Effective EPC Risk Management

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Effective EPC risk management for thermal power stations: 

“A brick in your hand and a sword in your belt “

What is EPC? 

Is this a familiar term to most people? Most likely not, but the concept is referred to extensively in engineering and construction. Imagine the shock and horror on a person’s face if a highly demanding boss were to pint their finger at a person and barks the instruction “Do the EPC on this vital project” when the person has no experience or even familiarity with this vital progress for any specialized projects success.  

EPC is an acronym for “Engineering, Procurement, and Construction,” and refers to the following three phases of project development:    

  1. Engineering: The design/development phase of a project where the primary engineer or a team of engineers will draft technical schematics for the project. Project management will also consider the scope of work, dimensions, and specifications for each step, and develop systematic policies to complete the project according to set budget and quality standards. 
  1. Procurement: The purchase of all the materials, components, and subsystems that will be needed to complete the scope of work specified within the schematics of the project. 
  1. Construction: Erecting, building, and commissioning the designed plant contingent upon the previous two steps.   

EPC is likewise only used within a very particular context. Although one could argue that the term could be used to refer to numerous project types which require planning, designing, and building, the intended use of this term is about EPC conducted for Power station projects.  

Each EPC project needs a special set of attention due to the complexity of the project being completed, and the necessity of this project functioning optimally. For example, companies such as USP&E Global have a large number of positive references from across the globe because of their extensive experience in the EPC, O&M, and consultation on many thermal power plant projects. 

An essential resource to communities and companies within the emerging industries is functional power. A reliable and load reactive energy system requires management professionals who can swiftly take all necessary precautions toward positioning the project to a guaranteed success. 

EPC risk management

What are the Risks of EPC? 

Firstly, we need to define what is risk and how it impacts a project. A risk is any factor or force which can hinder the progress of a project, you essentially have a risk. Something that will cause regression in the completion phases of the EPC project and will expensively impact the company doing EPC. 

1. Forecast and Prepare.  

It is most Critical to prepare for the possible risks before even taking the first step. An EPC project will inevitably have a large array of unidentified risks which need to be properly defined before a contractor can safely commence the project he is assigned with completing. 

To calculate the risks involved in a project, the EPC company must consider every risk and take the appropriate actions. After an overarching outline of risk factors have been identified, they can be grouped into 1 of three main areas per the below diagram. 

External Environments Predictable Sources  Internal Environment  External Environments Unknown uncertainties  
Political and Legal  Scope change, Time overrun, Cost Overrun  Leadership and organizational failure  Acts of God  
Design and Specification  Technology Change  Resource Failure  Ecology  
Financial and Economical  Quality and specification failure  Contractor Failure  Safety and Health  

Cited from “Risk management in EPC contract – Risk identification” pg.9 (Feb 2014). 

  1. Estimating and managing.  

The next vital phase of risk management is to estimate how to cost these risks. Although a larger variety of methods Effective EPC risk managers make use of charts like the above and below as guidelines to assess the risks that exist within the current projects available to the EPC contractor.  

Each possible risk is identified and given a particular rating regarding the likelihood of this risk materialising (Unlikely-Extremely likely), and the impact each risk factor will have on the project (minor-critical). The combination of the likelihood and impact scores will equal the scope of the risk matrix, which is serves as the most vital component of the companies strategy to counter any risk which could delay or destabilise the efforts to complete the project.  

S. no  Risk Description  S.no  Risk Description  
1  Project Scope Risk / Feasibility Risk  11  Force majeure & ecological Risk  
2  Design & Specification Risk  12  Political, Legal and Social Risks  
3  Quality Risk  13  Financial & Economical Risk  
4  Time overrun Risk  14  Safety Health and environmental Risk  
5  Cost Overrun Risk  15  Funding Failure Risk  
6  Leadership Risk  16  Communication and network failure Risks  
7  Organizational Risk  17  Project Execution Risks  
8  Physical Resource mobilization and utilization Risk  18  Installation Risks of Mechanical and Electrical works.  
9  Technology Risk  19  Purchase and Procurement Risks  

Cited from “Risk management in EPC contract – Risk identification” pg.9 (Feb 2014). 

  1. Acquiring resources for risk management.  

If a person was forced to jump out of a burning aeroplane, do you think they would like to do it with or without a functioning parachute? It would be suicidal to jump without one. 

In a similar concept, why good is engaging a risk management plan without having the necessary resources to implement this plan? In project terms, to prepare a plan without preparing the financial resources for this plan is the same as to jumping out a plane without a parachute.  

After companies have created an summarised list of every risk involved in the EPC their projects, it will become necessary to have a sufficient budget plan which can fund the risks involved within the project. With one of the most effective methods being sufficient contingency funds built into the project planning, companies such as USP&E global will do their utmost to price themselves in a means which any possible risk can be paid for with the payment received from a client. If this is done properly, the contractor will never need to worry about losing funding on behalf of a project failing from an unbudgeted risk.  

While this is an effective method to maximise project success and the contractors profit, it does have one weakness. If the client is ignorant of the exact commercial values of each service and asset the EPC contractor may provide, it can be used by the to create an unjust profit from the client by proposing a price markup that is significantly more than is needed for a sufficiently funded contract. Which has lead to massive mistrust to a great deal of EPC companies all over the world. 

USP&E’s risk management system.  

Although problems of unjust pricing markups can cause significant harm to the integrity to EPC companies, methods of however, is avoided through straightforward implementation of a following principle. Validate through precision. 

Every EPC project is a highly complex project to cost since materials and assets needed to complete the project will constantly be changing. The greater part of any EPC contractor’s time when planning for risks will be to assert how much it will cost a client to pay for the construction materials, special parts for the project, and any their risks involved in maintaining these assets.  

If, however, this is done incorrectly however, every clients and contractor involved within the project are in jeopardy of carrying massive financial problems take place.  

  1. The price is extensively more expensive than a client expected, and incurs loss from the project. 
  1. The price of completion is lower and creates financial loss for the contractor.   

Thus, how can we avoid these problems? 

Key Estimator at USP&E John Bryant has mentioned the necessity of having the following to create a fair an effective pricing method: 

“Precise [EPC] cost estimations are directly proportionate to available information.”  

This policy  governs the entire cost estimation methods used at USP&E involves educating each respective area of ensuring that we can prepare for our costs is to justly and effectively know. 

Our company has an excellent reputation as experienced Thermal Energy EPC contractors who have successfully completed a large array of highly complex projects all over the world. We have made particular efforts in ensuring our entire process of all including turn key solutions are well developed within our costings. Providing every sufficient resources for a clients power plants to run with optimum efficiency, and reserve everything needed to protect that projects from failure.  

We like to go into our EPC contracts with a brick to build energy for life, and swords in our belts to prepare for the unseen hinderances to the project being completed.  

Here at USP&E we are about creating Excellence with speed and taking personal ownership of our work. We acknowledge each time we make any mistakes and will do our utmost best to create the excellence we strive for. 

Contact us today at info@uspeglobal.com to find how we can assist you with your EPC needs.