Contract Risk Management for Engineering Contractors презентация

FIMechE

Elements of Contract Risk Management (CRMP) – pre-contract

FIG. 1

continuous process from first contact with a potential client to contract close-out
Clients were transferring more risk to contractors
Some risks were not being identified early enough
The result was profit erosion after the point of sale
Project managers were blamed for profit erosion
‘Disaster’ contracts were endangering the company

FIG. 2

contractors
Lump sum fixed prices were normal
Technical change is accelerating – innovation
Plant performance tests more onerous
Trends towards re-vamping existing plants
Novelty of client, country, culture, language, applicable law
Clients becoming more commercially skilled
Contract terms becoming more onerous
Clients want predictability of cost, time, performance and return on investment

FIG. 3

risks

FIG. 4

the proposal and estimate
Inadequate priority in staffing the proposal team
Inadequate involvement of senior management
Inexperienced proposal management
No structured tender approval procedure
Inadequate/inappropriate contract conditions
Failure to control the negotiation

FIG. 5

the client allowed sufficient time?
Are the ITB conditions compatible with the CRMP?
What are the chances of success?
Does client relationship demand that we bid?

FIG. 6

The above questions are addressed at the Enquiry Acceptance Meeting

of technical excellence
Project execution strategy
Commercial and financial aspects
Strategic alliances and the reasons for these
Government involvement
Client contacts

FIG. 6(a)

by client - method and time scale
Visits to client pre-tender

FIG. 6(b)

the proposal and estimate
Inadequate priority in staffing the proposal team
Inadequate involvement of senior management
Inexperienced proposal management
No structured tender approval procedure
Inadequate/inappropriate contract conditions
Failure to control the negotiation

FIG. 5

the proposal and estimate
Inadequate priority in staffing the proposal team
Inadequate involvement of senior management
Inexperienced proposal management
No structured tender approval procedure
Inadequate/inappropriate contract conditions
Failure to control the negotiation

FIG. 5

recognise or we ignore:
The effects of novelty in all its forms
The ability to justify a ‘thin’ estimate
Self delusion in avoiding under recovery/redundancies
Occasional technical weakness of our selling position
Inconsistencies/conflict in the contract documentation
The dangers in the ‘thrill of the chase’
The many other potential risks in a particular contract

FIG. 8

procedures
Risk assessment and analysis
Contract start-up procedures
Contract control procedures for time, cost, quality/specification
Contract review and reporting procedures
Staff training and development
Contract auditing system
Contract close-out reports

FIG. 9

10

standard format
Commercial and technical appreciation
Contract liabilities statement
Country clearance report
Risk assessment and analysis
Cash flow analysis

FIG. 10(a)

those involved
Maximum experience should be assembled
Participants need a common thought process – standardisation
Complete in one session
Address maximum number of elements of the estimate
Set a standard acceptable level of probability of breaking even
Simple and quick to operate and adjust
Market situation must not affect it

FIG. 11

= BASE ESTIMATE
+
RISK PROVISION

PRICE = BASE ESTIMATE +
RISK PROVISION
+
PROFIT

FIG. 12

elements
Degree of definition – impact on activities
Contract conditions – risk areas
Financial risks in contract execution
Siteworks risks – if not covered above

FIG. 13

- ΔR

identify the objectivity and walk away point
Retain the support of vendors and subcontractors
Share the ‘pain of concessions’
Continually update the risk analysis
Negotiate reallocation of risk
Data base for evaluation of scope changes
Achieve a fair/acceptable deal or walk away
Seek reapproval before settling

FIG. 15

damages
Reduce defects liability period
Early freeze date for basic engineering
Apply international design standards
Client to provide insurance cover
Improve terms of payment
Relax bonds and guarantees
Client responsibility for duties and taxes
Client accepts tender-to-contract exchange rate risk

FIG. 16

of the Project Manager
Inadequate control procedures
Inadequate reporting and forecasting
Inadequate Risk Management strategies
Poor Contract Administration
Inadequate Involvement of Senior Management

FIG. 1

acceptance
Development of the proposal
Assumed contract execution strategy
The as-sold estimate
The contract programme
Tender acceptance documentation
Finally negotiated scope and responsibilities
Details of contract documentation
Client personnel and relationships
Third parties involved
Meeting led by Chief Sales executive
Preliminary handover to Operations

FIG. 2

of the as-sold scope
P.M.’s view of risk analysis
Strategy for execution and risk management
Responsibilities of each discipline
Cost control budget
Contract programme
Quality plan
Meeting led by Project Manager
Final take-over by Operations

FIG. 3

responsibilities and timing
Reporting and review meetings
Basic design freeze dates
Client involvement and lines of communication
Training requirements
To set the ground rules for the contract

FIG. 4

of the Project Manager
Inadequate control procedures
Inadequate reporting and forecasting
Inadequate Risk Management strategies
Poor Contract Administration
Inadequate Involvement of Senior Management

FIG. 1

at contract start-up
PM to develop strategies for each area of risk
PM reviews strategies regularly (monthly)
PM repeats risk analysis monthly
Application of QA reduces risk
Operational audits on contracts confirm strategies

FIG. 5

assessment and analysis
Contract start-up procedures
Contract control procedures for time; cost; quality/specification
Contract review and reporting procedures
Staff training and development
Contract auditing system
Contract close-out reports

FIG. 6

system
Credit control
Contract variations and change control
Site controls and record keeping
Daily diaries
As-built programmes and drawings
Minutes of meetings
Dated progress photographs
Site instructions and valuations
Weather and lost time records

FIG. 7

controls
Apply quality assurance – BS5750 (Part 1), ISO 9001
Engineering
Procurement
Construction
Vendors
Subcontractors
Familiarity with quality manual
Apply technical audits to engineering
Implement quality control through inspection

FIG. 8

and PIDs
HAZAN studies
Quantitative
Based on fault tree analysis for major hazards
Engineering safety reviews
Checklist method
Based on protection systems, site plans and area classification

FIG. 9

start-up
Basic engineering confirmed
Review 3
Major review after basic engineering
Provides sound basis for detail design
Review 4
Prior to AFC stage
Provides sound basis for construction
Review 5
Prior to commissioning
Provides final assurance that plant as built is fit for commissioning

FIG. 10

Status Report
Progress Summaries – E, P, C1, C2
Claims Analysis
Areas of Concern
Risk Management Strategies

FIG. 11

contracts
General description of scope including plant layout
Management summary
Areas of concern
Major events in the period
Schedule review
Commercial review
Engineering/technical review
Procurement/manufacturing review
Construction/commissioning review

FIG. 12

contracts
Project Director’s executive summary
Expenditure and commitment reports with ‘S’ curves
Approved budget changes report
Current budget.forecast variation report
Escalation report
Risk provisions review
Cash flow report
Detailed progress for E, P, C1 & C2
Force report
Photographic record of site progress

FIG. 13

of contract control procedures
Assess risk management strategies
Carry out current risk analysis
Produce cost report and profit forecast
Recommend corrective actions/solutions

FIG. 14

Board
Comprehensive scope from enquiry receipt to time now

FIG. 15

for recording responses
Follow audit trail from first contact with client to time now
Advise parties in advance of documentation to be available

FIG. 16

of sales
Interrogation of proposals
Interrogation of estimating
Check risk analysis presale
Check tender approval submission
Review changes during negotiation
Check final approval
Review commercial contract

FIG. 17

operations and start-up meeting minutes
Review preliminary contract instructions
Review as-sold scope documentation
Review minutes of start-up meeting no.2
Review final contract instructions
Review minutes of start-up meeting with client
Review initial staffing of contract

FIG. 18

goods receipt to final acceptance
Control of vendors/subcontractors
Client involvement
Risk identification and management
Contract financial status report – including risk analysis

FIG. 19

appraisals
Re-entry to home office organisation
Agree outstanding claims from/on client and subcontractors
Confirm final acceptance by client
Recover bonds and guarantees
Invoice for remaining retentions
Produce final contract financial status report
Write close-out report

FIG. 20

procedure
Tight proposal management
Comprehensive risk assessment and analysis
Standardised tender approval procedure
Thorough preparation for and discipline during negotiations
Avoid pitfalls with ‘Letter of Intent’. And implement a formal contract start-up procedure
Effective contract administration and application of time/cost/quality controls from Part (1)
Accelerate design whenever possible to create float in the programme
Apply risk management strategies including regular technical, managerial and safety audits and reviews
Site construction requirements to be paramount – locate project manager on site
Thorough preparation for systematic handover to client and expeditious completion of plants/systems performance tests, and monitoring of client operations post handover
Comprehensive close-out of project including obtaining outstanding retention/bonds, settling claims and issuing internal close-out report

FIG. 21