pricing or distribution policies. 12. Do not attend unscheduled, informal, ad-hoc or side sessions. Conclusion

Trade associations can be targets for government agencies patrolling and enforcing compliance with competition law. By conducting its business openly and avoiding even the appearance that it is engaging in activity that might seem to have an effect on prices or competition, the Association and members can protect themselves from charges of violations of competition law.

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