1 st PMI AGC Energy Forum DMS PMI

1 st PMI AGC Energy Forum: DMS & PMI Debates Abu Dhabi, UAE 2 nd June 2010 EPCs on Bonus Incentive Scheme to Exceed Contract Expectations Wael H. Al-Jasem (MBA, PMP, MSP Register Practitioner) 1

Background • Incentives used to motivate EPCs – reducing the time or – the cost of the work. • Added benefit to owner (earlier delivery to the market). • Improved return on investment • Features added to contract agreements (regulate incentives management). 2

Different Requirements • Schedule Incentive • Predetermined payments for early completion. • More money for an earlier end date. – A percentage from contract price per day with a limit not to exceed. – It is necessary to include such arrangements in the main contract. – Applies to lump sum and similar types of contract. • Milestone payment terms as incentive for achievement of key schedule objectives – completion of provisional turn over ahead of the agreed date, – physical completion of stages or sections of work, – Payment linked to achievement of each milestone. 3

Different Requirements • Cost Incentives • Reimbursable or related types of contract. • Any savings or losses against target cost. – Split in predetermined proportion between the EPC and the owner. – EPC and the owner will share in the savings from the agreed cost. • E. g. , EPC completes with 80% of the target man-hours, rewarded with 20% of realized savings. 4

Different Requirements • Notice: use of incentives means additional effort as regards to change control: Changes in project scope or project schedule impact on the agreed completion date and or target man hours. effect of changes on incentive provisions to be determined suitable adjustments to be made to ensure that the incentives are revalidated and updated – additional effort to calculate the incentive payments to the EPC. – – 5

Advantages • EPCs motivated to perform better – – – Payments linked to completion of physical stages of work improved achievement more profit free to move on to other project resource re allocation. • Project owner & EPC have mutual goals – overall construction cost – schedule to complete – early warning system to assist in achieving a better target. 6

Disadvantages • Effect of scope & schedule changes on incentive provisions • Upsetting effect on the workers – not sharing in the benefits from early completion and cost saving – pass on some of the savings to the labor force. 7

Thank You Wael H. Al-Jasem (MBA, PMP, MSP Registered Practitioner) Kuwait National Petroleum Company Clean Fuels Project P. O. Box 69, Safat, 13001 Kuwait w. jasem@knpc. com Tel. +965 320 4711, Fax +965 320 3213 8