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AB

Identifying and Assessing Riskin Construction Contracts

An IMCA Discussion Document

International MarineContractors Association

www.imca-int.com July 2006

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AB

The International Marine Contractors Association(IMCA) is the international trade associationrepresenting offshore, marine and underwaterengineering companies.

IMCA promotes improvements in quality, health, safety,environmental and technical standards through the publicationof information notes, codes of practice and by otherappropriate means.

There are two core activities that relate to all members: Competence & Training Safety, Environment & Legislation

The Association is organised through four distinct divisions,each covering a specific area of members interests: Diving,Marine, Offshore Survey, Remote Systems & ROV.

There are also five regional sections which facilitate work onissues affecting members in their local geographic area Asia-Pacific, Central & North America, Europe & Africa, MiddleEast & India and South America.

IMCA Risk Discussion Document

This document was prepared for IMCA by its ContractsWorkgroup, under the direction of the Overall ManagementCommittee and IMCA Council.

www.imca-int.com/contracts

The information contained herein is given for guidance only and endeavours to

reflect best industry practice. For the avoidance of doubt no legal liability shallattach to any guidance and/or recommendation and/or statement herein contained

.

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Identifying and Assessing Risk in Construction ContractsAn IMCA Discussion Docume

nt

July 2006

1 Introduction ........................................................................................................... 1

2 This Document ...................................................................................................... 3

2.1 Risk ....................................................................................................................................................................... 3

2.2 Contracting .............................................................................................................................

............................ 3

2.3 Profitability .......................................................................................................................................................... 4

2.4 Risk Management ............................................................................................................................................... 4

2.5 Where Does Control of Risk Lie? ................................................................................................................. 4

2.6 Risk Identification............................................................................................................................................... 5

2.7 Target Audience for this Document.............................................................................................................. 6

2.8 Main Risk Areas .................................................................................................................................................. 6

3 Contractual Risks ................................................................................................... 8

Appendices

1 Risk Areas ............................................................................................................. 11

Performance Risks ........................................................................................................................................................ 12

Financial Risks ................................................................................................................................................................ 14


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Political Risks ................................................................................................................................................................. 15

Technical Risks .....................................................................................................................................

......................... 16

Geographical Risks ....................................................................................................................................................... 17

Operator Risks.............................................................................................................................................................. 18

2 IMCA Competition Law Guidelines .................................................................. 19

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1 Introduction

The handling of risk in construction contracts varies considerably.This depends on the nature and location of

the work, the operator and contractor involved and the prevailing contracting climate. Each of these variesover time and there are also outside influences such as banks, governments and t

he insurance market.

In recent years, operators and contractors have remarked thatthe balance and handling of risks in somecontracts was not ideal and this document aims to promote dialogue between all parties to try to improve thissituation.

IMCA is an international trade association representing offshore, marine and underwater engineeringcompanies. IMCA members are upstream contractors ingeneral, but several of them are integratedcontractors completing downstream projects as well, so the intent of this document is to cover oil and gascontracting in general.

IMCA is widely recognised for collecting good practice from several parties andpublishing generic guidelines ofrelevance throughout the industry and around the world on many

issues relating to performance in theindustry on, for example, safety, the environment and other aspects.

Amongst IMCAs objectives are to:

strive for the highest possible standards with a balance of risk and cost;

achieve equitable contracting regimes; and


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promote co-operation across the industry.

In publishing this document, IMCA believes it will serve the long-term interestsof all participants in the oil andgas industry and promote dialogue between the parties about risk in pursuit of the above objectives. This, inturn, will improve relations, increase efficiency and reduce overall costs.

The document is not intended to represent an exhaustive analysis of all risks which are covered by contracts inthe oil and gas industry. It is a short discussion document intended to highlight issues. The subject is huge andthere exists already a vast knowledge base about risk and risk management in the public arena, published byacademics and the industry with input from operators and contractors. In addition, each operator andcontractor probably has its own department responsible for this subject and its own strategy, perhaps in aformalised document and approach. This document is not in

tended to replace this regime; rather, it isintended to supplement it.

Each contract, project and client/contractor relationship isunique. This document does not present apreconceived single solution or recommendation for or against contract styles such as EPIC (engineering,procurement, installation and construction) or lump sum. It aimsat commenting on some of the issues thatmay need to be addressed in various contracting situations.

This document is about:

identifying risk;

identifying the financial consequences of the risk becoming a reality;

helping the contracting parties to achieve their appropriate risk balance;

trying to avoid parties accepting risks they dont understand; and

dealing with unknown risks.

The document can be used by operators and contractors to identify areas where risk may threaten theintegrity of a contract. Parties to a contract often do not realize that theperson who manages the risk under acontract may not necessarily be the person who carries the financial consequences of the risk becoming areality. The risks should be allocated to the party best to assume the risk.

This document does not contain contractual clauses and does not form a standardcontract. It is published asan aide for operators and contractors alongside their in-house risk approaches.

A trade association cannotmake compliance with its publications mandatory and remain within the bounds ofcompetition law. IMCA

The publication of this document by IMCA is intended to assist and promote industry dialogue and efficiency and its adoption is not mandatory.


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IMCA Risk Discussion Document1

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recognises the requirements of competition law and these are reflected in the IMCA Competition Law Policy

which is reproduced in Appendix 2.

The document has been developed by the IMCA Contracts Workgroup in conjunction with other IMCAmembers who also contributed to the development of the related

document IMCA Contracting Principles.IMCA documents often evolve and any reader is welcome to provide suggestions foradditions. This documentshould generally be considered to be work in progress. It is intendedas a document to help dialogue betweenthe parties to understand, mitigate and manage risk appropriately to the benefitof all the parties. Its aims are

to:

improve dialogue;

improve risk apportionment and understanding in contracts and projects;

improve efficiency and project delivery;

improve operator/contractor relations;

save money;

avoid litigation;

increase opportunities;

facilitate the development of alternative solutions; and

sustain the industry.


2IMCA Risk Discussion Document

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2 This Document

2.1 Risk

Risk is sometimes poorly understood by the main contracting parties and also those outside.

The effect of this is a danger:

to operators, in that they embark upon or frame a development uninfo

rmed of some of the risksinvolved;


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to contractors, that they adopt risk that they donot understand and lose money, perhaps

becoming bankrupt, thus reducing the global pool of contractorscapable of doing work;

to both parties, that if the risk is poorly understood and allocated, it is likely to be incorrectly

assessed, mitigated, insured and managed, resulting in poor project delivery;

to those further down the supply chain, that if the two main playerscannot deal with risks well

themselves, sub-contractors are likely to manage this poorly too;

to those outside (such as banks, national oil companies, etc.), thatthey will take poorly informed

decisions that make the risk environment worse;

to all parties, in that a lack of understanding of risk leads to inefficiency where each pays more andmakes less out of the venture.

2.2 Contracting

During the contracting process:

1 an operator wants to achieve a goal;

2 the operator does not want to take the risk of doing the work itself. This could be for a variety

of reasons: it does not have the skill, personnel, equipment, ti

me, desire, etc.;

3 contractors offer to do the work on the operators behalf. Why? The contractors are

established to have the skill, personnel, equipment, time, desire etc.;

4 however, the capability of the bidding contractors varies.They may all be able to complete the

work, but some can accept more of the risks than others.This depends on their skill, personnel,

equipment, time, desire etc., as well as their risk acceptance profile. These behaviours may be

amongst the distinguishing factors between bidders to help decide who is awarded the work, but

all parties need to understand the risks which they are accepting and know how the contract is

dealing with them. An operators best interests are not necessarily served by contractors

competing on criteria such as acceptance of excessive risk.

A large number of contracts are completed under the lump sum/turnkey regime. The reason for this

is that the operator wants to know at the outset what the budget andschedule is and then should be

required to have no management or other role during the project.It relies on a well-defined scope of

work and a competent contractor. The intent is tha


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t the operators define what they want, thecontractor builds it and hands it over in working condition to the op

erator who inserts the key, turnsit on and then owns and operates a successful facility. T

his idyllic model is easily spoiled by variousfrequently seen events:

1 the scope is not well-defined at the outset;

2 the contractor under-performs;

3 during the project, the operator interferes with: the scope, or the management, etc.;

4 unforeseen events.

It is not possible to have a lump sum without theturnkey element the two are inseparable.

The contractor cannot estimate the costs and run his

own project whilst maintaining budget andschedule control if the operator interferes. The upstream anddownstream construction industry has



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not always been as successful at leaving the contractor to deliver lu

mp sum turnkey facilities as, forexample, the ship building industry.

Contractors are not bankers or underwriters. The risks of funding projects, changes in foreign

exchange rates and insuring projects should be understood and taken by the most appropriate party.

The operator may be better placed.

One of the aims of this document is to avoid erosion of the profit margin through incorrect

understanding and apportionment of risk.

2.3 Profitability

Contractors generally aim to make a certain percentage profit margin.The industry has reported that

profit margins have been low or negative for several contractors on several projects in recent years.

Some contractors have accumulated several loss making projects such that their whole annual result

has been negative and this viability-threatening situation for several contractors has been one of the

drivers for this document. A number of operators have commented on this unsatisfactory state of

affairs as well.

Clearly, features in the commercial process such as competitive biddi


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ng impact on profit margins, butthis model has served the industry well. During difficult co

mmercial times, contractors are presentedwith the difficulty of bidding too high and missing the award.

If this occurs, their expensive facilities(offices, workforce, fabrication yards and vessels) will be

idle. If there is a large incentive to keep

these facilities active (at almost any cost) then bids can be submitted too low with no (or negative)

profit margin in desperation to win work. The work is later completed at a loss and the situation can

only get worse for all parties. This situation is unsustainable.

Nearly all of the risks discussed in this document have the capacity of eroding profit margin and

moving the project from a profit making into a loss-making venture.

In the hypothetical case of a contractor with a project target profitmargin of 5%, it should be noted

that it takes only a small swing in the contract price of 5% to erode100% of its margin. Further,it should be noted that the contractor only has recourse to the proje

ct duration (a few years at most)to achieve its return. The producing life of the facility that t

he contract was put in place to deliverclearly has a longer time for the operator to break even plus the opp

ortunity to charge more highly ifnecessary/appropriate/possible for its products later in the facilitys

life. Of course, a 5% swing in thecontract price for the operator is simply 5%, not 100% of his profit.

2.4 Risk Management

Risk management is the process by which the likelihood of risk occurring or its impact on a project is

reduced. It has five steps:

1 Identify the potential sources of risk on the project.

2 Determine their individual impact and select those with a significant impact for full analysis.

3 Assess the overall impact of significant risk.

4 Determine how the likelihood or impact of risk can be reduced.

5 Develop and implement a plan for controlling the risks and achieving the reductions.

2.5 Where Does Control of Risk Lie?

One way of classifying the risk is by identifying where control of the risk lies. This may change during

the life of the project.

The publication of this document by IMCA is intended to assist and promote i

ndustry dialogue and efficiency and its adoption is not mandatory.

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There are five classifications of risk according to where control lies:

1 External: Unpredictable

These are risks beyond the control of the individual or operator and are totally

unpredictable. They arise from external influences such asthird parties, acts of god, etc.

2 External: Predictable but Uncertain

These risks are also beyond the control of individuals or companies. They are expected, but

to what extent? There is usually data to determine a n

orm or average, but the actual impactcan be above or below this norm. Bad weather is an example.

3 Internal: Technical

These are risks arising directly from the technology of the project work, of the design,

construction or operation of the facility.

4 Internal: Non-Technical

These are within the control of individuals or the operator

and usually arise from a failure ofa project team to achieve its expected performance.

They may result in schedule delays, costover-runs or an interruption to cash flow.

5 Legal: Civil and Criminal

Risks under civil law can arise from contractual arrangements, patent rights etc. Risks under

criminal law can arise under statute, e.g. the UK Health &Safety at Work Act.

2.6 Risk Identification

2.6.1 Timing of Risk Identification

Risks need to be identified early enough to do something about them. Project risks should be

considered from the earliest conceptual stage. For example, risks from environmental

loading are key drivers in choice of conceptual design and so are considered on day one.

This document indicates that risks should beconsidered throughout the process from

conceptual screening through more detailed front end engine

ering and design (FEED), the bidprocess, award and project execution. A risk

inventory can run through from phase to


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phase, so nothing is lost between phases when the contracting parties may change. It can

continue right through into the production phase where it may have an influence on

maintenance, for example.

The key message is that the earlier the risk is identified

the better.

2.6.2 Who Retains the Risk?

After the risks are identified, it is critical to see whichparties retain this risk in practice and

through the contract clauses. Limiting values and circumstances may need to be defined.

2.6.3 Risk Importance

A conventional risk analysis can be used to rank the import

ance of the risks in descendingorder from: High risk + high value, through high risk +low value or low risk + high value, to

low risk + low value.



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2.7 Target Audience for this Document

The target audience for this document is:

Operators: Operator during conceptual development, bidding, construction Operator during production Partners

Contractors: Prime contractors Sub-contractors Vendors

Others: Finance community Host governments/national oil companies Insurance market/brokers.

The key targets are the operators and prime contractors during conceptual development, bidding and

construction. The other stakeholders in the list can influence therisks and their allocation and need

to be aware of the issues.

2.8 Main Risk Areas

The main areas of risk in these contracts are:


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Contractual

Performance

Financial

Political

Technical

Geographical

Operator

Contractual risks may include:

Operator group and contractor group property and personnel

Project works (including both operator and contractor supplied items)

Pollution

Third parties

Consequential losses

Warranty obligations

Unlimited liability/damages at large

Insurance cover

Force majeure and suspension

Delay

Variation orders

Free access to worksite

Intellectual property rights

Termination by operator for convenience

Operators obligation to pay contractor.



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Performance risks may include:

Scope, nature and duration of work


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Schedule interactions

Size

Safety and environmental performance

Weather

Soil and foundations

External influences

Operator and influences at time of bid.

Financial risks may include:

Profitability

Value of contract (size)

Balance sheet debt

Off-balance sheet debt

Level of exposure

Foreign currency exposure

Terms of payment

Operator creditworthiness

Insurance.

Political risks may include:

Interference

Disturbance

Confidentiality

Permits and licences.

Technical risks may include:

FEED quality

New technology

Weather

Soil and foundations.

Geographical risks may include:

Location of the work

Operator risks may include:


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Operator areas of influence

Insurance

Problems which impact the operator and can impact the contractor.

There will always be overlaps between these areas. The

contractual risks are a function of thewording of the contract whereas the other risks evolve from elsewhere

but the contract will be usedwhere necessary to deal with them. For this reason th

e contractual risks are explored in slightlygreater detail in section 3 below, whereas the other topics are explor

ed in Appendix 1.



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3 Contractual Risks

C.1 Operator group and contractor group property and personnel

The contract should define the costs of loss of or damage to the parties respective groups property

and personnel of whatsoever nature, irrespective of cause (includingnegligence).

C.2 Project works (including both operator- and contractor-supplied items)

The contract should define the responsibility for loss of or damage to the project works if such loss or

damage is caused by an act or omission on the part of the contractorgroup whilst the project works

are in the care, custody and control of the contractor group.

C.3 Pollution

The contract should define the responsibility for theeffects of pollution and contamination of

whatever kind emanating from the contractor groupsspread and onshore facilities, operators

facilities, the work and the facilities of others (third parties).

C.4 Third parties

The contract should define the legal liability for third parties losses caused by each, including in

circumstances where a contractor is required to perform work in an area of close proximity to any

existing facilities.

C.5 Consequential losses

The contract should define the indemnities for eac


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h partys groups respective indirect orconsequential losses howsoever caused or arising (including negligenc

e) whether or not foreseeableat the date of the contract.

C.6 Warranty obligations

Warranty obligations and defective performance liabilities (includingpost termination for default) and

all other implied liabilities should be expressed inthe contract in terms of magnitude, time and

remedy.

C.7 Unlimited liability/damages at large

The contract should define or limit the contractor groups total cumulative liability under the contract

and at law, in order to enable him to assess his overall exposure resulting from, for example, liability

for delay, damage, rework, re-performance and/or replacement and default (whether or not suchactions are carried out by a third party).

C.8 Insurance cover

The full details of the insurance policy terms, conditions, limits and exclusions (and any alterations)

should be available to all parties and define the cover available ornot for the project.

C.9 Force majeure and suspension

In the event that the contractor is prevented from performing the work due to force majeure or

suspension by the operator, the contract should definewhether the contractor has the right to

remove any vessel from site once a maximum period agreed in the contract has been exceeded.

C.10 Delay

The contractors liability for delay and liquidated damages should be defined and should be the

operators sole financial remedy under both the contract and at law.

C.11 Variation orders

The contract should define the contractors obligations to perform theoperator instructed variation

orders taking account of contractors other existing commitments, any change to the risk profile of

the workplace and a mutually agreed adjustment to price and schedulewhere appropriate.




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C.12 Access to worksite

The contract should define the access to the work site and remedies in the event of delay or

additional costs incurred as a result of restricted access to the wor

k site by the operator or any party(other than a member of the contractor group), including intervention

by an action group whether ornot such intervention is defined as force majeure.

C.13 Intellectual property rights

Intellectual property rights (IP) in terms of the party who developedthose IP before or during the

project should be clearly identified.

C.14 Termination by operator for convenience

Should the operator terminate the whole or part of the work for its convenience then the contract

should define the entitlement to payment for all workperformed, materials including cancellation

costs relating thereto and all vessel and equipment costs and termination fee.

C.15 Operators obligation to pay contractor

Payment by the operator to the contractor is a material term of the contract and time critical.



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Appendix 1

Risk Areas

The main areas of risk in these contracts are:

Contractual (C) (this is discussed in section 3 above)

The following areas of risk are discussed in this appendix below:

Performance (PE)


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Financial (F)

Political (PO)

Technical (T)

Geographical (G)

Operator (O)

The risks are grouped, numbered and annotated as shown in the brackets above forease of cross reference.



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Performance Risks

PE.1 Scope, nature and duration of the work

The scope and nature of work should be defined inthe contract. The contractor should have

sufficient time and information to assimilate the detail in the bid phase. Particular difficulty occurs with

contracts where:

there is insufficient time or information available to understand thedetail;

the information is insufficiently developed at bid stage (poor FEED see T.1);

the project depends on the contractor developing a new solution during the project for which he

cannot quantify the resources (groundbreaking projects see T.2);

the information available is wrong;

the bid scope is outside the knowledge of the operator and/or bidder (eg very large turnkey

projects).

The operator also has to perform in order for the contractor to perform. This issue is discussed

further under O.3.

If there is a danger of any of these risks occurring, the contract should define how the parties will deal

with the situation.

PE.2 Schedule interactions

The parties should understand the schedule and what happens if the sch


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edule changes. The effect ofschedule changes which are operator initiated (change of

scope, delivery of information/materials/components/approvals/permits etc, variation orders) and contractor ini

tiated (delay) should be definedin the contract. This includes interaction with long lead time items.

PE.3 Size

The probability of a problem described in items PE.1 and 2 in this performance risk register occurring

is increased on large projects.

PE.4 Safety and environmental performance

The contractor is expected to complete the workwith certain operator/own/industry safety

performance targets. If these targets are not achieved there wil

l probably be other knock-on effectson the project performance. Any targets, other than the contractors own ones, should be defined in

the contract such that there are no surprises.

PE.5 Weather

Weather risk needs to be assessed on a case-by-case basis.For example, some vessels are able to

accept a different level of weather risk than others.This may be a competitive edge issue if

contractors have, for example, larger equipment which can operate in worse weather conditions. But

for each contractor there will be a limit, beyond which the responsibility for weather risk should be

identified.

PE.6 Soil and foundations

The soil and foundations (site conditions) risk is generally borne bythe operator. This follows the

principle that the risk cannot be fully measured bythe contractor prior to the commencement of

work and so unknown costs could be out of proportion to the contractorsreward.

PE.7 External influences

Many of the risks discussed in this document may be outside the control of the contractor. Such risks

may prevent the contractor performing and include:

Access (see C.12);

Interfaces with operator and interfaces with other contractors;

Political risks (see PO.1-4);

Risks of interference and disturbance (see PO.1 and PO.2).

The publication of this document by IMCA is intended to assist and promote i


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ndustry dialogue and efficiency and its adoption is not mandatory.


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PE.8 Operator and influences at time of bid

If there is incomplete information at the time of bid, it will impactnegatively on the performance of

the contractor. If the contract is re-bid or negotiated over anextended period before award, both

the operator and contractor may have a lack of continuity in the bidprocess and amongst personnel.

Both can impact negatively on contractor performance.



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Financial Risks

F.1 Profitability

Contractors generally aim to make a certain percentageprofit margin. This is the most critical

outcome of the contracting process for the contractor.

At the end of the contract the contractoronly has the financial result. By comparison, the operator acquire

s an asset with a lifetime expectationof positive returns and with some element of control over these retur

ns.

F.2 Value of contract (size)

See PE.3.

F.3 Balance sheet debt

The terms of payment and any deposits, performancebonds, bank guarantees, and parent co

guarantees etc should be understood.

F.4 Off-balance sheet debt

The terms of payment and any deposits, performancebonds, bank guarantees, and parent co

guarantees etc should be understood.

F.5 Level of exposure

See F.2. This is related to size but also to payment method, cash fl

ow, etc

F.6 Foreign currency exposure


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Many contracts are in countries which are not the home country of the contractor. In addition,

components, supplies and sub-contractors can also come from further countries. These facts can

combine to mean that the contractor could have acurrency exchange risk for the project.

The operator is often better placed to cope with this risk. This is because:

the materials etc which are paid for with foreign currencies may have been designated by the

operator;

the operator is probably operating in the local country of the work (which the contractor may

not be) and so will be set up to deal with its currency;

the operator (generally being a larger capitalised comp

any) can get better currency terms andperhaps has access to the host government to negotiate terms.

Swings of a few percent are regular and should be considered in the light of F.1 above.

F.7 Terms of payment

The payment terms should reflect the progress of the work and be cashneutral. It is noted that host

governments in some overseas projects are obstacles in this area and it is clearly an operator matter

to address this with the relevant government. See F.3 and F.4 above.

F.8 Operator creditworthiness

Some operators are now smaller companies than the main contractors.Understanding whether the

operator has the financial backing to continue to pay the contractoris important. For some overseas

projects the parent operator may have sufficient creditworthiness butthe project may be operated via

a separate subsidiary with smaller credit.

F.9 Insurance

See C.8. The financial integrity/security of the underwriters is critical.

F.10 Materials

The implications of material cost fluctuation, e.g. fuel or steel prices, should be understood by both

parties.




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Political Risks

PO.1 Interference

PO.1.1 Before award Some host governments in

terfere with the normal business process(operator/contractor relationship) by insisting on c

ertain contract styles. These include EPICcontracts, lump sum bids, specific contract and

payment terms, local content and locallegislation/standards. This can add considerable uncertainty and

risk to bids. Host governments canfrustrate the award process as well, making the

cost of bidding higher (due to protractednegotiations), the risk of interference with other projects for the c

ontractor higher, the prospect offrustrated bidding (a bid submitted which costs money to prepare and

where eventually no award ismade), and stimulating general negative effects on contractor cash flow. The contractor has little

opportunity to influence these aspects which should be clarified in the bid stage and the operator is

generally better placed to influence these aspects positively.

PO.1.2 During contract The same broad points as in PO.1.1 apply.In addition, the host government

may delay payment, change laws and taxes, change local standards, andinterfere with local content or,

be a cause of delay where local content is late or of unacceptable quality. The contractor has little

opportunity to influence these aspects which should beclarified in the bid and the operator is

generally better placed to influence this positively.

PO.2 Disturbance

The contractor needs a secure environment to completehis work on site. Local disturbance can

negatively influence schedule. The operator has the best opportunity to influence local stability and

provide security to the contractors workforce and spread. Similarly, the operator has the best

opportunity to influence the completion of local work and ensure no interruption to the supply of

materials, personnel and third party provided items tothe contractor. The parties should work

together with other operators in the region, host governments and security personnel to aim at

secure working. Again, the contractor has little opportunity to influence these aspects which should

be clarified in the bid and the operator is generally better placed to influence this positively.

PO.3 Confidentiality

There is a risk that confidentiality may be breached which is a political risk. The contractor has little

opportunity to influence this so it should be clarified in the bid an


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d the operator is generally betterplaced to influence this positively.

PO.4 Permits and licences

Permits and licences may not be issued in time bythe authorities, or may be required by the

authorities at a time when they cannot be procured by the contractor.The operator is usually closer

to the authorities and may be better placed to influence the issue ofpermits and licences.



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Technical Risks

T.1 FEED quality

The contractor may be asked to bid on the basis that he has studied the FEED (front end engineering

design) and accepted it. There may be insufficient time to complete this study in full depth in the bid

period. FEED may have errors and in a complex bidthese may be impossible to find. It is also

inequitable to ask the bidders (effectively) to be theauditors of the FEED which is, in part, what

occurs in a bid where the contractor is asked to accept the FEED.The risk of FEED being inaccurate

needs to be understood and the possible effects of this clarified.This process often needs only to bedone once with the successful bidder, not with all bidders.

T.2 New technology

In ground-breaking projects the bidder may be asked to carry out designs and activities during the

project that have not been completed before. The biddermay be unable to envisage that a piece of

technology will be unsuccessful. Both parties should understand this situation and work towards

understanding the risks, their implications and the costs of solutions. Then the risks should be

apportioned.

T.3 Weather

See PE.5.

T.4 Soil and foundations

See PE.6.



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Geographical Risks

G.1 Location of the work

The geographical location will determine the magnitude of weather, political and operator risks. Most

of these issues are discussed under Political Risks above and include: politics; stability and changes to law/tax; local legislation/standards; governing law; security of vessels and personnel; material supply interruption;

hindrance to mobilisation of spread; interruption to supplies for spread; hindrance to movement of personnel (crew change); late delivery of the work from or by third parties; project logistics; quality of operator supplied materials; permits and licences.



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Operator Risks

O.1 Operator areas of influence

The paragraphs above discuss operator risks and the operators influenceon:

the bid; award schedule; intellectual property; credit worthiness; interference; supervision; approval regime and timing; timely provision of information; local content; logistics; contracting regime; FEED quality; scope of work clarity; cash flow for project work and variation orders; permits and licences.

O.2 Insurance

If the operator decides to self insure all or part of the project the


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re is sometimes no policy wording.Without it, there is a risk that a claim will lead to dispute rather t

han payment. In the case of a claim,the contractor has recourse only to the operator (who

may be claim averse) rather than to aninsurer, who recognises that paying claims is an integral part of his

business. This can lead to souring

of the contract relationship. If recourse is to the project manager, whose job is to keep the project

within budget (and whose bonus may depend on it) the claim handling may be particularly complicated

and the project manager may not be well versed in claims handling which is a discipline that insurers

particularly retain. An insurance wording should exist and be available for all parties. See also C.8.

O.3 Problems which impact the operator and can impact the contractor

Some project problems impact the operator. If these

occur, an operator problem should not bepassed on to the contractor. However, such problems often impact the contractors performance,

despite being outside his control. Examples are late deliveryof third party materials or information,

poor quality third party materials, poor quality information, late approval, late delivery or deficiencies

in permits and licences, late payment and poor interfaces. Each of these eventualities should be

understood by the parties.



----------------------- Page 23-----------------------

Appendix 2

IMCA Competition Law Guidelines

Introduction

These guidelines are compiled for members in accordance with the Associations constitution. They will becirculated to all members.

Policy

The Association, its regional sections and all committeeswill comply with all applicable

competition law (competition, antitrust and similar laws) including those of theUnited States ofAmerica, the European Union, the United Kingdom and other countries in which theAssociation

is active.

All meetings will start with this as agenda item 1.


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General

1. The Constitution and section objectives are written to comply with competition law.2. Membership is open to all companies active in the offshore, marine or underwater engineering industries.

Any action in rejecting a membership application or currentmember is reviewed for compliance withcompetition law.

3. The Association has a formal document retention and disposal policy.4. The Association has a formal complaints procedure

Rules for Meetings

Members should comply with the following guidelines when meeting:

1. Agendas of all meetings should be reviewed for compliance with competitionlaw.

2. Items not on the agenda will not be allowed if they raise issues which violate competition law.3. All participants have the right to question any topic or discussion that might violate competition law. Any

participant has the right to state their objection and leave a meeting if they feel that any topic or discussion

violates competition law.4. Minutes of all meetings should be accurate and should not be doctored or incomplete.5. Minutes of all meetings should be reviewed for compliance with competition law. Minutes should also

include statements to show compliance with competition law.6. All meetings should be scheduled and no unscheduled, informal, ad-hoc or si

de sessions should be held.

The following guidelines should be adhered to by all members during any meetings:

1. Do not discuss current or future prices.2. Do not discuss what is a fair profit level.3. Do not discuss an increase or decrease in price.4. Do not discuss standardising or stabilising prices.5. Do not discuss pricing procedures.6. Do not discuss cash discounts.7. Do not discuss credit terms.8. Do not discuss controlling sales.9. Do not discuss allocating markets.10. Do not complain to a competitor that its prices constitute unfair trade practices.11. Do not discuss refusing to deal with a company because of its pricing or distribution policies.12. Do not attend unscheduled, informal, ad-hoc or side sessions.

Conclusion

Trade associations can be targets for government agencies patrolling and enforcing compliance withcompetition law. By conducting its business openly and avoiding e

ven the appearance that it is engaging inactivity that might seem to have an effect on prices or competition, the Association and members can protect


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themselves from charges of violations of competition law.



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