1. Risk Management & Challenges during EPC Project Execution Experience in MEA Region Correy Connaway, PE International Project & Construction Manager 7 October 2016

2. 1.Corporate Parity Arianna Lee & David Mark 2.The Chair Professor Renato Nazzini 3.Sponsors Eversheds, Mayer Brown, & Fenwick 4.Attendees, Speakers, and Delegate THANK YOU 2

3. 1.Background About Parsons Our experience Globally, focus on the Middle East 2.Characteristics and Trends of the Industry Particularly in Middle East Challenges facing the Industry overall 3.Risk Management strategies Practical Solutions Pre & Post Award 4.General Discussion TODAY’S AGENDA 3

4. 1.Share experience, characteristics, & trends related to EPC project execution in the Middle East 2.Take away key Risk Management strategies that will help EPC teams be a little more successful overall 3.That you will have a better understanding of the market in the Middle East, the challenges and ways of doing business there 4.Provoke some points to think about and discuss in next year’s conference, in the interest of advancing the Industry OBJECTIVE & OUTCOME 4

5. ABOUT ME 5 From the United States Bachelor Degree in Electrical Engineering Professional Engineering license in New York State 42 years old with around 18 years of experience Started my career as a design engineer, moved into construction, and finally into project & program management Been employed with Parsons Corp. for 10 years (mostly on International assignment in the Middle East) Currently Manager of Projects for a multi-billion dollar Infrastructure Program in Saudi Arabia Port City of Yanbu Industrial City (Yanbu Al Siniayah) 65 Active Construction projects totaling 1.7B USD 60+ Projects in the FEED stage totaling 1.8B USD National Transformation Program has committed 3B USD over the next 5 years 400 sq-km, population of about 100k people

6. WHO IS THE PARSONS CORPORATION? 6 Founded by Ralph Monroe Parsons in 1944 Not related or affiliated with Worley Parsons or Parsons Brinkerhoff (3 separate and independent companies) Projects “From bridges to wastewater treatment facilities to homeland security, Parsons designs, builds, and manages projects around the world. Customers choose us because we follow a skilled, principled approach and have the resources necessary to solve the toughest challenges, creating a model for success. We never lose sight of our most important benefactors—the people living in the communities we serve.” https://www.parsons.com/projects/Pages/default.aspx#pageState=1

7. ABOUT PARSONS 7 https://www.parsons.com/Pages/default.aspx

8. ABOUT PARSONS 8 https://www.parsons.com/markets/industrial/Pages/energy-chemicals.aspx

9. GLOBAL PRESENCE 9 Projects in over 30 Countries

10. MIDDLE EAST AND AFRICA (MEA) 10 Over 40 Years in the Middle East Turkey Kuwait Iraq Jordan Israel UAE Oman Saudi Arabia

11. SAUDI ARABIA 11 Services Program & Project Management PMC and Construction Management Services FEED Documents & RFP Prep Detail Engineering & Design Industries Energy & Chemicals Oil & Gas Infrastructure Defense Public Sector Works

12. 12 PERSPECTIVE Where are you in the Project Life Cycle? Which stakeholder are you? Owner Owner’s PMC EPC (Prime Contractor) OEM Supplier 3 rd Party Claims Advisor Independent Agent Pre-Award Post-Award Operating Period  Feasibility (Pre-Feed) FEED Financing Structure RFP & Contract Development Bidding & Bid Analysis Etc. Detail Engineering Procurement Construction, Commissioning, & Startup Construction & Claims Management Warranty Operation & Maintenance Decommissioning

13. CHARACTERISTICS AND TRENDS 13 Spending plans are oil revenue based 2015 and 2016 were tough years for everyone Rebalancing of investment portfolios Virtually all new starts have been on hold since beginning of 2016 Many new risks and uncertainties have come into play Nonetheless… all eyes are still on the Middle East Saudi Vision 2030 announced in April 2016 outlines an ambitious plan to create jobs and diversify away from oil revenue 514 initiatives with over SR 270B (72B USD) committed over the next 5 years Shift to alternative types of project funding mechanisms PPP, BOO, and BOOT with Contractor financing EPC Contractor equity stakes are becoming the norm  Buyer’s (Owner) market Today’s Contracts are “Owner’s Contracts” with often onerous T&C’s Almost always Lump Sum Virtually no Cost Reimbursable or Cost + type Contracts

14. CHARACTERISTICS AND TRENDS 14 Client expectations are high Time to Market ROI (Schedule) Quality Price conscious Clients want Mercedes at Chevrolet prices And often times get it by squeezing the Contractors Contracts are generally governed by local Procurement Law E.g., local Saudi partner /JV is required Saudiazation % requirement Informal Claims resolution processes Recent reforms to the Arbitration process have not been tested E.g., Allowance of jurisdiction outside the host country in re to arbitration

15. 15 Diverse multi-cultural, multi-national project teams Hundreds or thousands of workers from largely 3 rd world countries with varying degree religions, background, and skill sets Shortage of professional & experienced management teams Historically this was on the Owner’s side This is changing – e.g., the late King Abdullah of Saudi Arabia instituted a program of subsidizing advanced education abroad for all Saudis (150,000 per year studying abroad) As a result the professional workforce is maturing Still cultural differences in ways of doing business Imported skilled and unskilled labor varies greatly Owners want more and more control (and less liability) Tendency to squeeze & micromanage the EPC and PMT CHARACTERISTICS AND TRENDS

16. 16 Global market conditions are increasing the amount of competition on EPC Contractors Contractors are underbidding projects at all levels by up to 20 and 30% in some cases Larger burden on the project management team and Contract Admin The number of Western EPC firms willing (or able) to take part in large EPC projects in the Middle East are shrinking In part due to the one sided Contract conditions and informal business culture In part due to the desire of Owner’s looking for JV & Equity Partnerships with the EPC Largest EPC Contractor’s are State backed (China, Korea) New cultural gap between Owners and Contractors will take some time to adjust to ADDITIONAL CHARACTERISTICS OF MIDDLE EAST MARKET CONDITIONS

17. FINALLY…. 17 Almost every single project in the Middle East is behind schedule and over budget 2 years behind schedule is common, especially in the Power and Petrochemical space (but also for Infrastructure and Public Works) Cash flow issues, Claims issues EPC is being executed not as a risk management strategy, but as a necessity Owner’s don’t have the capability or expertise Financially or Technically The theoretical advantages of executing a project Design / Build (EPC) are not being realized Owner’s are not saving money and their projects are not coming in on schedule

18. WHAT ARE WE TO DO ABOUT THIS? 18 How do we define “Success” ? Is it a project that comes in on time and on budget? Or has less than a certain % of the Contract value in Claims? Are we to accept that two years behind schedule and 30% over budget is the new norm? It depends on your perspective. EPC definition will differ from the Owner’s Middle East owner’s are many times focused on the timing of operation (acceptance) based on market conditions and need Payment is often sporadic - Cash flow management becomes critical

19. COMMON CLAIMS (OTHER THAN NORMAL CONTINGENCY BASED SCOPE CHANGE) 19 1.Means & Methods Claims (the Cardinal Sin of EPC execution) EPC Contract is supposed to put the Contractor in the drivers seat to design & construct the project based on his experience and expertise Owner’s (or Owner’s PMT) interference can really hurt EPC execution projects Owner awards EPC then feels he doesn’t have control of the Project, so he begins to dictate to the Contractor how to do the work The Owner’s reps feel the need to justify their existence, so they do the same Cultural gaps between EPC and Owner can cause this as well Design review degrading into detail design by the Owner (Assumption of the Design liability) 2.Governing Document Claims (with regards to Scope) EPC Contract documents & specifications can reach many volumes Which document governs during a Scope dispute is important Ideally, the governing documents should be: T&C’s Scope of Work Drawings & BOQ (if applicable) Specifications

20. RISK MANAGEMENT DURING PRE AWARD 20 The best kind of Risk Management is Avoidance Current trends are to pass more and more (all) of the risk to the EPC via the Contract But…the Contract won’t save you (as an EPC or as an Owner)…you can have the tightest Contract in the world, but once a project is in arbitration or work has stopped or been delayed or is being inundated with Claims – it’s a “lose lose” 1.BD 101 – Understand your Customer (and market and culture of the area you are in) Communicate with him and build relationship The Arabic way of doing business is very informal 2.Have a robust procurement process including pre-bid Q&A 3.Define the governing document hierarchy clearly in the Contract 4.Make the EPC an Equity partner – Make the EPC an Owner Weed out EPC’s who buy the Contract or don’t’ understand the work As an Owner, use independent 3 rd party agents to provide an execution analysis and “fair price” estimate for comparisons to your internal estimate Very large and complex projects can be difficult to estimate Owner’s won’t always heed advice Use two envelope approach for bid evaluation

21. RISK MANAGEMENT DURING POST AWARD 21 Again…the best kind of Risk Management is Avoidance The Importance of the Project Team EPC Contracts are inherently risky to the EPC due to uncertainties – the owner is paying a risk premium to pass that to the Contractor The team needs to understand the Risk Transfer and Transfer of Liability concepts of the EPC concept very well This would seem self explanatory but is not always the case Pre-kickoff workshops with the PMT (and Owner) to define the boundaries of liability and ensure everyone on the team understands their role and responsibility is critical The Importance of the FEED documents?

22. WHERE ARE WE HEADED? FOR YOUR CONSIDERATION… 22 This is a fairly conservative Industry – Changes in Contracting Approaches are not going to happen quickly If there are better ways of packaging and awarding and managing these really large and mega projects other than the current trend of “EPC” and “EPC as Equity Partner” - What are they? Innovation, Creativity, Imagination “Radical” thinking Certainly, there can be improvements - starting in the planning and developing (the pre Award) phase Partnerships, Relationships, Communication, and Collaboration “Adapt or Parish” How are the shifts and current trends in the global markets affecting your business and what are you doing about it? What role will you (or your Company) play in tomorrow’s EPC world?

23. BACKUP SLIDES 23