Industry publication, December 2001

NYC 9/11 Public Portal Document

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the Raleigh-based management consul- mon. About a year ago, power develop- mark the completion of a familiar cycle. tant and investment banker. “But there’s ers, especially those with large multiple “It’s a model that used to be done in the so much work that’s not a reality any orders, began taking back the warranty 1960s, and it’s nothing new. The contrac- more. So owners have had to step up” risks associated with the power island tual approach has gone through cycles of and assume more risk. equipment. The cost of insurance for liq- the old total reimbursable, to subcon- In EPC contracting, “The pendulum uidated damages associated with these tracting lump sum by discipline managed has swung past center to the favor of the risks had gone sky-high and owners , by the client, to EPC. Now it’s returning to EPC,” says Don Zabilansky, senior vice decided they could save money by not where the owner can lessen the cost by president of Lockwood Greene, Spar- paying contractors fees that included in- taking out the risks for the contractors.” tanburg, S.C. suring those risks. Risk-sharing is more common when And the swinging pendulum is re- Risk-sharing on labor overruns and the owner provides the financing, so lev­ I defining strategies eraged independent about who will work power producers and for whom, providing their lenders and some companies a *• investors are unlikely beachhead on less- to play the game, risky terrain that was Toby Hsieh, a power previously off limits. industry debt analyst By limiting the with Standard & number of projects for Poor’s (like ENR and which it will compete, Power, a unit of the ! I McGraw-Hill Cos.), Shaw Group, which began performing says that of all the turnkey contracts in | the last few years, says | Bj great many projects financed through it will work only on a | "I bonds “none are done cost-plus basis where I that way. Lenders its risk is limited to its - haven’t accepted” the

ft' fee. This is the most ■ conservative approach ; among EPC companies j Jlflt risks of labor over­ runs, he says. The new realities and the Baton Rouge­ appear to favor indus­ based company’s abili­ trial contractors who ty to succeed with it define themselves as over several years has constructors and yet to be proven. | shun risks not asso­ For many contrac- S ciated with construc­ tors, the return of cost- j tion at the site. These plus contracts—once a companies have standard during the j strong home bases, construction of nu- 1 knowledge of local clear powerplants in labor markets and the 1980s—is a wel- • the ability to self-per- come development. form parts of the job One power industry ; or to add value by k- executive, who asked ' building more than not to be named, says • the base generating that such contracts ; units. have only a limited Target prices, role. While he says his ji often used with nego­ company is thinking eELA-I. tiated construction Sv ' about “test-driving” CAUTIOH Losses on Washington Group Jobs underlined risks of overruns. contracts for which a

I some cost-plus con- substantial amount of tracts on a selective basis, he also com- quantities is a more recent phenomena, design has been done, give these com­ plains that “contractors would like to When one contract involving a target panics a greater feeling of security. make the whole market cost-plus. It price and shared cost-overruns first Under one type, contractors and owners won’t happen,” crossed the desk of Winter Park, Fla., create a target price, but if less is spent, Another power industry executive says attorney V. Frederic Lyon nine months both contractor and owner reap savings, that his company will consider negotiat- ago, “I said, ‘What a fat deal for the con- Liquidated damages may be applied to ing with contractors if it can get the con- tractor,’ I have since seen it come up time some aspects of the project even if a tar- tingency and risk money out of the proj- and time again.” get price is being used. Often, the con- ect price. That could save 8 to 15% on a To Raymond F, Rugg, senior vice pres- tractor’s pricing is shown to the owner, typical EPC contract, ident for business ventures, sales and and in some cases the built-in contin- While pure cost-plus remains a rarity, planning at Utility Engineering Corp,, gency fees are given to the owner, other types of risk-sharing are now com- Minneapolis, the new contracting terms Graycor has one finished' and one

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