An effective risk allocation through strategic contracting in EPC projects

Abstract

Engineering, Procurement, and Construction (EPC) projects have become an internationally popular model for construction projects, where large risks are bore by the EPC contractor and the subcontractors [Galloway, 2009; Guo et al., 2010]. Risks are inherent to all construction projects, however, the high uncertainties of the international EPC markets, and the complex EPC processes, create for abundant risks which often make it unfeasible for EPC contractors to manage the risks by relying solely on their own capabilities [Wang et al., 2016]. These projects are often of large scale, financially and technically, in
a competitive environment where subcontractors have tight margins and even unrealistic budgeting [Yeo and Ning, 2002]. Furthermore, the concept of risk management is a widely discussed topic in construction literature. However, the effective allocation of these risks to certain parties down the supply chain is
not a popular subject. EPC project environments are known for their adversarial relationships between stakeholders, where subcontractors have demonstrated a certain feeling of distrust within the supply chains [Dainty et al., 2001]. The status quo of these large and complex EPC projects is that the number of subcontractors willing and able to take on the risks of EPC projects is shrinking. There is a need for a more effective risk allocation within the supply chain.

To address this problem statement, this research focuses on analyzing how the risk allocation within the supply chain can improve, in order to improve the project performance for all parties involved. This problem statement is answered through the viewpoint of the contracting strategy used in EPC projects since the contracting strategy is a tool for allocating risks. The final output of this research is a Network Risk Allocation model and recommendations for both EPC contractors and subcontractors. This is attained by conducting exploratory research, consisting of quantitative data gathering, in order
to answer the main research question:

How can risks within EPC projects effectively be allocated among the EPC contractor and subcontractors, to improve project performance through strategic contracting?

This research is divided into three phases. The first phase includes the theoretical background, including a literature review, document review, and exploratory interviews. Phase one dives into the theory around risk allocation, risks in EPC projects, and the supply chain network. Here it is concluded that an effective risk allocation for EPC projects is in the form of a network risk allocation. Phase 2 continues by conducting empirical research in the form of a Case Study analysis. Two projects are analyzed on the basis of their risk allocation. This led to recommendations for effective risk allocation. Phase 3 dives into the development of the solution model: the network risk allocation model. It is found that collaboration in the network is an important element to effective risk allocation, amongst other factors.