Deep Dive: Risk Management
This week it’s all about risk management. We've gathered Breakbulk Studios interviews, Breakbulk Magazine stories and more to give you expert information on this topic. What’s more, we’re offering a new project cargo risk management workshop at Breakbulk Americas.
Sign up for the workshop, which will be led by Steven Weiss, Sr. Vice President/Chief Underwriting Officer from Munich Re Specialty Group/Roanoke Insurance Group, along with a panel from USI Insurance Services, Castlerock Risk Services, Marsh USA and Freeport LNG. When it comes to risk management, Breakbulk Americas has you covered!
See each post to learn more and use promo code BBAMDEEPDIVE for 25% off the workshop that includes the exhibition and conference. #bbam2019
As project owners require longer terms and project finance requirements escalate, many project forwarders feel stuck in the middle. On the other side, vendors keep forwarders on a short leash. Corey Henry, Regional Senior Logistics Manager Americas for engineering and construction firm McDermott, offers his take at last year’s Breakbulk Americas.
Leandro Brusque of OCYAN from last year’s Project Forwarders: Stuck in the Middle with Risk session at Breakbulk Americas shares his take on who should take on the risk when transporting project cargo.
This Deep Dive into risk management comes from Breakbulk Middle East 2019 with Rafael Vicens at Panalpina. Vicens shares the challenges project forwarders are facing with project owners and how they are responding to an increasingly competitive market.
This Deep Dive on Risk Management comes from Breakbulk Magazine Issue 3/2019's story, Contracting Complexity by Paul Scott Abbott
In a business full of the unexpected, contracts that tend to be both rigid and complex are challenging project cargo forwarders in their efforts to serve engineering, procurement and construction firms, or EPCs.
Project freight forwarding experts from UTC Overseas’ Mirko Knezevic to BATI Group’s Kaan Aydin concur with international shipping attorney Michael Wray in telling Breakbulk that flexibility and coordination may be keys to effectively putting together what Wray sees as a jigsaw-like puzzle.
“This is really, really tough,” said Knezevic, chief operating officer for global projects at Houston-headquartered UTC Overseas, for which he has worked for nearly 20 years. “It’s totally getting out of hand.”
Knezevic, who has more than 35 years of project forwarding experience, said today’s contracts may well be hundreds of pages in length, including extensive legal verbiage.
“It’s a whole lot of work to go through that, and sometimes they are very rigid and not negotiable, with absolutely no wiggle room,” said Knezevic, who is based in the Rochelle Park,
New Jersey, office of UTC Overseas. “You have to be almost a legal wizard to understand all this. It can distract us from doing the work, from doing what we’re good at.”
LEGAL EXPERTISE NEEDED
UTC Overseas, like other project forwarders, found itself turning to costly outside trade attorneys and consultants before a decision was made to hire an in-house legal expert dedicated to addressing contracts. Knezevic said lump-sum contracts from EPCs may require the forwarder to take responsibility for functions such as vessel hull insurance – which, he said, is not technically feasible, as the forwarder does not own the ship.
“It’s an impossible situation for us to cover that,” he said. “Legal departments of the clients want to shift the complete responsibility not only for the cargo value but [for] everything else, like accidents or any delays, to the forwarders – but the fees are the same. It’s very much an issue of compensation.”
Because, as Knezevic pointed out, “shipping is not an exact science,” it may prove beneficial to the client to adjust strict specifications of a given contract.
For example, UTC Overseas used contract flexibility to shift a kiln shipment from a scheduled ocean transit to transport on an Antonov An-124 aircraft, when the original unit at a cement plant in Guayaquil, Ecuador, suddenly failed irreparably. The shipment, from point of manufacture in China, required modification of packing and footprint to be able to fly on the heavy-lift cargo aircraft, but the replacement unit arrived at the plant much faster than if it had gone by sea, as intended prior to the existing kiln’s fatal breakdown. Thus, plant downtime was significantly minimized.
COORDINATION URGED
To account for the unexpected while keeping costs under control, having an in-house group overseeing the project at the forwarder is advisable, according to Aydin, who is business development manager at Istanbul-based BATI Group – which counts turnkey logistics management for projects among its areas of expertise.
“It is impossible to draw up a contract which will cover each and every cost and aspect in regard to a project, since one unforeseeable aspect will easily lead to another,” Aydin said from his office in Turkey. “The costs stipulated in the contract may be the lowest, yet once the contract is signed, all other unspecified costs which are accrued during the course of the project will lead to overspending on behalf of the EPC.
“The most reliable way to prevent this situation is the appointment of an in-house team, which will control the project, decrease the costs and minimize the risk,” Aydin said. “This method is much more reliable when the service fee for every service area is discussed and determined before the beginning of the project. The service fee may differ from one service to another, yet this difference can be determined by service clusters in advance.”
Aydin also urged greater coordination between EPCs and contractors.
“The biggest challenge is to appoint the same contractor for every aspect of the project and to collaborate with them for mutual performance,” Aydin said. “A single contractor is appointed for a project for the purpose of risk minimization. However, this brings along consequences such as overbidding. By overbidding, the contractors aim to prevent the occurrence of any hidden costs which may put the EPC in a challenging position.”
BATI Group seeks to make the process easier and more controllable by appointing a team to work with the EPC in exchange for a fixed service cost, allowing the EPC to be in control of every decision-making process while knowing the contractor has offered rock-bottom rates, Aydin said.
FLEXIBILITY HOLDS KEY
Wray, a Houston-based partner in the shipping sector practice of HFW, a 135-year-old, London-headquartered global law firm, said thoroughness must be balanced with flexibility in a collaborative approach in order to achieve mutually beneficial success in project logistics contracting.
The environment of the project plays a large role in determining the risks that are important to the entities involved, as well as the appurtenant costs, he said. For example, an offshore energy project by nature presents more challenges than a landside endeavor, as everything from hurricane seasons to tides may pose limitations while the number of available contractors is likely smaller as well.
“There are a lot more moving parts when you’re conducting an offshore project,” Wray said, noting that basic considerations include when work can be done, who will undertake it, who is qualified to do so and when they are available – as well as overall shipping market conditions, all of which may impact the price, risk and timing.
Regardless of specific circumstances, a typical contract addresses such common issues as indemnification, insurance, warranties and regulatory requirements, Wray said. Also, considerations include market conditions and, more recently, cybersecurity concerns.
“You certainly see cyber risk clauses getting inserted into some of these contracts,” Wray said, pointing out this adds to complexity. “What you try to do in these contracts when you’re drafting them is allocate, ahead of time, basically all of the foreseeable risks and costs so, if there’s a problem, you just look to your agreement. You don’t want to have to go to court. You don’t want to have to go to arbitration, depending upon whatever dispute resolution mechanism you choose.”
Importance of appropriately thorough risk identification and allocation – balanced with flexibility – is especially paramount in a world in which the unexpected seems to be inevitable.
UNFORESEEN LURKS
“You’re there to try to get a project done,” Wray said. “You’re there to try to make money. You’re there to try to safeguard life, property and environment and do things in a reasonable and safe manner, but there’s always the unforeseen, and – much like life – you look at what has happened in the past as sort of a benchmark for the future.”
That can mean parties may be tied to the “that’s how we’ve always done it” mentality.
“When you’re trying to account for the unknown, you have to be a little bit flexible, but sometimes, particularly in large organizations, there is inherent inflexibility,” Wray said. “They may say: ‘This is the contract we’ve used, and it has worked for umpteen projects in the past. Why would we change it now?’
“Well, maybe you should change it, or think about changing portions of it, because the world has changed. As the lawyer, you try to think of creative solutions to protect your client from various risks and you also want to try to make sure it’s not so onerous that you can’t get the deal done.”
Wray noted that certain aspects may be deal-breakers for a specific client but not so important for others, or vital to a contractor but not to an operating company.
“There has to be a degree of flexibility when you’re preparing these contracts, but it all ties back to leverage,” he said. “If it’s a down market and contractors are hungry for work, the operating companies have more leverage. But if it’s a hot market and you can’t get a contract lined up, then the contractors have more leverage.”
Flexibility relates most directly to commercial terms, according to Wray, while parties tend to be less flexible when it comes to standard insuring and indemnification clauses. Some oil and gas-producing states, for example, have anti-indemnification statutes that modify or even prohibit indemnity in certain circumstances, so the choice of state and/or country for a contract may modify obligations as well as regulatory compliance remedies.
‘COMPLEX JIGSAW PUZZLE’
“It’s really a bit of a sort of complex jigsaw puzzle,” Wray said. “It involves understanding your environment, where you’re working, who your regulators are, what law will apply, what law the parties choose and understanding the market conditions. From a technical side, we rely on our clients and what they need to get this job done. There’s definitely a balancing act. It’s kind of like a conductor managing a symphony.”
The sheer size of today’s contracts and the potential need to harmonize more than one such legal agreement are likely to be factors too.
“When you have documents with multiple schedules and parts, and you’re building large, complex structures, they can be very unwieldy,” Wray said of contracts. “These contracts tend to have long lead times. It takes time, and it takes people to talk about this stuff, to understand it, to review it and to make sure all the moving parts are in order.”
Furthermore, the multiple contracts that may be required for an offshore wind energy farm project, for example, must be coordinated with each other. Wray said separate contracts are likely to cover project financing, regulatory compliance, shipping and construction.
“To have not just one contract work, but all of your contracts required for this project to be in sync, does create a lot of work and takes a very long lead time to make sure everything
is in harmony,” he said. “It generally impacts the cost of the project when you have multiple contracts with multiple lawyers reviewing them and multiple vendors. It definitely creates cost and affects your risk allocation model.”
With all that said, UTC Overseas’ Knezevic said project forwarders may wind up coming to a question-based conclusion when it comes to undertaking work under a highly restrictive contract: “Is it worth the effort?”
Choose the Right Vessel for Project Needs
Multipurpose covers a huge variation of vessels including heavy-lift capability, but all are typically geared with some type of crane or derrick. In this modern age, multipurpose vessels will also have hatch openings that allow full access to ’tween decks and lower holds. While ’tween decks can be fixed but often flexible in their location, lower holds can often stretch the full length of the allowable cargo area. Some multipurpose vessels have lift-on, lift-off; roll-on, roll-off; or float-on, float-off capabilities, and many have container carrying facilities, both in the hold and on deck.
Tony Betteridge, head of marine – Asia at Munich Re Syndicate, agrees with me that the ideal for most underwriters, risk engineers and seafarers is that breakbulk cargoes should only be carried on vessels that allow full access to the stowage location and have their own lifting gear, so that vessels are not dependent upon port infrastructure for load or discharge operations.
In addition, the ability to weld sea-fastenings is a major advantage, although some multipurpose carriers prefer not to. In short, geared bulk carriers and multipurpose vessels deliver flexibility and, additionally, the ability to modify a stow plan late in the game should surprises pop up during loading.
Capt. Glenn Walker from Atlantic Marine Associates, or AMA, a worldwide surveying firm, points out additional risks associated using bulk carriers over multipurpose vessels. He lists the risks as a lack of deck strength, and a lack of adequate lashing equipment and points in cargo holds and/or on deck.
Betteridge adds that the ability to weld adequate sea fastenings on the tank top in the cargo holds of a bulk carrier will likely not be an option due to the lack of vessel structure and deck strengthening, as well as the close proximity to bunker tanks. When weldments are considered in the holds of bulk carriers, weldments on the deck should be aligned with vessel internals to cope with high accelerations. Geared bulk carriers may also lack suitable lifting equipment where heavy-lifts are concerned.
In all events, the type of vessel needs to be properly evaluated where loading and securing of cargo is concerned in order to ensure suitability. Chief Engineer John Poulson, director from AMA’s New York office, offers advice on carrying non-homogeneous cargo such as steel coils in conventional bulk carriers. Carrying such products can test side shell-plating and structure due to hydrostatics and hydrodynamics that cause panting in heavy weather due to non-homogenous cargo support from the inside. I’ve seen shell plating failures from this type of cargo carriage, so the condition of internals is very important.
Premium Ship Choice
With such flexibility, multipurpose project carriers have long been billed as the “premium” option for project cargo, but this doesn’t mean that all other vessel types are not also capable of successfully delivering project cargo or breakbulk. Market forces such as overall economic growth and oil prices add to the rollercoaster of supply and demand of specific vessel types, so in parts of the market cycle the very best vessel choice may not be available.
A project manager really needs to do some detective work to make sure that a vessel being presented is not only the best fit, but not a potential problem in waiting. Insurers have tremendous amounts of data at their fingertips and searching out vessel capabilities can be done with little effort.
Capt. Adrian McCourt, group chief engineer of the Munich Re Syndicate, gives some ship selection advice: “I would always look at port state inspection history and trading routes. It’s worth remembering, for example, regular callers to Australia which abruptly stop calling at Australian ports are sometimes avoiding the rigours of AMSA inspections. The quality of vessels can sometimes be guessed at when they are trading in non-aggressive inspection trades, such as Indonesia, Russia, India, Philippines and South America – excluding Brazil.”
Capt. Walker recommends taking a solid look at the carrier’s reputation as it relates to vessel class society and vessel age. He notes there are more than 50 vessel classification societies that monitor the condition of vessels through a wide variety of inspections and not all classification societies are created equal. The International Association of Classification Societies is composed of 12 of the largest class societies and handles more than 90 percent of the world’s tonnage. His suggestion: look at who classes your choice of vessel.
Age of a vessel is also an indicator to vessel condition. Older vessels typically are in a poorer state of condition. When a vessel begins to approach the 15-year-old mark, therefore, you should know the age of the vessel. Typically, older vessels demand high insurance premiums.
Taking Responsibility
When vessels are chartered for the transport of project cargo, it is the charterer’s responsibility to provide a suitable vessel, ensure that it has a well-recognized classification society, that all certificates are in date, that on-hire and suitability surveys are conducted, and that the lashing equipment is new and certified. High-level planning between owners, charterers, shippers and receivers or their representatives for the load outs is essential. Review that lashing materials, quantums, passage plans, weather forecasts and calculations are acceptable for the worst weather that may be experienced. There is no excuse for not performing all the requirements necessary to load and carry the cargo safely.
Additionally, the role of the cargo surveyor and risk engineers should also be fully appreciated. Cargo surveyors should not be there just to tick a box for cargo insurance requirements, and they should be selected on experience and ability rather than price. Like any other professional, surveyors all have their specialty, and it’s important to make sure they too have the experience. A quick check of their resume and a review of prior employment and projects can prove helpful.
The best advice I can give when it comes to project cargo is that all vendors need to take on some role of risk management in the decisions or solutions they offer, and perhaps project owners need to emphasize this in their engagement. I suggest this as nobody wants a cargo claim, and even with insurance, including “Delay in Start Up” coverage, no loss is fully covered. A holistic approach to project risk management must be the guiding force and not simply up-front costs.
Richard W. Bridges is vice president, client development of Roanoke Trade. With more than 21 years of international trade and insurance experience, Bridges advises on insurance and risk management matters involving the trade and transportation of freight.
