2. November, 2000 Slide 1 Project Services Division RISK MANAGEMENT Project Services Division Presentation By: Adam Malkhassian November, 2000

3. Slide 2 Project Services Division AACE INTERNATIONAL’S PROFESSIONAL PRACTICE GUIDE TO RISK RISK MANAGEMENT DICTIONARY PUBLISHED OCTOBER 1995 & APRIL 2000

4. November, 2000 Slide 3 Project Services Division ALLOWANCES CONTINGENCYESCALATION DESIGN DEVELOPMENT CLIENT RESERVE RISK

5. November, 2000 Slide 4 Project Services Division RISK = THREATS + OPPORTUNITIES

6. November, 2000 Slide 5 Project Services Division  RISK MITIGATION Risk mitigation takes place primarily before contract award, and consists of the limitation or elimination of risk items by exclusions, sharing, insuring or by the use of appropriate legal documentation and financial instruments.  RISK CONTROL Risk control takes place primarily during the project execution phase and consists of the prompt identification and anticipation of risk items by rigorous scope, quality, cost and schedule control, by a comprehensive program of insurance, and by being constantly alert to the potential concerns, interests and behavior of third parties. DEFINITIONS

7. November, 2000 Slide 6 Project Services Division RISK MANAGEMENT  RISK ASSESSMENT  RISK ANALYSIS  RISK MITIGATION  RISK CONTROL

8. November, 2000 Slide 7 Project Services Division RISK ASSESSMENT  IDENTIFICATION OF UNCERTAINTIES  THREATS  OPPORTUNITIES NOTE: ALLOWANCES ARE ALSO SUBJECT TO ASSESSMENT

9. November, 2000 Slide 8 Project Services Division RISK ANALYSIS  QUANTIFICATION  PROBABILITY OF OCCURRENCE  LOW  MEDIUM  HIGH  POTENTIAL IMPACT  LOW  MEDIUM  HIGH

10. November, 2000 Slide 9 Project Services Division RISK MITIGATION (RESPONSE DEVELOPMENT )  DEVELOPMENT OF RISK MANAGEMENT PLAN  ELIMINATE OR REDUCE PROBABILITY OF A THREAT OCCURRING  ELIMINATE OR REDUCE IMPACT OF THREAT IF IT DOES OCCUR  ENSURE OR INCREASE PROBABILITY OF AN OPPORTUNITY OCCURRING  INCREASE THE IMPACT OF AN OPPORTUNITY IF IT DOES OCCUR

11. November, 2000 Slide 10 Project Services Division RISK CONTROL  IMPLEMENTATION OF RISK MANAGEMENT PLAN  PREDEFINED ACTION PLAN  INSURANCE  ALLOWANCE  SCHEDULE  QUALITY  TRIGGER POINTS  MONITOR POINTS

12. November, 2000 Slide 11 Project Services Division GUIDELINES FOR SUCCESSFUL RISK ANALYSIS  WELL-DOCUMENTED COST ESTIMATE  COSTS SHOULD REPRESENT MOST-LIKELY SCENARIO  COSTS MUST NOT CONTAIN HIDDEN CONTINGENCIES & ALLOWANCES  COST ESTIMATE MUST BE REVIEWED AND APPROVED BY PROJECT TEAM  RISK FACILITATOR  OVERVIEW AND GUIDELINES OF RISK ANALYSIS  RISK ANALYSIS  INTERPRETATION OF RESULTS

13. November, 2000 Slide 12 Project Services Division RISK SOURCES PROJECT SPECIFIC RISKS  TECHNICAL RISKS  COMMERCIAL RISKS PROJECT RELATED RISKS  COUNTRY & LOCATION RISKS  CLIENT RISKS  SLI RISKS

14. November, 2000 Slide 13 Project Services Division TECHNICAL RISKS  LEVEL OF ENGINEERING DESIGN  EFFICIENCY & PERFORMANCE  PROVEN / UNPROVEN TECHNOLOGY  EQUIPMENT CAPACITIES  SOIL CONDITIONS

15. November, 2000 Slide 14 Project Services Division COMMERCIAL RISKS  SUPPLY & LABOUR PRICING  PRODUCTIVITY & AVAILABILITY  TRANSPORT  INSURANCE & BONDS  SCHEDULE RISKS  LEGAL CLAUSES

16. November, 2000 Slide 15 Project Services Division COUNTRY & LOCATION RISKS  POLITICAL SITUATION  LAWS & REGULATIONS INCLUDING TAXES  ALL PERMITS & APPROVALS  UNIONS & WORKING CONDITIONS  WEATHER CONDITIONS  CORRUPTION & CRIMINAL ACTIVITIES

17. November, 2000 Slide 16 Project Services Division CLIENT RISKS (TO SLI)  FINANCIAL STATUS  AUTHORITY  COMPETENCE OF PROJECT TEAM  PAYMENT POLICY  APPROVAL METHODOLOGY & TIMING

18. November, 2000 Slide 17 Project Services Division SLI RISKS  TECHNICAL KNOW-HOW  AVAILABILITY OF (RIGHT) STAFF  PARTNERS  OTHER RESOURCES  LOCAL CONTACTS  SUPPLY POINTS  FINANCING SOURCES

19. November, 2000 Slide 18 Project Services Division RISK MITIGATION  AVOIDANCE  LEGAL CLAUSES  INSURANCE  RISK ALLOWANCE  ACCEPTANCE

20. November, 2000 Slide 19 Project Services Division RISK ANALYSIS CAUSEEFFECTRANKING  PROBABILITYLOW - MEDIUM - HIGH  IMPACT LOW - MEDIUM - HIGH

21. November, 2000 Slide 20 Project Services Division PROBABILITY & CONFIDENCE LEVEL PROBABILITY  A MEASURE OF HOW LIKELY A CONDITION OR EVENT IS TO OCCUR  RANGES FROM 0 TO 100 PERCENT CONFIDENCE LEVEL  PROBABILITY THAT RESULTS WILL BE EQUAL TO OR MORE FAVORABLE THAN THE AMOUNT ESTIMATED  PROBABILITY THAT RESULTS WILL BE EQUAL TO OR LESS FAVORABLE THAN THE AMOUNT ESTIMATED

22. November, 2000 Slide 21 Project Services Division CHOOSING THE “RIGHT” CONFIDENCE LEVEL GROSS MARGIN  OVERHEAD  RISK  PROFIT OTHER ALLOWANCES  ESCALATION  CONTINGENCY WORST CASE SCENARIO = ZERO PROFIT & ZERO LOSS

23. November, 2000 Slide 22 Project Services Division $610 M $582 M

24. November, 2000 Slide 23 Project Services Division RISK ANALYSIS (DISCRETE DISTRIBUTION)

25. November, 2000 Slide 24 Project Services Division EFFECT OF RISK ANALYSIS ESTIMATE = $570 MILLION -15%+15% RISK ALLOWANCE +$12.6M REVISED ESTIMATE @ 50% = $582.6M

26. November, 2000 Slide 25 Project Services Division RECOMMENDATION ANALYSIS VALID FOR ANY TYPE OF ESTIMATE / PROJECT CARRIED OUT ON PARTIAL OR TOTAL PROJECT DISCUSSION OF RISK ITEMS BETWEEN TEAM MEMBERS ESSENTIAL PROJECT SPECIFIC & RELATED RISKS RISK CAN BE POSITIVE OR NEGATIVE

27. November, 2000 Slide 26 Project Services Division CONCLUSION ASSESSMENTANALYSISMITIGATENOW