So, let's talk about some of the cost risks first in the construction phase and

these can be around things that you would expect to see

in a construction project anywhere.

They can be around scope, schedule, budget and quality, but also around terms and

conditions and

the legal approvals that will be required to allow construction to proceed.

So let's kinda look at a typical construction site these days

and you see a range of activities that are performed on site through life cycle

from planning, and preparation through design, and procurement, and construction.

You see a bubble there describing the cost of time, because the longer it

takes to move around that cycle, the greater the risk that you'll face and

probably the less economical the project will become.

At later stages, the facility would be operated and maintained.

And then ultimately, it would be decommissioned.

But today, especially for

large projects not all activities take place at the final construction site.

Increasingly, we're moving activities offsite.

We're looking at modules and prefabrication.

And in effect, we've created one or more additional construction sites.

All of which need to be coordinated with the final sight of the project and

this requires a lot more emphasis on supply chain, and the risks,

and opportunities associated with it.

And also much, much more focus on logistics.

And again, the risks and the opportunities that, that represents.

And looking for common choke points, common failure points as you

move to multi-site fabrication becomes a very, very important risk asset in

today's international development and construction projects.

If we look at scope itself, a range of risks that we face.

Poorly defined or incomplete scope, that's kind of a shame on us.

We should know better than that.

Interfaces that are not well-defined and

I always like to say, there's a couple levels to interface.

There's the direct interfaces that you can see, that you expect.

That you can say, well, he needs it to be three meters high and

this delivered by the other guy will be three meters high, but there's secondary

sets of interfaces that are not well defined and they may actually exist

in some of the constraints and in some of the inputs that go into the project.

An example I like to use is a program with three projects.

The critical path flowed through project one and

into project two, and project three started later than project one,

and finished earlier than project two, and was not on the critical path.

Project number three slipped six months.

It's still shown as starting much later than project number one and

still finishing well before project number two not on the critical path,

the program schedule should be unaffected.

The reality is the program experienced a six-month slip.

Now, why?

Because when project number three slipped, the critical skill that it relied on,

which was welders, now coincided with the demand for

welders in project number two and welders already were in short

supply in the market were high priced and were hard to keep.

And so by having this slippage in project number three,

we impacted the overall program, because that labor interdependency,

that labor interface, that constraint,

that coupled constraint between the projects was not well understood.

Another aspect on scope is that reference standards may not be well-defined.

That's becoming less of an issue today as we move more to international standards,

but it is still an issue.

Also ensure that as you're undertaking the construction projects

that you understand the revision and the date, and

the associated acceptance criteria that go with those standards.

Otherwise, you run the risk of having very, very open scope and

that means an uncontrolled project.

The responsibility of the various parties are often not well-defined.

They're are assumptions made.

I think as an industry, we have a Infatuation with assumptions.

But one thing that's also important about assumptions in

longer duration projects, they themselves change over time.

And so while in short duration projects, our experience tells us that

we can reliably count on the assumptions we make at the beginning in

the project to be not impactful through the duration of the project.

But as we get into more complicated regimes,

longer duration projects that assumption about assumptions is no longer good.

And so assumption migration becomes a key risk that's important,

especially in longer duration projects.

And then finally, projects of any kind, construction projects will

run into change conditions and not defining where responsibilities

shift becomes a key consideration in these projects.

Schedule.

The number one way to control a construction project is by schedule.

If you control the schedule, you'll control the cost.

If you use the schedule to drive the project, you'll drive decision-making.

Many things can impact schedule, normal labor issues,

volatility around it, work stoppages.

All of those kinds of things, but also changes in work rules whether those

are a result of a negotiation with a trade union of some kind or

as a result of workable changes maybe imposed on the project by government.

Labor productivity,

something you should be measuring every day during the execution phase.

But your assumptions around labor productivity, you

need to make sure that they appropriately factor in learning curves and

also appropriately factor in local customs, local culture,

the local cycle of the workday if you will.

Are we stopping for prayer multiple times during the day?

Takes some time for productivity to recover after we've gone back to work and

then other factors, such as weather and environmental.

And increasingly in international construction projects,

you will be dealing with non-governmental organizations, international

NGOs that will often work in support of local NGOs to protect the local populus,

the local environment as well as to promote more global kinds of causes.

These are realities, you need to be aware of the stakeholder groups and

the potential for their impact on schedule.

So budget, growth and labor costs, labor typically on

these projects in generally 40% of the construction cost of these projects.

You have local labor and many international projects,

you'll have third country nationals.

You'll have ex-patriots, which will be very expensive, typically.

And so getting that labor mix right,

getting a good handle on what the total labor cost is gonna be.

And so clearly, you can see if the project stretches out,

if productivity drops, adding to that stretch out,

you can see your labor cost can quickly get out of hand.

If you try recovering schedule by working second shifts or

longer work weeks, then you're also adding to the overall labor cost.

Materials and supplies can grow.

Inflation is one factor, but availability, competition for resources.

So some years ago, competition for steel, competition for copper.

Products in the construction materials and

supply area saw huge increases in cost, really impacting

the cost effectiveness and the market effectiveness of many of these projects.

And then finally, you have a member supply chain cost that you need to be cognitive

of, depending where you're working in the world, security considerations

with respect to not only your labor, but also your supply chain.

Delays that one might face or

costs that one might face associated with customs and import.

Duties, for example.

And then finally, energy.

Energy is a huge component for all construction activities both

directly at the site as well as in the content of the materials and

supplies, and equipment that you'll be purchasing for your project.

Inefficiency, kind of touched on that, but I'll call out means and methods.

Key to a successful construction project are efficient, means and methods.

So when you're assessing risk at the beginning of the project, you really

need to be thinking about how you're going to go about building this project.

Those means and methods will help shape the risk that you incur

as well as the risks that you avoid and careful selection of means and

methods is a great risk mitigation tool,

especially in very large construction projects.

There's a range of other costs and you can see those on the slide.

Now, terms and conditions is something that I don't think get enough

consideration when risk is being assessed.

Those terms and conditions can range from local expropriation

of the land that you're gonna build on or your equipment and

materials, the government seizes it for whatever set of reasons.

Changes in law, whether those are with respect to the ability to do business.

Tax law, employment law and the potential for

conflicts between local laws, regional laws, national laws.

All of the represent terms and

conditions that you need to have a clear understanding for.

And in your contract,

you need to ensure that these have been addressed with respect to the level of

risk that you will assume and the level of risk that will be retained by others.

The faults can occur at many levels in international construction projects

from the government, a concession company, from the contractor or

subcontractor, depending where you enter into that overall value chain.

So some of the terms and conditions also will relate to your

local partner, to the bonding company who has a lot to say in

terms of what risks may be and what risks will you assume.

The bank then maybe bringing financing or

an insurance company that you may be looking to layoff certain risks on.

Payments, also a key point.

The fact that one has a contract and

is entitled to payment does not mean that you will necessary receive the payment.

So making sure that the obligations to pay are well-laid out,

the retention and the contribute for release of retention are clear and

then any other payments that one has to make or one wishes to receive,

such as retention or progress or milestone payments are clearly, clearly spelled out.

And then finally and

I'll touch on this at another point in the presentation, as well.

One needs to assure that all payments,

all payments are consistent with all the various anti-bribery,

anti-corruption laws that exist around the world.

For the US, those would be covered by the foreign corrupt practices act and

then the OECD countries have their own set of limitations as do many other countries.

Basically, construction is, has been and unfortunately is

likely to remain an industry that is plagued by corruption.

And therefore, you need to insure,

then you do not become a party to that corruption.

Just rapping up on a couple of the terms and conditions,

bonds will carry a wide range of terms.

I mentioned that dispute resolution mechanisms,

the jurisdiction becomes very, very important.

If you're working for the government of some country, you may not want

the jurisdiction for resolving a dispute to be the government of some country.

You may want an international settlement.

If there's a mediation process or alternative dispute resolution process

make sure those are clearly spelled out that the process is clearly spelled out

and what the obligations of each party is during the dispute period

are also clearly called out in your agreement.

So, quality is another area of risk.

Poor workmanship, it is not uncommon in cements in national settings for

you to come in, inspect a particular piece of equipment or particular system,

to find it acceptable.

And then you're going to inspect the next one of those systems a week later,

only to find out that the first system you inspected was removed, replaced with

an uninspected system and the inspected system, which they know will pass

inspection moved on to the second train of equipment for you to inspect yet again.

So quality is not only about assuring that you have good workmanship,

but also understanding the requirements and the context to do that.

Quality can be affected not only by your own QA, QC programs,

but don't ignore the need for complete documentation.

This will be required both for turnover, but may also become required for

release of retainage.

So sometimes in the heat of the moment,

there's a tendency to act and document later.

That's not a good practice.

That documentation really needs to be kept complete and contemporaneous.

All the notice requirements that are in contracts are in contracts for a reason.

Cost Risks: Construction Projects

Construction Project Management

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