Kosovo Motorway, Kosovo

42°24’29”N |20°15’50”E

Managing Risk in Mega-EPC

Projects – Where Do We

Start?

CIVIL

GOVERNMENT SERVICES

MINING & METALS

OIL, GAS & CHEMICALS

POWER

Concept: Risk

What is Risk?

A “risk” is an uncertain event or condition that, if it occurs, has a

positive or negative effect on the business - at a project, GBU or

enterprise level.

Risks can be Threats or Opportunities

It’s the essence of business – must take risks to generate returns

Importance of Risk Management

Every business is surrounded by risks, many of which are

identifiable and manageable

Differentiate between risks taken after careful judgment and those

taken unwittingly

The risk management framework must be robust enough to cope

with unexpected risks

How much risk is appropriate?

Risk management is an art as well as a science

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Risk Management Philosophy in a Nutshell

Identify and assess the risks of a proposed project comprehensively, rigorously and honestly.

Do not just focus on project execution risks – there are many other risks that need to be managed (third party risk, political risk, jurisdictional risks etc.)

Do not just focus on contractual risks.

Surface new or unusual risks early.

Manage the risks of each project:

• Allocate and limit the risks in the prime contract

• Insure the risks that can be insured.

• Flow down appropriate risks to subs and suppliers.

• Build risk mitigation into the project execution plan.

• Price the residual risk (in contingency and fee) to balance risk

and reward.

© Bechtel | 3

A Risk Management Process – Typical Model

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Risk Analysis Process

Risk Management Process

A. Risk Identification

B. Risk Assessment/Evaluation

C. Risk Management Strategies

Avoid• Avoid the Threat

• Forego the Opportunity

Funded UnfundedBy Contract By Insurance

Assume•Informed Assumption of

Threat

•Keep the Opportunity

Reduce/Exploit•Through Execution,

Performance, processes,

planning

Transfer/Share

Decline Work

(Priced Reserved) (Run the Risk)

Administrative Process

D. Active co-ordinated monitoring of risk

and effectiveness of mitigation plans

E. Claims Management

F. Feedback: Learning

Importance of Managing the Risk vs. Reward Relationship

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The Risk vs. Reward Relationship

Business is about taking risks:

• Intelligently and on an informed and evaluated basis

• Receiving adequate reward for the risks assumed (by contract

or otherwise)

• Developing a robust framework to cope with the unexpected

Bechtel’s principal ways of managing risks are:

• Through engineering

• Our execution – e.g. our processes and procedures around

procurement, construction and management

• Fair contract terms

• Insurance

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Using core competencies will enhance rewards in risk taking.

Project and corporate overall success depends on effective

risk management.

Allocation and Alignment of risk

Allocation of risk by agreement

Alignment of risk and ability to control the occurrence

Alignment of risk and ability to mitigate the effects

© Bechtel | 7

WEF Top Global Risks : 2011 - 2013

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Probability

2011 2012 2013

1st

Meteorological

Catastrophes

Severe income disparity Severe income disparity

2nd

Hydrological catastrophes Chronic fiscal imbalances Chronic fiscal imbalances

3rd

Corruption Rising greenhouse gas

emissions

Rising greenhouse gas

emissions

4th

Biodiversity loss Cyber attacks Water supply crises

5th

Climatological catastrophes Water supply crises Mismanagement of

population ageing

Impact

2011 2012 2013

1st

Fiscal crises Major systemic financial

failure

Major systemic financial

failure

2nd

Climatological catastrophes Water supply crises Water supply crises

3rd

Geopolitical conflict Food shortage crises Chronic fiscal imbalances

4th

Asset price collapse Chronic fiscal imbalances Diffusion of weapons of

mass destruction

5th

Extreme energy price

volatility

Extreme volatility in energy

and agriculture prices

Failure of climate change

adaption

Economic Environmental Geopolitical Societal Technological

Global Risks - Categorisation

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Project vs Corporate Risk - Frequency and Impact

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Cost Impact

Frequency

Losses

Catastrophic Losses

Severe Losses

Facility/ProjectBusiness

Line Enterprise

Management of Risk During the Project Life Cycle

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Prospect

screening

Prospect approval

Submission of proposal

Identification

Partners

Subcontractors

Shaping the deal

Engineering and construction commenced

Contract signed

Other works/client changes

Financial management

The deal

Risk flow down

Risk transfer

PERM Risk analysis

Execution methods

ES&H

Construction completed/signoff

Insurance claims/financial

recovery/ wrap-up

Project close out

Warranties

Latent liabilities

Corporate Risk Management Strategies for Catastrophic Exposures

Contractual Allocation

Insurance

Corporate Architecture?

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Project Insurances

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Liability – CGL/TPL

Builders Risk (CAR)

Worker’s compensation

Employer’s liability

Construction equipment

Professional liability/indemnity

Contractors pollution liability

Marine cargo

Aircraft liability

Marine liability

Railroad protective

Etc..

OCIPs and CCIPs (Wrap Ups)

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Different terms, different meanings

Typical structure vs wrap up

Does it matter which party

arranges?

What are the drivers for the wrap

up?

Loss funds

Contract issues – wrap up manuals

Risk Management

and Insurance15

Pricing. Coverage, Service Variables

Service (claims)

Coverage Price

InsuranceVariables....

November 1, 2012