PROJECT OWNERS SHOULD INCREASINGLY ADOPT THE COST PLUS

MODEL OVER LSTKPOSITION: AGAINST THE MOTION  

Kuwait City, Kuwait - 12th June 2011

PMI AGC Energy Forum: DMS Debates

Dr. Mohammed Sammur -  Executive VP, Larsen & ToubroSalah Jebara Al Bufalah - Head of Major Projects ZADCO & President PMI AGC UAE Felipe Revenga – Chief Operations Officer, Tecnicas Reunidas

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WHY OWNERSSHOULD NOT ADOPTCOST PLUS MODEL?

June / 2011PMI AGC Energy Forum: DMS DebatesFelipe Revenga - COO, Técnicas Reunidas

COST PLUS - DISADVANTAGES

• Contractor and Subcontractor Controlled by Owner• Delays and Errors assumed by Owner• Diffuse Accountability• PMC not enough empowered

CONSTRUCTION

• SOW Undefined and NOT CLEAR• SOW self-developed during project execution• High Probability of Changes• Potentially oversized Team

ENGINEERING

• ALL Risks by Owner • Uncertainties in Project Price & Schedule

GENERAL

• Procurement Cycle normally longer than LSTK• Price negotiation advantages missed No incentives

PROCUREMENT

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WHY OWNERS SHOULDADOPT LSTK MODEL?

GENERAL

LSTK MODEL – ADVANTAGES

OWNER´S BENEFITS

• Competitive Bids according to Market Value• Total Cost Fixed. Owners do not have pressure about Costs• Contractors may contribute to find sources of financing• Reliable Forecast of Total Investment Cost

• Risks assumed by Contractor• Single Point Responsibility (Contractor)• Owner focused on Schedule, Quality and HSE

• Schedule defined and agreed• Better definition of SOW since the beginning

ALL KEY PARTIES INVOLVED WITH ACTIVE PARTICIPATION

ContractorOwner

SuppliersSubcontractors

June / 2011PMI AGC Energy Forum: DMS DebatesFelipe Revenga - COO, Técnicas Reunidas

ENGINEERING

Early BE/FEED Validation and Freezing

Early problems detection

Design Changes minimized

Engineering Team focus in Schedule and Quality of deliverables

LSTK MODEL – ADVANTAGES

GENERAL

June / 2011PMI AGC Energy Forum: DMS DebatesFelipe Revenga - COO, Técnicas Reunidas

LSTK MODEL – ADVANTAGES

ENGINEERING

PROCUREMENT

Price deviations (E&M) and uncertainties vested in Contractor

Manufacturing and Delivery (E&M) Schedule and Quality are

controlled by Contractor

Vendors' Management is Contractor´s responsibility

GENERAL

June / 2011PMI AGC Energy Forum: DMS DebatesFelipe Revenga - COO, Técnicas Reunidas

LSTK MODEL – ADVANTAGES

CONSTRUCTION

PROCUREMENT

ENGINEERING

GENERAL

Owner do not have to take responsibility to Control Subcontractors.

Safety performance Optimized and MaximizedConstruction troubleshoots by ContractorContractor is empowered Total Control Construction

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WHO IS THERISK OWNER?

June / 2011PMI AGC Energy Forum: DMS DebatesFelipe Revenga - COO, Técnicas Reunidas

OWNER CONTRACTOR

CONSTRUCTION

PROCUREMENTENGINEERING

GLOBALFACTORS

TECHNICAL LEGAL / CONTRACTUAL

FINANCIAL RESOURCES

LSTK MODEL – RISKS

RISKS TRANSFER TO CONTRACTORS

EPC-LSTK implies to contract a

specialist in Risk

Management

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ENGINEERING

PROCUREMENT

CONSTRUCTION

LSTK – TIPS TO REDUCE & CONTROL RISKS

Early ProcurementEarly and Efficient KOM with vendorsVendors Dwgs. Early reviews and approvals at

workshopsReducing Quality Deviations

Construction Organization involved since Engineering Phase

Early agreement of SubcontractsContinuous Critical Path Analysis and deviation actionsConstruction & Commissioning Driven Projects

Early Eng. Works and quick mobilization to Taskforce. Design Changes controlled and Limited at early stagesEnhance Quality Policies (Check Lists, procedures)

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WHAT WE CAN DO TO MAKE LSTKMODEL MORE ATTRACTIVE?

LSTK MODEL MORE ATTRACTIVE?

Realistic Schedule, with reasonable period for Bid preparation

Balanced Terms and Conditions. Liabilities, LD’s, Bonds, etc

Sharing some of the uncontrolled risks and rewards, Multi- Currency Bid, Commodities Indexing, Exchange Rates fluctuation, etc

1

2

3

Incentives Programs (Quality, HSE, Schedule)

4

5 Apply Value Engineering

LSTK through Open Book Conversion6

June / 2011PMI AGC Energy Forum: DMS DebatesFelipe Revenga - COO, Técnicas Reunidas

LSTK MODEL MORE ATTRACTIVE?

OBE + LSTK MODEL

Real Cost + an agreed Conversion factor assures a fair juice to Client and Contractor.

Time enough and develop the project and to avoid unnecessary contingencies.Application of Cost Saving to mach project cost to Clients budget.

Short bidding period, as cost estimate does not need to be as detailed

Shorten of the overall schedule of the project as time for Extended FEED and EPC bidding is shortened dramatically.

ADVANTAGES

COST

SCHEDULE

June / 2011PMI AGC Energy Forum: DMS DebatesFelipe Revenga - COO, Técnicas Reunidas

LSTK MODEL MORE ATTRACTIVE?

OBE + LSTK MODEL

SIGNIFICANT COST & TIME SAVINGS VS. TRADITIONAL LSTKLSTK

OBE + LSTK (CONVERTIBLE) Schedule Advantage

FEED EPC LSTK

Contract AwardContract Award

FEED + EPC LSTK

Contract Award ConversionPhase

Fair PriceContingencies minimized

Price Definition: Better accuracy on the costs

Kuwait City, Kuwait - 12th June 2011

THANK YOU GRACIAS شكرا

Dr. Mohammed Sammur -  Executive VP, Larsen & Toubro

Salah Jebara Al Bufalah - Head of Major Projects ZADCO & President PMI AGC UAE

Felipe Revenga - COO, Tecnicas Reunidas