1 Essa G. Al-Ansari 2nd PMI AGC Energy Forum DMS Debates DMS Debates Project owners should increasingly adopt the Cost Plus Model over LSTK

III. III.CONTRACTING STRATEGY CONTRACTING STRATEGY EXTENT OF INVOLVEMENT & RISK PROFILE The level of involvement & risk profile for project exwcution can be between two extremes of “largely with the Contractor” or “largely with the Owner”. LSTK EPC Fully Reimbursable (C+Model) PRIME CONTRACTOR OWNER Responsible for cost, schedule and quality Provide small team for quality control Provide services Responsible for cost, schedule and quality Reimbursable Procurement and Construction Reimbursable Construction (EPCM) EXTENT OF INVOLVEMENT & RISK OWNER CONTRACTING STRATEGY

A risk/benefit matrix can be developed to evaluate potential strategies. CONTRACTING STRATEGY EVALUATION (Risk/Benefit Matrix) RISKY AVOID PREFERRED RISK BENEFIT

Client has key focus areas, in terms of risks and benefits that influence the selection of the most appropriate strategy. BENEFITS Quality/safety Price (in terms of value) Financing requirements Schedule Ability to influence Contractor selection RISKS Poor quality/safety control Conflicts Insufficient Owner capabilities Approval process cycle time impacting performance Poor initial price definition Poor initial schedule definition Risk of high levels of refinery “changes”

General contracting strategy can be guided by a “decision-tree” LUMPSUMLUMPSUM LUMPSUMLUMPSUM RE-IMBURSABLE Is there good technical definition Is the equipment industry standard Are there specific local circumstances Yes Lump sum Engineering Yes No, LSTK NoNo E,P&C - all reimbursabl e NoNo Lump Sum E P&C - reimbursable Yes DETAILED E NGINEERIN G P ROCUREMENT C ONSTRUCTION Step 1 Step 2 Step 3 Lump sum E only (P&C to be decided) Lump sum E & P Lump Sum E & P C – to be decided

6 VALUE Phase 1 Opportunity Identified Phase 2 Generate & Select Alternatives Phase 4 Execute Phase 5 Operate Value IdentificationValue Realization Phase 3 Develop Preferred Alternative Decisions have the greatest impact during initial Phases 1 & 2 when the project scope is defined and value identified Poor Project Definition Good Project Definition Poor Project Execution Good Project Execution A B C D

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LSTK implementation strategies offer certain advantages and disadvantages Transfer of risk to the Contractor, via Single Point responsibility Clear and enforceable guarantees are in place for cost and schedule Can result in lower cost and shorter time for project implementation “Small” client team required to control quality Strong capability to be debt financed Implementation of “scope” changes can be less flexible and more costly. Restricted opportunity for Owner to influence vendor/subcontractor selection. Requires a well defined ITB Package – high front-end loading KEY ADVANTAGES DISADVANTAGES

Fully reimbursable approaches are typically adopted when the Contractor is required to provide services that cannot be accurately pre-defined. Client retains control of all aspects of the project, including vendors and subcontractors Flexibility in implementing changes ADVANTAGES Fully reimbursable approaches

Fully reimbursable approaches ….Cont’d Can result in longer project implementation, and resultant higher costs. Extensive demand on the client’s technical and managerial resources, requiring a larger team. Contractor will not provide completion guarantees (in terms of cost/schedule), as it is only providing services. Limited capability to be debt financed Project cost will only be known with certainty towards project completion Risks rest primarily with Owner DISADVANTAGES