This document discusses risk analysis and management for Engineering, Procurement, and Construction (EPC) projects. It defines risk and project risk, and describes the importance of risk management. It outlines various risks involved in EPC projects related to owners, contractors, government, climatic conditions, social factors, and shareholders. It then discusses techniques for risk analysis including using historical data, expert judgement, Delphi estimates, decomposition, activity sequencing, procurement planning, and project management. The key is to identify, assess, and control risks in order to prevent or decrease gaps between estimated and actual project costs, timelines, and quality.

1. Risk Analysis and Management- EPC Projects
Palla Narasimhudu , Larsen & toubro ltd.
The demand for scientific management in different types of projects is constantly increasing, especially for
project base organizations, Engineering, Procurement and Construction (EPC) projects have become one of the
more popular methods of project execution by both clients and contractors. Risk Management, one of the critical
concepts of project management is interesting to focus on because of its advantages and capabilities [1].
Utilization of Project Risk Management methodologies, especially in large EPC projects can lead to huge
advantages on all aspects of projects’ development. It can also be implemented as the main reference and basis
for bidding, tendering and execution (including cost, time, resource, and quality management).
By risk identification, assessment and control, probable gaps between estimated and real cost, time, and quality
of projects can be prevented or decreased. This approach also provides facilities to predict the final cost and end
dates of projects with a greater level of confidence [1].
Risk can be defined in many ways
Risk is a possibility of something that may occur in the future. It has its origins in uncertainty as on today and
has to be identified today [2]
“Risk is most commonly conceived as reflecting variation in the distribution of possible outcomes, their
likelihoods, and their subjective values” (March & Shapira 1987)[1].
Risk is defined as the possible variation in results and can be either positive or negative (Williams et al., 1998)[1]
Risk defines as the “effect of uncertainty on objectives” while “An effect is a deviation from the expected -
positive and/or negative. Objectives can have different aspects (such as financial, health and safety, and
environmental goals) and can apply at different levels (such as strategic, organization-wide, project, product and
process).Risk is often characterized by reference to potential events and consequences or a combination of these.
Risk is often expressed in terms of a combination of the consequences of an event (including changes in
circumstances) and the associated likelihood of occurrence.” - Joint Technical Committee OB-007 (Standards
Australia/Standards New Zealand, 2009)[1]
Considering the definitions above, a wide variety of risk descriptions can be found based on the circumstances
and applications. These definitions reveal two important aspects of the risk in general; uncertainty and
consequences. Therefore the occurrence probability of the risk and the severity of the effects are considered as
two major parameters of defining the risk [1]
All in all, risk is interpreted as a type of unknown event with unpleasant effects, although it can be a pleasant
happening with positive consequences which would normally be considered as an opportunity. Risk analysis
focuses on both pleasant and unpleasant aspects of the risk [2]
Profit/Loss
Problem
Situation
Risk
Uncertainty
Attributed to
Chakradhar Iyyunni, Ph.D
L&T IPM

2. Project Risk
According to the Project Management Body of Knowledge standard, PMBOK® Guide (PMI, 2008, p.275)
project risk “is an uncertain event or condition that, if it occurs, has an effect on at least one project objective. A
risk may have one or more causes and, if it occurs, it may have one or more impacts”. A cause can be considered
as an assumption, condition, constraint, or a requirement that makes the probability of positive or negative
results, and project objectives consist of cost, time, resource, scope and quality [1]. A project is a certain type of
service which gathers different products together in order to achieve an inclusive solution. From this perspective,
projects are generally considered to have greater risk than products. Project risk is categorized separately from
financial or technical risks.
According to Mulcahy (2003) Projects risk are divided into two parts:
Static: Static risks are those who keep their characteristics during the whole project life cycle.
Dynamic: Dynamic risks can change their occurrence probability and consequences severity in the project time
span [1].
Project Risk Management
Based on PMBOK® Guide (PMI, 2008, p.273), "Project Risk Management includes the processes of conducting
risk management planning, identification, analysis, response planning, and monitoring and control on a project.
The objectives of Project Risk:
Management are to increase the probability and impact of positive events, and decrease the probability and
impact of negative events in the project."[1]
“It is the art and science of identifying, analysing and responding to the risk factor throughout the life of project
and in the best interest of its objectives.”[2]
Inherent Project
Risk
Risks Specific to
the Owner
Execution Risk
Uncertainty Risk Problem Evolution
Project Risks Evolution
Project Risk = (Probability of Events) (Consequences of Events)
Attributed to
Krishnamurthy,
Ex- Dean, L&T IPM

3. Applying of risk management is managing the risk effectively rather eliminating all risks in projects. Benefits of
risk management involves,
1) Systematic decision making approach and implementation
2) Probable out comes of the project
3) Outcome plan or approach to mitigate
4) Considered as a threat or opportunity ,which affects quality, time ,cost and performance of the project
5) Express the organisation’s responsibility to the clients
6) Able to withstand the competition
7) Demonstrate and enhance the successful completion of organisation record
8) Explore the techovative thinking, while face off risks.
9) To facilitate good platform for further growth of individual as well as organisation.
10) To facilitate good plat form for leaders
EPC PROJECT
EPC stands for Engineering Procurement and Construction, In EPC contracts, the contractor is responsible for
engineering and designing the project, procurement of all materials, tools and equipment and fabrication or
construction of the project, either in house or by subcontracting some work packages or some phases of the
project.
In EPC projects, total interaction of multiple agencies and multiple people working concurrently towards
common goal and transference of sharing information.
Engineering procurement and construction enterprise seen as key element participation and is critical for
delivery of project. Quality does not need more cost, but its value needs to be recognised.
The approach involves the execution of engineering and procurement activities running concurrently with
required at site deliveries timed match the schedule for efficient construction and installation.
In EPC projects, working with issues such as deadlines, controls, mission statements and submissions
combinations, along with delivery (with defined cost, time and quality by considering risks in the domain of each
contract), all in all means management, although the management of an EPC contract must be committed for all
pre-defined responsibilities (Huse, 2002).
Risks involved in EPC projects
Because the dynamic and complex nature of projects, contractor carry the risk on behalf of the customer at large
extent and there is substantial amount of risk involved.
The procurement phase is allocated the highest risk in the cost distribution of an EPC project and, as such, it is
imperative to ensure accurate and correct collaborations between the engineering and procurement sectors
Ability to handle good frontline engineering, basic engineering is the key factor to optimise the cost. If it is not it
may be disaster.
EPC companies are not much value creator for shareholders, over the years it may be not attractive, if not come
up their expectations.
Owner 1. Lack of Customer Interaction
2. Failed to Financial Closure/ Crisis.
3. Change in Scope
Contractors 1. Inexperience Project Management Team
2. Lack of common practices (life cycle, planning, and so forth)
3. Ineffective project decomposition (Work Break down Structure) resulting inefficient
Plan Risk
Management
Identify Risks
Perform
Qualitative
Risk Analysis
Perform
Quantitative
Risk Analysis
Plan Risk
Responses
Monitor and
Control risks

4. work flow
4. Non availability of technical, skilled and semi-skilled manpower
5. Ineffective Communication and Coordination
6. Safety
7. Competition
8. Poor Documentation
9. Poor Quality
10. Poor Cash Flow Management
11. Higher Inventory
12. Higher Interest rates
13. Environmental Controls
Government 1. Regulatory Issues
2. Policy paralysis
3. Unstable Government
4. Ineffective Co-ordination between Central and State Departments
Climatic and
Geographic
Conditions
1. Unforeseen Occurrences like Rain, cyclones, earthquake
2. Excessive Heat during Summer
3. Unusual Soil Strata
Social and
Economic
1. Anti-Social elements involvement and unethical process
2. Recession
3. Fluctuation in Currency and commodities
Shareholders 1. Low wealth creation
Risk analysing & management
EPC Projects are large in nature; better data at bid stage would provide higher level of resource optimisation and
deliver better bids/bid decision. During the phases of project development by the owners/ clients and bidding by
EPC contractors, it is important to generate realistic budgets and to develop a sound execution strategy to meet
the completion requirements of the project. To understand the base cost of the project a careful bottom-up cost
estimate for procured items as well as for contracted services including various risks associated with the project
is required. Estimating project work is challenging, and most people are admitting also avoiding, probably most
significant problem of technical projects like EPC involves engineering, designing, procuring and constructing
requires interaction and integrating chain relation.
Key
Contributor
Unable to
Complete
Critical
Scope
SchedulePeople
Cost Organization
Causes Effect
Changes Need
Unavailable
Skills
New Technology
Requires
Unanticipated
Skills
Budget Cut
Task Queued Due
to Resource Limits
Reorganizatio
n
Layoffs
Inadequate
Notice and
Communication
Learning Curve too
High
Work Delayed, Leads
to Timing Conflict
Interruptio
n
Not Ready in Time
Lost Resource
Personality Conflict
Wrong
Skills

5. The best way of effort is the measurement made the same /similar work done erlier.Good estimates relies on:
1)Finding and using of historical data:- one’s go through the historical data, one can find out the project
analysis and lesion learnt, reference material s and engineering or other standards, published technical data and
the kind of risk level [3].
2) Experts and expert judgement: - Historical information need not be personal to be useful. Even when no
one on the project has relevant experience or data, there may be others who do, outside of project. One source
may be peers, managers, and technical talent elsewhere within organization. Another possibility is to seek out the
opinions of colleagues in professional societies who do similar work for other companies outside consultants in
technical or management fields may have useful information that they will share, for a fee. Even quotations and
proposals from service suppliers may contain useful data that you can use for estimating project work [3].
3) Delphi estimates: -Delphi is a ‘‘group intelligence’’ way to tap into subconscious historical data that would
otherwise be unavailable. It is also a collaborative team technique and contributes to group buy-in, ownership,
and motivation [3].
4) Further decomposition: -When you lack of historical data, begin by breaking the activity to be estimated into
even small pieces of work. Extrapolate from actual measurements of the portion of the work to estimate whole
activity [3].
Estimation Techniques [3]
Relevant Metrics Exist No Data Available
Prior Activity Experience  Retrospectives
 Databases
 Parametric Formulas,
Experiential Rules (“Size”
Methods)
 Life Cycle Norms
 Task Owner Input
 Peer Inputs
 Inspections
 Delphi Analysis
 Short Tasks (20 Day Max)
in WBS
 Further Decomposition
No Activity Experience  Published Information
 Vender Quotes
 Expert Consultation
 Guess
 Get Outside Help
 Use Older Technology
5) Activity sequencing: - Activity sequence requires determining the dependencies for each project activity, and
these linkages reveal many potential sources of project delay. Discovering risk arising from schedule
dependencies require all project activities to be linked both predecessor and successor activities. Critical path
method analysis is a useful technique for determining which schedule risk belonging on project risk list [90].
6) Planning horizon: -The uncertainty inherent in work planned more than a few months in the future is a
source of significant schedule risk on any lengthy project. Make specific note of any unusual, novel, or unstaffed
activities more than three months into the project. On a regular basis, include explicit activities in the project
plan to review estimates, risks, assumptions, and other project data. Risk management relies on periodic
recommendations for project plan adjustments based on the results of these reviews [96]
7) Planning procurement:-Starting before any work, specific risk permeates all aspects of the procurement
process. Procurement planning involves investigation of possible options, and requires a “make-or-buy” analysis
to determine the amount of risk involved. Determine what is most important of the project and ensure meet the
specifications that the project required and specific work on technical projects tends to evolve and change
quickly; it is challenge to evaluate potential suppliers to supply accordingly. After select a supplier, the next step
in the procurement process is to finalize the details of the work and finances. Once a selection is made, the
balance of power begins to shift from the purchaser to the supplier, which raises additional risks. When the work
begins, the project becomes dependent on the supplier for crucial, time-sensitive project deliverables. Since the
primary consideration on the supplier side is financial, the best tactic for risk management in negotiation is to
strongly align payments with achievement of specific results. Risk management also requires that at least one
member of the project team be involved with planning and contracting for outside services so that the interests of
Fishbone Diagram Analysis [3]

6. the project are represented throughout the procurement process. Before finalising request for proposal, one needs
gather information through other agencies; colleagues, internal business units and some other outsource to
determine the capabilities and risk taking abilities of the particular agency/out sourcing firm. Communication
throughout the process is also essential. Anything that one potential supplier finds unclear in the request for
proposal needs to be addressed [3]. In projects everything is possible, some highly influenced supplier is
definitely potential risk source for project, and management should definitely take a look. Despite best efforts,
results in terms that represent potential project problems, note these as risks. In extreme cases, may need to
reconsider selection decision
8) Engineering and Construction: - Ability to handle good frontline engineering, basic engineering is the key
factor to optimise the cost. If it is not it may be disaster. Engineering is the prime in control the project in the
scientific way. Person need not come from elite colleges, but person who having passion and dedication inside
organisation with bit training able to create great results. Early in the engineering phase a document delivery
schedule shall be developed which supports the project baseline schedule. This would enable manpower as well
as resources planning. In case the available in house resources are not sufficient to support the project execution,
utilisation of contracted resources shall be considered, as a compromise on project schedule due to resource
constraints would not be desirable. Major focus areas during engineering are speed and quality of engineering
deliverables. Hidden defects in engineering can prove extremely expensive to rectify if identified at a late stage
of the project. Delays in engineering shall be avoided by all means as this will have a knock-on-effect on the
further project execution schedule. Also, delay recovery in engineering can be easily handled compared to
recovery of delays in fabrication or construction. An established culture of fair reporting of problems, either
technical or relating to project schedules, within the EPC organisation enables the project manager to initiate
corrective actions right in time.
EPC companies needs to be concentrate. Finally construction, it is really the art of management to cope with
planning, time, schedule and cost more importantly Quality and Safety of the people because these are the only
land mark for future prospects. Project manager needs to accelerate his role to create interaction between his
team and multiple agencies for getting things done. Needs to conduct weekly, monthly and quarterly reviews and
meetings to track and monitor the progress and foreseen risks and appropriate plans to overcome. In construction
stage, whole package to brake at smallest level, tracking schedules, creating critical paths, Quality and Safety
plan develop and implementation, creating work front for resources utilisation, cost optimisation ,documentation
is the part of evidence and future controller risk and change management, managing stack holders ,legal and
regulatory issues, vertical ,horizontal and down level communication, for the coping with lack of skills
,identifying and upgrade by training ,skill training to work men for enhance the quality of product ,methodology
preparation for all activities along with risk and hazard identification and mitigation at planning and execution
stage, resource levelling, outsource resources is involving potential risk, decision making, interaction with
customers, methodology for delayed schedules ,monitoring the cost, inventory control , invoice and billing in
accordance with financial aspects, accounts receivable, accounts payable to vendors, cash inflow and out flow,
working capital management, cost control management, waste management, change management,
environmental harmony and unforeseen risk all are part of execution, every entity having potential source of risk,
inefficient risk management leads to damage the company ,human lives, machinery.
9) Project Management: An essential role during project execution is project management, which we would
foster into highlighting some important activities in the context of risk mitigation strategies. First and foremost
being the generation and freeze of the baseline schedule for which client approval shall be obtained. The baseline
schedule shall clearly define client obligations (what and when; e.g. handover of cleared site, provision of
utilities, etc.) and shall be supported by a schedule basis memorandum describing important assumptions made
for the generation of the schedule. The approved baseline schedule is not only a fundamental tool to steer the
project within the organisation of the EPC contractor but is also essential when consequences of changes have to
be evaluated. A change event in a project may lead to cost and/or schedule consequences and the latter can be
evaluated and substantiated only if the baseline schedule and regular schedule updates are available to EPC
contractor and client. In respect to changes to the project scope or schedule a frequently seen mistake during
project execution is the late notification of a change event and the late determination and documentation of its
impact on time and cost. A further important activity is the billing schedule which ideally targets a cash positive
or cash neutral project execution. As the approval of the billing schedule is often a precondition for submission
of first invoices, due attention should be given to this activity.
In the execution phase it is essential to be precise in crucial decisions and move forward to actualise the plans
rather than spending excessive time in exploring alternatives or going into R&D, as the EPC projects have
predefined boundaries of project time, cost, and quality.

7. A significant challenge for the project management in this phase is the coordination of the interfaces between
various engineering disciplines as well as between engineering, procurement and construction. In order to
manage this challenge the project manager shall have the full understanding of required workflows and processes
and has to align these with the schedule requirements. When the construction site nears completion the quality
and completion documentation become an issue in respect of timely generation at required quality. For an EPC
contractor it is highly recommended to keep the generation of test packs and other quality documents under tight
control or under own management.
However, with careful planning and risk management through all the phases of the project, from proposal to
completion and with due consideration of at least the described risk mitigation measures, the EPC contractors
shall be able to execute the projects within their budgets and time.
References:
[1] Amir Hassan Mohebbi, Ngadhnjim Bislimi, Project Risk Management: Methodology Development for
Engineering, Procurement and Construction Projects, Karlstads Universitet, Karlstad, Sweden, (2012), p.1,3,4
[2] Chakradhar Iyyunni, Ph.D, Risk Management to Opportunity Management, L&T Institute of Project
Management, Knowledge City, Vadodara
[3] Tom Kendrick, PMP, Identifying and Managing Project Risk, Second Edition, PHI Learning Private Limited,
Delhi, (2013) p.81, 82, 87, 90, 96, 178