PROJECT OWNERS SHOULD INCREASINGLY

ADOPT THE COST PLUS MODEL OVER LSTK

POSITION: AGAINST THE MOTION
PMI AGC Energy Forum: DMS Debates

Dr. Mohammed Sammur - Executive VP, Larsen & Toubro

Salah Jebara Al Bufalah - Head of Major Projects ZADCO & President PMI AGC UAE
Felipe Revenga – Chief Operations Officer, Tecnicas Reunidas
Kuwait City, Kuwait - 12th June 2011
 WHY OWNERS
SHOULD NOT ADOPT
COST PLUS MODEL?

2
COST PLUS - DISADVANTAGES
GENERAL
• ALL Risks by Owner
• Uncertainties in Project Price & Schedule

ENGINEERING
• SOW  Undefined and NOT CLEAR
• SOW self-developed during project execution
• High Probability of Changes
• Potentially oversized Team
PROCUREMENT
• Procurement Cycle normally longer than LSTK
• Price negotiation advantages missed  No incentives

CONSTRUCTION
• Contractor and Subcontractor Controlled by Owner
• Delays and Errors assumed by Owner
• Diffuse Accountability
• PMC not enough empowered
Felipe Revenga - COO, Técnicas Reunidas PMI AGC Energy Forum: DMS Debates June / 2011
 WHY OWNERS SHOULD
ADOPT LSTK MODEL?

4
LSTK MODEL – ADVANTAGES

GENERAL OWNER´S BENEFITS

Owner Contractor

Subcontractors Suppliers
ALL KEY PARTIES INVOLVED WITH ACTIVE PARTICIPATION
• 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
• Schedule defined and agreed
• Better definition of SOW since the beginning

• Risks assumed by Contractor

• Single Point Responsibility (Contractor)
• Owner focused on Schedule, Quality and HSE
LSTK MODEL – ADVANTAGES

GENERAL

ENGINEERING

Early BE/FEED Validation and Freezing

Early problems detection

Design Changes minimized

Engineering Team focus in Schedule and Quality of deliverables

Felipe Revenga - COO, Técnicas Reunidas PMI AGC Energy Forum: DMS Debates June / 2011
LSTK MODEL – ADVANTAGES

GENERAL PROCUREMENT

ENGINEERING

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

Felipe Revenga - COO, Técnicas Reunidas PMI AGC Energy Forum: DMS Debates June / 2011
LSTK MODEL – ADVANTAGES

GENERAL PROCUREMENT

ENGINEERING CONSTRUCTION

Owner do not have to take responsibility to Control

Subcontractors.
Safety performance Optimized and Maximized
Construction troubleshoots by Contractor
Contractor is empowered  Total Control Construction

Felipe Revenga - COO, Técnicas Reunidas PMI AGC Energy Forum: DMS Debates June / 2011
 WHO IS THE
RISK OWNER?

9
LSTK MODEL – RISKS

RISKS TRANSFER TO CONTRACTORS

CONSTRUCTION
PROCUREMENT
ENGINEERING

OWNER CONTRACTOR

EPC-LSTK implies
to contract a
specialist in
GLOBAL T ECHNICAL LEGAL / FINANCIAL RESOURCES
Risk Management
FACTORS CONTRACTUAL

Felipe Revenga - COO, Técnicas Reunidas PMI AGC Energy Forum: DMS Debates June / 2011
LSTK – TIPS TO REDUCE & CONTROL RISKS
ENGINEERING
Early Eng. Works and quick mobilization to Taskforce.
Design Changes controlled and Limited at early stages
Enhance Quality Policies (Check Lists, procedures)

PROCUREMENT Early Procurement

Early and Efficient KOM with vendors
Vendors Dwgs.  Early reviews and approvals at
workshops
Reducing Quality Deviations

CONSTRUCTION Construction Organization involved since Engineering

Phase
Early agreement of Subcontracts
Continuous Critical Path Analysis and deviation actions
Construction & Commissioning Driven Projects
11
 WHAT LSTK
WE CAN DO TO MAKE
MODEL MORE ATTRACTIVE?

12
LSTK MODEL MORE ATTRACTIVE?

Realistic Schedule, with reasonable period

1 for Bid preparation

Balanced Terms and Conditions. Liabilities,

2 LD’s, Bonds, etc

Sharing some of the uncontrolled risks and

3
rewards, Multi- Currency Bid, Commodities
Indexing, Exchange Rates fluctuation, etc

4 Incentives Programs
(Quality, HSE, Schedule)

5
Apply Value Engineering

6 LSTK through Open Book Conversion

LSTK MODEL MORE ATTRACTIVE?

OBE + LSTK MODEL ADVANTAGES

Real Cost + an agreed Conversion factor assures a fair

COST
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.

SCHEDULE
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.

Felipe Revenga - COO, Técnicas Reunidas PMI AGC Energy Forum: DMS Debates June / 2011
LSTK MODEL MORE ATTRACTIVE?

OBE + LSTK MODEL

SIGNIFICANT COST & TIME SAVINGS VS. TRADITIONAL LSTK
LSTK Contract Award Contract Award

FEED EPC LSTK

OBE + LSTK (CONVERTIBLE) Schedule

Advantage
Contract Award Conversion
Phase
FEED + EPC LSTK

Price Definition: Fair Price

Better accuracy on the costs Contingencies minimized

Felipe Revenga - COO, Técnicas Reunidas PMI AGC Energy Forum: DMS Debates June / 2011
 ‫شكرا‬ THANK YOU GRACIAS
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
Kuwait City, Kuwait - 12th June 2011