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Table 6 - Evaluation of compensation scheme and taking over Alternative

%A B C

o Market availability of bidders

In general, contractors would prefer to enter into lump sum contracts provided that at the time of entering into the contract, the extent and or the cost of the works are sufficiently
known and significant changes at a later stage are not expected. Moreover in this case contractors, not only need to be technically capable (and with the balance sheet capacity) to
accept the risk transfer, but also they need to be able to financially bond those risks i.e. they must be able to provide the contractual securities as requested.

o Availability of std. contract forms

The standard forms of contract, conventionally known in the industry for major construction projects, particularly those being project financed, are prepared considering all the
engineering, procurement and construction works on lump sum basis. However, variations to said standard forms have been implemented by clients, through time, so as to response
to prevailing market conditions.

o Availability of financing

The standard forms of contract, conventionally known in the industry for major construction projects, particularly those being project financed, are prepared considering all the en-
gineering, procurement and construction works on lump sum basis. With respect to other compensation schemes, the lump sum method is considered the more bankable method.

o Nominated subcontractors

Normally, in relation to a given SoW, the contractor must be able to object the firm nominated as subcontractor alleging (i) the refusal of the nominated subcontractor to undertake
towards the contractor the obligations imposed on the contractor towards the client and/or (ii) the nominated subcontractor’s lack of qualifications to perform the obligations to
be subcontracted.

o Single point of responsibility

The lump sum method provides the COMPANY (and the project’s sponsors/stakeholders) with a single point responsibility that is bearing all the completion risks. Caps on liabilities
and market power of the parties shall duly be taken into account. In addition, in the lump sum scheme COMPANY’s contractual remedies available to recover potential COMPANY’s
losses in case of contractors’ default are proportional to the lump sum price. Other contractual schemes require the remedies to be in relation to a fee and not necessarily to the
overall estimation of the works.

o Contract prices

In the lump sum scheme a single tendered price is given for the completion of the specified works to the satisfaction of the client by a certain date. This method is the one that
provides the highest risk transfer from COMPANY to contractor in relation to the completion of the SoW. Subject to the prevailing market conditions, such risk transfer may be
agreed, provided that a financial risk contingency for the obligation is adequate to persuade the contractors to take that risk.

o Delay and cost overun risk

With the lump sum method of pricing, COMPANY and the financing stakeholders have a certainty (at least on paper) of the works’ duration, and will know that contractors will bear
the risk of increases in the time of the works. Thus contractors will commonly be motivated to ensure tight control and monitoring of their activities. Other compensation methods,
different from the lump sum, allow for a higher degree of flexibility for changes in the works, as the delay risk is more on COMPANY’s side than on the contractors’ side.

o Replacement of contractor in case of default

COMPANY’s decision to terminate a given contract and complete the construction by engaging another contractor, is an important decision bearing in mind the effect this would
have upon total costs. The higher the risk transfer (from COMPANY to contractor) the harder will be for the COMPANY to replace the contractor in case of default, and the higher
will be termination’s cost and time implications for the COMPANY.

o Risk transfer

With the lump sum method of pricing, it is the contractor who has the responsibility for and control over (at least on theory) each of the completion risks elements (cost, time
and performance quality of the works). Thus is commonly understood that with this compensation method the risk transfer (from COMPANY to contractors) is higher than the one
allowed for under other contracts.

o Risk of claims

Considering that (i) contractors will be invited to include in their price the endorsement of the works’ FEED engineering, and that (ii) the lump sum arrangement suggests that the
contractor is required to take full responsibility for the entirety of the design of the works, numerous disputes may arise during the execution of the works, where there are changes
in the design of the works following award of the contract.

o PMC/COMPANY’s effort

The lower the risk transfer (from COMPANY to contractors), the stronger will be the necessity for COMPANY of having large and experienced in-house teams to deal with the
management and administration of all contracts so as to achieve the project’s objectives.

Table 7 - Evaluation of compensation scheme and taking over

o Market availability of bidders

International EPC contractors business and organization structure is commonly based on three main domains, namely Engineering, Procurement and Construction, handing over
the works , care, control and custody responsibility to the COMPANY upon ready for commissioning/startup.

o Availability of financing

(i) financing is, very often, contingent on the degree of confidence financing stakeholders have regarding the operation of the revenue generating facility; and normally, (ii) EPC
contractors require the contractual exclusion of indirect and consequential damages.

o Risk transfer

A higher scoring shall be given to the alternative that transfers the most to the contractor the responsibilities in terms of (i) time for completion, (ii) transfer of care, custody and
control, (iii) commencement of defect liability period, (iv) successful completion of the performance tests, (v) training of COMPANY’s personnel (with agreed training results) and of
(vi) technical supervision of the operation and maintenance of the works.

o COMPANY’s costs

The higher the risk transfer, the higher will be the price that will be quoted by bidders and the higher the total COMPANY’s costs. With regard to the “product in hand” approach,
it is generally assumed that the output of the works is to be owned by the COMPANY. Yet, particular attention has to be given to the alignment of interest between the contractor
and the COMPANY during this period.

o Completion risk

In broader terms, the risk of the plant not being completed in time, within the agreed budget and to the required performance quality, can be defined overall as the completion risk.

o PMC/COMPANY’s effort

The lower the risk transfer (from COMPANY to contractors), the stronger will be the necessity for COMPANY of having large and experienced in-house teams to deal with the
management and administration of taking over activities so as to achieve the project’s objectives.

Impiantistica Italiana - Maggio-Giugno 2015 53