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Innovative Approach to Risk Analysis and Management of Oil and Gas Sector
EPC Contracts from a Contractor's Perspective

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Journal of Business & Economics
Vol.5 No.2 (July-December 2013) pp. 149-170

Innovative Approach to Risk Analysis and

Management of Oil and Gas Sector EPC
Contracts from a Contractor’s Perspective

Sajjad Mubin*
Abdul Mannan∗∗

Abstract

Engineering, Procurement and Construction (EPC) is an advanced

contracting method in which a single party is responsible to complete all the
components of the project and further commission it and handover to the
client within a predefined cost and agreed timeline. Failure to which, EPC
contractor has to pay heavy penalties. There are many risks for both the
parties in this arrangement. Proper risk analysis and management is very
important for this type of contract which dominates a project’s success or
failure. In this research an effort has been made to identify, analyse and
quantify rationally risks of oil and gas sector EPC projects. For this purpose
a model has been proposed to assess and quantify risks involved in the
process. Proper mitigation measures have also been proposed for all the
critical risks to successfully complete a project from the contractor’s
prospective in the oil and gas sector.

Key Words: EPC, FIDIC, Oil and Gas Sector, Risk Analysis and
Management

1. Introduction

The operational and fundamental structure of projects has significantly

changed in the last ten years as globalization became more prominent, the
*
Sajjad Mubin, Planning and Development Department, Government of Punjab, Lahore,
Pakistan. Corresponding author email: sajjadmubin@yahoo.com
∗∗
Abdul Mannan, Water and Power Development Authority, Lahore, Pakistan.

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 Mubin & Manan

construction industry being multifaceted has especially gone through major

changes. In conventional approaches of contracting, it is difficult for the
owner to assign responsibility for the delay or cost overrun as a number of
stakeholders are involved. To overcome this discrepancy an advanced
approach has been introduced known as Engineering, Procurement and
Construction (EPC). In EPC projects a single party is obliged to deliver a
complete facility to a developer who need to only ’turn a key’ to start
operating the facility. In addition to delivering a complete facility, the
contractor must deliver the facility for a guaranteed price by a guaranteed
date and it must perform to the specified level. Failure to comply with any
requirements will usually result in the contractor incurring monetary
liabilities (Damian M., 2011). In these projects, largest engineering and
construction risks are transferred to the contractor. This type of contract
requires an excellent project definition, but it ultimately guarantees a well-
defined cost and completion time. The EPC type of contracting method is
ideal for owners and developers because the capital cost is fixed at the start
and the risk is placed onto the EPC contractor. EPC contracts and their use in
construction have received bad publicity, particularly in contracting circles.
A number of contractors have suffered heavy losses due to improper
knowledge of risk identification, assessment and their mitigation, as a result,
a number of contractors have now refused to enter into EPC contracts under
certain jurisdictions. On the other hand, more the risk the greater is the rate
of return for an EPC contractor, if risks are properly addressed. There are a
lot of EPC contractors who have almost doubled their turnover in a decade.

Through the EPC contracting method, sponsors and owners expect to get
the degree of certainty as to time and costs that they require. Such has been
the popularity of this method of procurement that organizations such as
International Federation of Consulting Engineers (FIDIC) responded to the
need for appropriate standard forms that more closely reflected market
conditions by, for example, the introduction of its Conditions of Contract for
EPC/Turnkey Contracts (the Silver Book) given by Henchie (2001).

EPC projects are being executed in many fields of engineering and

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 Innovative Approach to Risk Analysis and Management of Oil and Gas Sector

construction. However, they are more common in oil and gas sector therefore
focus has been made to oil and gas sector in this research.

Risk analysis and management is a comprehensive and systematic way of

identifying, analyzing and responding to risks to achieve the project
objectives (PMBOK, 2007). Construction projects can be extremely complex
and fraught with uncertainty. Risk and uncertainty can potentially have
damaging consequences for the construction projects (Mills, 2001).
Jannadi and Almishari (2003) made attempt to assess risks associated with
various construction project activities, defining risk as the potential damage
that may affect personnel or property. They modeled risk by probability,
severity of impact and ‘exposure’ to all hazards of an activity and provided
software to generate risk scores. However, they did not provide a
methodology for aggregating risk ratings.

Similarly, Cagno et al. (2007) adopted the P-I model and quantify the
‘risk load’ allocated to each project element by identifying sources of
uncertainty, activities affected, and risk owners. Risk impact is assessed in
monetary terms but collectively as a single figure. They attempt to improve
risk modeling by introducing the concept of ‘controllability’ as a ratio
between the expected risk impacts before and after applying mitigation
actions. Controllability is dealt with as a tool for justifying mitigation actions
economically.

Mubin S. (2007) defined risk as an unwanted but probable event which

has negative impact on projects in terms of project targets. Moreover, he also
identified various types of risks encompassing technological, financial &
investment, natural disaster, environmental, health & safety, contractual and
socio-economical. He also described two broader types of risk analysis i.e.
quantitative and qualitative.

Therefore, the risk analysis and management is one of the major features
of the EPC project management of oil and gas sector in order to efficiently
deal with uncertainty and unexpected events to achieve project success. The

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benefits of the risk management process include identifying and analyzing

risks, and improvement of construction processes and effective use of
resources, which ultimately results in completion of projects with in
predefined targets of time, cost, quality and health & safety.

2. Gaps

There are different risk management models, which are a subset of a

larger project management model that attempts to analyze and control risk in
a more generalized way for all types and categories of projects and contracts.
There are certain models of risk analysis and management that are available
specifically for detailed analysis but no particular model is available from the
oil and gas perspective and particularly for those projects which are executed
under EPC contracts in a very risky environment such as Pakistan. Even
though, if a certain general model is adopted for risk analysis and
management but no attempt has been made to separate the contractor and
client perspective for risk analysis and management, in which mitigation
measures are opposite to each other.

3. Research Methodology

In this research an effort has been made to develop an easy approach and
model for EPC project and their associated risks from a contractor’s
perspective in the oil and gas sector. In this regard, a survey based
methodology has been developed to identify, assess and analyse the risks
involved in EPC oil and gas sector projects and propose mitigation strategies
for the critical risks taking into account all functions and peculiarities of EPC
projects. Moreover, emphasis has been paid in this research for giving three
dimensional risk assessment and quantification.

Through a survey based research, this model has given a way forward for
identification of risks with the help of process owners in four internal EPC
contractors working in Pakistan. The method developed by the author
addresses limitation of Project Management Institute (PMI) as mentioned in
the previous section highlight the EPC process of a successful project and to

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 Innovative Approach to Risk Analysis and Management of Oil and Gas Sector

explore a win-win situation for the both the parties in an EPC contract.
Identified risks along with a barometer of probability and impact scale
(different from PMI approach) were provided to the four EPC companies.
Each company imparted the probability and impact of each risk depending
upon its experience and lesson learnt from previous EPC projects. Average
of this information is analyzed and quantified and incorporated in the risk
register along with suitable management strategies by using FIDIC terms and
conditions of EPC projects, internal arrangement of risk mitigation, through
transfer or any other measure. Following components are necessary to carry
out the risk analysis process as per risk management model developed by the
researchers (Mannan, 2009)

3.1 Risk Management Planning

Pakistan Management Institute (PMI) approach of risk management

starts with the planning of risk management, which includes a detailed risk
management planning. In risk management planning the proposed course of
action for risk analysis is set. The process includes the following;

i. Setting criteria and planning method for risk identification

ii. Setting criteria for probability and impact of risks
iii. Selection of analysis method
iv. Reporting method

A risk management plan should be documented early in the project,

during the planning phase. A plan is undertaken prior to its execution phase
to ensure that all risks are identified and their most appropriate and realistic
assessment has been made. Immediately after the plan has been documented,
the risk management process is engaged to monitor and control the likelihood
and impact of risks on the project.

3.2 Risk Classification

In the context of EPC projects, risks are broadly classified into the
following seven areas keeping in view the structure of EPC companies as

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 Mubin & Manan

described by Mubin (2008);

i. Engineering
ii. Proposal
iii. Project Management
iv. Procurement and Contractual
v. Quality, Health & Safety (QH&S)
vi. Human Resource (HR)
vii. Finance and Audit

3.3 Risk Identification

After risk classification, it is essential to identify risk which is an

important part of any construction project described by Mubin (2008)
following risk identification methods were adopted;

i. Information Gathering Techniques

ii. Project Document Review
iii. Assumption Analysis
iv. Checklist
v. Diagraming

Figure 1 shows a complete model for risk identification and analysis

process of EPC projects. It shows the essential components of risk analysis
process and the steps involved in each component. It is evident from the
figure that after completing each risk analysis cycle, lessons learned or
conclusions drawn must be addressed in order to carry out the risk analysis
process in a better way. By using any or a combination of the aforementioned
methods any one or more than one of the following tools may be used;

i. Individual/ departmental experience

ii. Historical data of the projects
iii. Organizational document review
iv. Brain storming session

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 Innovative Approach to Risk Analysis and Management of Oil and Gas Sector

v. Periodic meetings for fact finding

vi. Questionnaire
vii. Interviewing

In this research, information gathering techniques have been used in

combination with other methods. Firstly, through document review process
all probable risks were enlisted followed by enlistment of all probable risks
according to the classification with the help of process owners and the
concerned line department in four major EPC companies i.e. Presson Descon,
Petronas, and SMEC. For accurate and realistic project risk identification all
relevant documents of one major project of each EPC company were studied
including Information to Bids (ITB) by reviewing technical and commercial
terms and conditions, design and construction complexity of a project, safety
and security on site, client repute and payment terms, socio-economic and
political conditions of site and country, exchange rate fluctuations,
performance of sub-contractors and vendors, environmental regulations,
requirements of licenses and permits, design error/ omission, human error
during construction and installation, natural disaster/ calamity, local
unavailability of semi-skilled and skilled workers, quantity/ volume of work
and material and rework risk etc.

With the help of process owner and concerned line departments in four
companies in which survey was conducted, total one hundred and sixty two
(162) most frequent risks were identified. Risks identified in departmental
representatives and process owners of every functional area were w.r.t. time,
cost and quality. With collaborative efforts and after extensive brain storming
sessions in four identified EPC companies, 162 risks associated with
engineering, procurement & contracts, finance and audit, quality health
safety environment (QHSE) and human resource (HR) aspects of oil and gas
EPC projects were identified with the following breakup as mentioned in
Appendix 1 on respective serial numbers:

i. Engineering (Risk No. 1 to 18), 18 risks

ii. Proposal (Risk No. 18 to 35), 17 risks

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 Mubin & Manan

iii. Project Management (Risk No. 36 to 70), 34 risks

iv. Procurement and Contractual (Risk No. 71 to 110), 39 risks
v. Quality, Health & Safety (QH&S) (Risk No. 111 to 124), 13 risks
vi. Human Recourse (HR) (Risk No. 125 to 140), 15 risks
vii. Finance and Audit (Risk No. 141 to 162), 21 risks

3.4 Risk Frequency and Impact Factor

Project Management Institute has given an ambiguous criterion to select

probability and impact of identified risks as shown in the Table 1 below.
However, it has been observed that one standard criterion cannot be adopted
to capture different aspects of a risk in a project by using the standard PMI
approach. PMI approach also does not help to find a separate impact of a risk
in terms of time, cost and quality rather it gives a common impact factor of
each risk mentioned in Table 1. Similarly, it is very difficult to categorize
the frequency in percentage terms of their frequency of occurrence. It shows
that for those professionals involved in risk analysis and quantification, it is
difficult to distinguish between “Very High Chance” and “High Chance”.
PMI approach also gives a limited choice to select a probability (frequency)
from the set criteria.

For this purpose, a mechanism has been developed in consultation with

all process owners and stakeholders for selecting probability of each risk.
Table 2 gives opportunity to the risk professional to select a frequency with a
base frequency of 50 percent. Neutral position of a risk, according to this
mechanism will be 50 percent frequency. If there is a positive possibility of
occurrence of risks, frequency higher than 50 percent will be selected. More
the chances of occurrence, higher will be the frequency or vice versa.

Similarly, the mechanism developed by the author, gives a risk

professional the opportunity to assign separately the impact of risk in terms
of time, cost or quality. Sometimes, it happens in an EPC project, where cost
is not too much implicit, it reduces the impact factor negatively downwards,
however, its other indirect impact on time or quality is significant, which is

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 Innovative Approach to Risk Analysis and Management of Oil and Gas Sector

ignored if we use the PMI approach. Impact of risks in three different aspects
will also be judged through experience of process owners or departmental
representative with thorough consultation, but the elements of bias, expertise
and personal judgments will impact the process of risk analysis, which is one
of the limitations of this research.

To avoid the subjectivity of PMI approach to identify, analyse and

quantify risks, a quantitative approach has been used and mentioned in
Table-4 and will be used for selecting an impact factor to a risk in a three
dimensional context of time, cost and quality to have three risk numbers
separately.

Table 3 shows the impact factor for risk quantification based on project
cost, time and quality. The percentage deviation in cost, time and quality of
an EPC project with respect to each impact factor shown in Table 3 was
selected in consultation with four EPC companies. The table shows that
highest impact factor of 0.9 is assigned when there is an increase of 10
percent of both cost and time with worst quality of work.

3.5 Risk Analysis and Quantification

There are several theories to quantify risks. Numerous different risk

formulas exist, but perhaps the most widely accepted formula to analyze and
quantify risk requires the following.

i. The likelihood (frequency/probability) of occurrence of each

consequence (risk)
ii. The magnitude (impact) of the possible adverse consequences (risk).

For risk quantification, likelihood of risk calculated based on the

frequency of risks is multiplied by the impact of event equal to the Risk
Number, mathematically expressed in equation 1.

Risk Number (RN) = Likelihood of Risks (Frequency) x Impact (on time,

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 Mubin & Manan

cost of quality) [1]

After identification and assessment of risk through the procedure

discussed above, risks are analyzed and quantified for their overall impact on
the organization/ project’s time, cost and quality targets/ objectives. The
following procedure is developed for risk analysis and quantification:

i. Probabilities and impact shall be shifted from risk identification form to

risk register at their respective position.

ii. Frequency (chances of occurrence) of each risk will be multiplied with

the impact on particular parameter i.e. time, cost or quality to get the
respective RN for time, cost and quality. Different RNs will be used to
filter different critical risks, impacting on particular parameter i.e. time,
cost or quality. To find critical risks impacting quality one may have to
find critical RN from quality RN column. Following formulae will be
used to find RNs in three dimensions i.e. time, cost and quality. Average
risk number and largest risk numbers may also be calculated as shown in
equation 5 & 6 and graphically represented in figure 2.

Risk Number (RN)Cost = Probability of risk x Impact on cost [2]

Risk Number (RN)Time = Probability of risk x Impact on duration (schedule)

[3]

Risk Number (RN)Quality = Probability of risk x Impact on quality [4]

Avg. Risk Number (RN)Avg. = (RNCost + RNTime + RNQuality )/3 [5]

Risk Number (RN)C,T,Q = Largest RN in Column V, VI, VII [6]

Limitations: For this research, RNQuality was not computed, due to

operational complexities and assumed to be zero and taking average of
RNTime and RNCost.

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3.6 Risk Register

All risks are recorded in the risk register. Certain new columns for RN
have been added based on the intervention in the process as mentioned in
figure 3;

Risk is ranked in the risk register on continual basis based on three

dimensional risk numbers and not on the basis of PMI approach of risk
analysis and management. Risks having maximum RN will be critical risks
for each category i.e. time, cost or quality. Moreover, average Risk Numbers
were also calculated and ranked which may be used when required for
decision making as shown in figure 3 below.

Ranking of different risks is shown in figure 2 and 3 (RR). These figures

show different risks when ranked at the criteria of “Cost” i.e. risks having
largest RNCost shall be ranked as ‘1’ and will be the critical risk w.r.t. cost of
the project. Similarly, all other risks will be ranked in order of severity of
their impact on cost, considering RNCost, given in col-V in figure 2. If a
project manager wants to see the critical risks in previous projects of Presson
Descon International (Pvt) Limited (PDIL), having significant impact on
cost, he will have to check col-X.

If the risks are to be ranked on the criteria of “Time” which means that
risks having largest RNTime shall be ranked as ‘1’ and will be designated the
critical risk w.r.t. time (duration of the project). Similarly, all other risks will
be ranked in order of severity of their impact on duration, by placing them in
order according to their RNTime, given in col-VI in figure 2. If a project
manager wants to see the critical risks in previous projects of PDIL, which
impacted on Duration, he will have to see col-XI.

If a mixed impact of risk is required to be checked, then column XIII will

be considered as the criteria i.e. average Risk Number (RN) will be analysed
for selection of critical risk in the project.

If the cost impact of any risk is considered to be equal to its time

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(duration) impact on project, then column XIV will be considered as the

criteria i.e. column XIV will be analysed for the selection of critical risk.
If the cost impact of any risk is considered to be equal to its time (duration)
impact on project as well as quality, then column XV will be considered as
the criteria i.e. column XIV will be analysed for the selection of critical risk
as shown in figure 4.

3.7 Risk Mitigation

This process designates a strategy to mitigate/ manage a particular risk in

the most appropriate, economical and safe manner. More emphasis and
diligence must be given in selecting a strategy of critical risks. Different risk
management strategies have been used conventionally to cater to critical,
normal and non-critical risks. Strategy may also be set to a risk depending
upon its nature. It may include risk avoidance, risk transfer, risk mitigation
and risk retention (acceptance). The ultimate aim of setting any strategy for
managing risk is to reduce or regulate the negative impact of risk to its
minimum and at the most applicable/ efficient way i.e. minimum cost. It may
include a strategy to accept some or all of the risks and their consequences at
a certain cost i.e. by incorporating certain allowances for that risk in a
proposal, bid or budget.

All the identified risks were analysed and mitigation measures were
proposed in the risk register as shown in figure 6. Proper Clause of FIDIC
terms and conditions for EPC projects was mentioned in front of each risk
which is supposed to be transferred or mitigated the other way.

3.8 Risk Monitoring

Risk analysis and management is an ongoing process in projects. Risks

are closed with appropriate mitigation whereas new risks are coming in the
process, recorded in the risk register. Risk monitoring process has the
potential of further improvement based on the lesson learned and continuous
improvement approach.

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 Innovative Approach to Risk Analysis and Management of Oil and Gas Sector

4. Conclusion

Based on the analysis of risk given in Risk Register four critical risks for
EPC Projects impacting cost and schedule are respectively as follows;

a) Cost

i. Cost overrun due to change/ variation in quantity and price of goods

and services.
ii. Exchange rate of currency and currency fluctuation.
iii. Error in estimation and omissions at proposal or execution stage.
iv. Change in the laws of the country (taxes, interest rate, inflation etc).
v. Problems in finding 100% technical compliance of Product/supplies.
vi. Error in FEED, (not compatible to site conditions) and omissions
resulting rework.
vii. Increase in the rate of mark up on guarantees at various stages of the
project execution.
viii. Vender Service Men (VSM) overstay.
ix. Poor claim identification, preparation and follow-up.
x. Incomplete data is provided by procurement at proposal stage.
xi. Noncompliance of quality requirements from Sub-contractor.

b) Time (Duration)

i. Error in estimation and omissions at proposal or execution stage.

ii. Timely vendor information for detail designing.
iii. Problems in finding 100 percent technical compliance of supplies
and services.
iv. Errors in FEED, resulting in rework.
v. Increase in supply time requested by a vender.
vi. Vendor’s delay in delivery of goods and services.
vii. Stoppage of work on site due to various reasons (Client, Sub-
Contractors, Locals and Regulations).
viii. Unavailability of complete data from engineering for preparation of

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 Mubin & Manan

RFQ.
ix. Inadequate project planning i.e. not well in time engineering
workflow.
x. (a) Change Order issued to supplier/manufacturer for change in
specification by contractor.
(b) Dispute with the supplier/ vender for late supply and under
performance.
(c) Delays on letter of credits (LCs) issuance

c) Average of Critical Time and Cost Risk Numbers

i. Error in estimation and omissions at proposal or execution stage.

ii. Problems in finding 100% technical compliance of the Product/
supplies.
iii. Error in FEED, and omissions resulting in rework.
iv. Impact of exchange rate fluctuation.
v. Cost overrun due to change/ variation in quantity and price of goods
and services.
vi. Unavailability of complete data from engineering for preparation of
RFQ.
vii. Timely vendor information for detail designing is unavailable.
viii. Arrangement of Advance Payment Guarantee & Performance Bond.
ix. Increase in supply time requested by vender.
x. Incomplete data is provided by procurement at proposal stage.

There are total 162 risks identified for oil and gas sector EPC projects
executed in Pakistan from a contractor’s perspective given in Appendix A.
Maximum number of risks were identified in the procurement process
followed by project management and finance & audit risk respectively. Three
critical risks noted in each identified broad category are mentioned below;

a) Engineering (Risk No. 1 to 18), 18 risks

i. Design and estimation error.

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 Innovative Approach to Risk Analysis and Management of Oil and Gas Sector

ii. Delayed vendor information for detail designing is unavailable.

iii. Incomplete data is provided by procurement department at proposal
stage.

b) Proposal (Risk No. 19 to 35), 17 risks

i. Price validation.
ii. Currency fluctuation and change in exchange rate.
iii. Change in policies and government taxes.

c) Project Management (Risk No. 36 to 70), 34 risks

i. Planning and scheduling risks, unrealistic and over stressed schedule.

ii. Poor claim identification, preparation and follow-up.
iii. Disputation or litigation with the client or sub-contractor.

d) Procurement and Contractual (Risk No. 71 to 110), 39 risks

i. Dispute with a supplier/ vender for late supply and under performance.
ii. Delays by vendors.
iii. Exchange rate and currency fluctuation.

e) Quality, Health & Safety (QH&S) (Risk No. 111 to 124), 13 risks

i. Quality and quantity issue and change in specification by vendors.

ii. Accident and third party damage on project site.
iii. Non Compliance and poor enforcement of HSE requirements during
construction by a contractor or sub- contractor.

f) Human Recourse (HR) (Risk No. 125 to 140), 15 risks

i. Human error in designing, execution.

ii. Fraudulence, leakage of information at proposal stage.
iii. Over stress burden on employees.

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 Mubin & Manan

g) Finance and Audit (Risk No. 141 to 162), 21 risks

i. Timely arrangement of advance payment guarantee & performance

Bond.
ii. Increase in the rate of mark up on guarantees at various stages of the
project execution.
iii. Delayed payment by the client and cost overrun due to change/
variation in quantity and price of goods and services.

5. Recommendations

Simulation and risk based planning, scheduling, estimating and

controlling of EPC projects is recommended to have most probable duration
and most probable cost of the project to avoid the unexpected delays and cost
overrun in EPC Projects.

References

Cagno, E., Caron, F., and Mancini, M. (2007). A Multi-Dimensional

Analysis of Major Risks in Complex Projects. Risk Management, 9, 1-18.

Damian M. (2011). EPC Contracts in Process Power Sector. Retrieved n.d.

from
http://www.dlapiper.com/~/media/Files/Insights/Publications/2012/03/E
PC%20contracts%20in%20the%20process%20plant%20sector/Files/epc
contractsprocessplantsector/FileAttachment/epccontractsprocessplantsect
or.pdf

Henche N. (2001). FIDIC Conditions of Contract for EPC Projects -The

Silver Book, Problems in Store, ICLR, 47-48. Geneva, Switzerland:
World Trade Center II.

International Federation of Consulting Engineers (FIDIC). (1999). Condition

of Contract for EPC Turnkey Projects (Silver Book) (1st Ed.). Geneva,

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 Innovative Approach to Risk Analysis and Management of Oil and Gas Sector

Switzerland: World Trade Center II.

Jannadi, O.A., and Almishari, S. (2003). Risk Assessment in Construction,

Journal of Construction Engineering and Management, 129(5), 492-500.

Mannad, A. (2009). Risk Assessment and Management of EPC Projects in

Pakistan (M.Sc. thesis, University of Engineering and Technology,
Lahore).

Mills, A. (2001). A Systematic Approach to Risk Management for

Construction. Journal of Structural Survey, 19(5), 245-252.

Mubin, S., & Mubin,G. (2008), Risk Analysis for Construction and
Operation of Gas Pipeline Projects in Pakistan. Pakistan Journal of
Engineering & Applied Sciences, 2, 23-37.

Project Management Institute. (2007). Construction Extension to the

PMBOK® Guide (3rd Ed.). Newtown Square, PA: Project Management
Institute.

Appendix

Table 1
Standard Values of Frequency of Occurrence and Impact Factors
Frequency of Frequency Type and Level of Risk Impact Impact
Occurrence (F) Factor (I)
Very high 90 % When maximum impact on scope, time and 0.9
chance cost
High chance 75% High impact on scope, medium impact on
0.6
Greater chance 60% time and lesser impact on cost
Possible 45% High impact on time, medium impact on
0.3
Likely 30% scope and lesser impact on cost
Unlikely 15% When high impact on cost of the project,
medium impact on time and lesser impact 0.1
on scope

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 Mubin & Manan

Table 2
Frequency of Occurrence of Risks in EPC Projects
Sr. No Chances of Occurrence Frequency
1 Almost sure that risk will occur in next project 91% - 99%
2 Extremely high chances of occurrence 81% - 90%
3 High chances of risk occurrence 71% - 80%-
4 Fair chances of risk occurrence 61% - 70%
5 May occur with some chances of occurrence 51%-60%
6 50 - 50 (May or may not occur) 50%
7 May not occur but some chances are still there 41%-49%
8 Poor chances of occurrence 31% - 40%
9 Extremely poor chances of occurrence 21% - 30%
10 No chances of occurrence but still it is a risk 11% - 20%
11 Almost sure that risk will not occur in the next 1% - 10%

Table 3
Impact Factor for Risk Quantification
Impact
Sr. No Type and level of risk Impact
Factor (I)
i. Scope (maximum impact and major areas are affected)
ii. Worst Impact on Cost (> 10% cost increase)
iii. Worst Impact on Time (> 10% time increase) 0.9

iv. Worst impact on Quality (unaccepted to the Client)

i. Scope (normal impact and some areas are affected)
ii. High Impact on Cost (5-10 % cost increase)
iii. High impact on Time (5-10 % time increase) 0.6
High impact on Quality (accepted by the Client with majo
iv. changes)

i. Scope (minimum impact)

ii. Medium impact on Cost (2-5 % cost increase)
iii. Medium impact on Time (2-5 % time increase) 0.3
Medium impact on Quality (accepted by the Client with
iv. minimum changes)
i. Scope (insignificant impact)
ii. Low impact on Cost (<2 % cost increase)
iii. Low impact on Time (<2 % time increase) 0.1
iv. Low impact on Quality (insignificant)

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Fig. 1 Risk Analysis and Management Model for EPC Projects

Table 4
Risk Analysis and Quantification
Frequency Impact Impact Impact Risk Risk Risk Avg. Risk
(F) on on on Number Number Number Risk Number
Cost Duration Quality (RN)Cost (RN)Time (RN)Quality Number (RN)C,T,Q
(RN)Avg.
Col-I Col-II Col-III Col-IV Col-V Col-VI Col-VII Col- Col-IX
VIII

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Fig. 2 Risk analysis for risks of EPC projects considering Time, Cost and Quality

Table 5
Mechanism for Risk Ranking Based on Risk Number Based on Time, Cost and
Quality
RISK RANKCost RANKTime RANKQuality RANKAverage RANKCost+Average
Col-X Col-XI Col-XII Col-XIII Col-XIV
5
RISK-1 14 6 8
RISK-2 162 153 95 167 169
RISK-3 5 152 15 19 6
RISK-4 4
1 6 2
RISK-5
1 1 91 4
RISK-6 141 162 41 160 156

Risk 5 is Critical Risk when Cost=Time

Risk 4 is Critical Risk with respect to mixed (avg.) approach

Risk 1 is Critical Risk with respect to Quality
Risk 5 is critical risk with respect to Duration
Risk 4 is Critical Risk with respect to cost

168
 Innovative Approach to Risk Analysis and Management of Oil and Gas Sector

Table 6
Risk Ranking Based on Average RN
RISK RANKCost RANKTime RANKQuality RANKAvg. RANKCost+Time
Col-X Col-XI Col-XII Col-XIII Col-XIV
RISK-1 14 5 1 6 8
RISK-2 162 153 95 167 169
RISK-3 5 152 15 19 6
RISK-4 1 6 4 1 2
RISK-5 1 1 91 4 1
RISK-6 141 162 41 160 156
Risk-5 is Critical Risk when Cost =Time
Risk-4 is Critical Risk with mixed (avg.) approach

Table 6
Risk Mitigation through Transferring of Risk by Standard EPC FIDIC T&Cs
Risk Identification & Risk Register
TOOL
Categorization Remarks
SR. Contractor’s
Risk
No EPC T & Cs
Engineering
Some margin in a proposal must be
kept for incompleteness of design
information. Risk may also be
transferred to design Sub-
Contractors by revision of sub-
Incomplete design contractor T&Cs, provision and by
1 4.10
information in ITB deduction from performance
guarantee to improve sub-
contractor’s performance.
Engineering scope must be very
much clear and finalize/frozen at
the negotiation stage.
Inefficient time is
8 allocated to engineering System improvement Internal
for making proposal
Risk may be mitigated by system
improvement and by developing
Incomplete data is
closer relation with reliable
provided by
9 vendors. Moreover, a contractor Internal
procurement at proposal
needs to improve the system such
stage
that more incentives are given to
the vendors’ to take part in

169
 Mubin & Manan

providing bidding information at

the proposal stage.
System improvement, more
engineers can be hired. Efficiency
Insufficient engineering
10 of engineers may be enhanced by Internal
resource is available
offering different motivation
packages
Good vendor relationship and
management is required to mitigate
Timely vendor
this risk. Incentives must be given P.O. Terms
11 information for detail
to vendors for sending, picking and (Internal)
designing is unavailable
accurate information to be
incorporated in a bid
Inadequate project
planning i.e. not well in
12 Internal
time engineering work
flow
Sub-contractors delay
in providing timely Risk transferred to an engineering T & C of
13 information/design Sub-contractor through contracted Sub-
drafts to a contractor T & Cs contractor
(PDIL)

170

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