RISK.03. Project Management Oversight: An Effective Risk Management Tool for EPC/Design-Build Projects

Transcription

1 RISK.03 Project Management Oversight: An Effective Risk Management Tool for EPC/Design-Build Projects A s the popularity of the EPC (engineer, procure, construct) contracts increases along with the size and complexity of projects, including international assignments, so is top management s needs to track its interest on such projects. Project management oversight (PMO) is an established practice where a review by an independent (nonproject personnel) is prepared to examine the risk status of the project (time, cost, and profit) at selected points in time, and possibly explore potential hidden problems that should be addressed and proactively reported to the top management. This practice requires an overall objective, accurate and complete review of issues where project management and project controls teams, for different reasons, cannot either detect and/or report on to upper management. Whether it can be called or categorized as project management overview, due diligence, risk management, claims avoidance, or project steering PM is a must service to help the project and top management take corrective actions at the right time to help in mitigating any risk and steering the interest of the project in the desired direction. In this article, the author will share his experience with PM oversight, and expose, from a large international EPC and DB (design-build) contractor s point of view, the risk and benefits associated with such involvement. The process can take different forms and expand into wide functionalities. It can be utilized during different stages of the life cycle of the project. The subject branches out into other related project management processes such as: risk management and risk analysis, claims and dispute resolution, claims avoidance, and other project controls tasks. This article is limited to the concept and benefits of project management oversight and will not discuss the above processes in any detail. EPC DEFINITIONS One of the current popular project delivery methods in construction contracts is an EPC contract. EPC stands for engineer, procure, and construct, where one or more contractors and designers join their efforts to deliver a full and complete facility. This method of contracting (in some contractual arrangements can be called design-build or turnkey) was emerged more aggressively for the last 10 to 15 years, as demanded by the market George E. Baram, P.Eng. CCE RISK.03.1 to divert from the traditional approach of contracting such as EPCM and design-bid-build. Figure 1 illustrates briefly and in general some of the most likely project delivery methods arrangement used today, classified under 4 main categories as: traditional, EPC, construction management, and customized contracts. EPC contracting can be understood as a general approach to delivering complete facility and can be prepared as: Pure EPC contracting to perform work for an owner or client in general EPC contracting as part of a full-fledged concession agreement, which may involve BOT (build operate transfer), BOOT (build own operate transfer), and other forms. Also EPC contracting can be performed by: A contractor with in-house design capabilities A contractor subcontracting the design to an engineer or design firm A joint venture between a contractor and design firm EPC contracts branched out into mainly two (possibly more) types of contracts: Design-build approach Turnkey contracts Other customized arrangements What differentiates the above branches within the same EPC family is the fine print related to different clauses and more specifically, clauses related to design and performance warranties, risks shifting, method of payment, and client-contractors responsibilities. OBJECTIVES Statistical studies and trends consistently show similar symptoms to projects failures in reaching their objectives. Among the top of the list are: delays, design changes and difficulties including scope changes, quality of work, owner s actions, or interference and communications among project team and stakeholders. Although most of the above are within the control of the project

2 Figure 1 - Project Delivery Methods manager and his or her submanagers (controls, engineering, and other managers), such issues and concerns, for different reasons, are often neglected or never noticed until it is too late, or too expensive to get corrective actions in place. For example: Project manager and his submanagers main concern is to keep pushing the progress of the work, satisfy the client needs, and focus on project reporting as opposed to project controls Lack of experience by the project team seeing problems developing Unfocused and nonobjective reporting Tendency by the project team toward reactive as opposed to proactive reporting Concerns about reputation, career, and personal interest Organization and internal politics at different levels causing untrue or misleading facts about the project Conflict of interest and bias by project managers toward reporting good news Project management oversight (hereinafter called PMOv) is a practice used by many companies, large and small, to overcome such problems and concerns as listed above, and provides top management and stakeholders the required assurance and confidence for decision-making. Therefore, one can define PMOv as an independent, objective, accurate, and complete assessment for selected strategic projects at certain important milestones. It can be achieved by an expert providing independent reports to top management on what they must know about their projects. RISK.03.2

3 SCOPE OF THE PM OVERSIGHT Depending on the organizational arrangement, whether the PMOv involvement is for a special assignment or it is regular verifications (preset periodic reviews), the PMOv mandate should be clearly identified and agreed upon with management, and include: The objectives of the PMOv mandate Timetable for the mandate The objectives of the PMOv mandate can be an independent report on the status of the project, or strategic projects, to the upper management to help assess and mitigate problems that arose on the project and/or with the client. For example, as a result of a stop work order, delays, or delay in payments. More often, there are cases where the project team cannot reach resolution with the client on certain issues. Other circumstances where red flags may arise and require independent project assessment are: Backlog of changes and scope variations Design issues: noncomplete, innovative design Quality issues Owner s interference actions or inactions Fast tracking and poor project start-up Project personnel, teamwork, and communication Project closeout, testing, and commissioning Claims and disputes The PMOv mandates are usually very pressing and short in time, and unfortunately, in most cases, the involvement of the PMOv s team is late and requires boosting resources to reach the objectives on time. With exception to certain complex issues, in general, these mandates last from 2 to 4 months. Other mandates for the PMOv team to get involve are: Early cost/schedule independent reviews Risk management, risk analysis Project status evaluations Delays, interruptions, and request for extension of time Acceleration Construction claims delay analysis, cost damages, and impact costs Early involvement with dispute resolution Recommendations and corrective actions RISK ELEMENTS AND PMOV Table 1 illustrates, in general terms, the risk elements and responsibilities allocated to EPC projects. This list is very general and by no means inclusive, and can be expanded based on the given situation. The main concern of the PMOv team is to protect the interest of the upper management and hence the project, in many ways including risk management. In this context, risk management for the PMOv purposes can simply be expressed as recommendations to the upper management or project team or direct 2003 AACE International Transactions involvement by helping the project team mitigate the risks at hand. In other words, on-the-ground risk management. One of the very early steps involving the PMOv team is to familiarize themselves with the main project documentations, facts, and agreements. Table 2 can help discipline this step and focus the analysis more into the proper channel within the EPC umbrella, along with allotted responsibility. It helps directing the issue to the most likely team leader or manager who can provide the required input. Questions related to most items in both Tables 1 and 2 ought to be cross-referenced between the two tables, and addressed and answered credibly without bias. WHEN TO GET INVOLVED The most difficult challenge for the PMOv team is timing. When is the right time to get involved? What are the warning signs that are bypassed by the project team that may pose potential threat to the project success? The red flags or early warning signs mentioned above are general indicators that may require the team involvement, but cannot be responded to all the time, otherwise a full-fledged second project management and controls teams are required. One approach to resolve this problem is to have periodical analysis conducted by the PMOv team on a preset timing, say at 30%, 60%, and 90% of detail design, or construction or somewhere between the two. Needless to say, review is needed whenever a major problem surfaces. Many projects experience some of the warning signs above. Many of these issues occurred at the early 25% (design is evolving and scope is changing) or the last 25% of the project (construction is advanced well and all items impacted from design and construction performance are identifiable). Figure 2 illustrates graphically some important timing involvement of the PMOv s. PM OVERSIGHT TEAM Nonproject personnel are the most likely choice for a PMOv team; however, it can be from within the company or outside consultants. The team led by the team leader should have scattered knowledge and deal with different project aspects. In addition to the basic technical skills needed to have an overall background of the project, the team is required to have personal communication skills and managerial skills. They should ask the right questions to the right people and follow up on critical issues. Also, they should not be involved in the politics of the project, and stay neutral and objective while building good relationships with the project team. They should not act as the spy for upper management; they are trying to help get the project on the right track. T his article discussed briefly the concept of project management oversight, why, and when. It is an introduction to a future trend in EPC project management where more risk taken by contractors requiring more management oversight. Project management oversight is a useful and needed approach for top management to ensure healthy and successful RISK.03.3

4 Table 1 - General Risk Matrix vs. Responsibility on EPC Project Table 2A - Typical Contract documentation to examine on EPC Project Table 2B - Typical Contract documentation to examine on EPC Project projects and protect the interests of the company. The difficulties and challenges during this process are to get involved at the right time and build good relationships with the project team to get the objectives achieved. Depending on the type and complexity of the project, the contractual arrangement and the relationship with the client, this process can take different shapes and serve different purposes. The bottom line is to ensure achieving the intended project objectives. RISK.03.4

5 Figure 2 - Typical PMOv Involvement George E. Baram, P.Eng. CCE 276 Brighton Drive Beaconsfield, PQ H9W 2L8 Canada george.baram@snclavalin.com RISK.03.5