Zaher DRIRA

March 2022

EPC PROJECTS FINANCING

PROJECT CONTROLLER ROLE
 EPC Projects Financing: Project Controller Role

Summary
I. INTRODUCTION..................................................................................................................................................2
II. PROJECT CONTROLLER INVOLVEMENT ............................................................................................2
1. CASH CALL/CASH STOCK AMOUNT AND PERIOD IDENTIFICATION ...........................3
2. FINANCIAL COST ESTIMATION ............................................................................................................3
3. INTER-PROJECT FINANCING ALTERNATIVE ..............................................................................5
4. FINANCIAL COSTS TRACKING AND MONITORING ..................................................................6
5. PROJECT BANKABILITY IMPROVEMENT ........................................................................................6
III. CONCLUSION....................................................................................................................................................9

Zaher Drira 1 March 2022

 EPC Projects Financing: Project Controller Role

I. INTRODUCTION

Most of the EPC projects are securely financed, lenders prefer to see the deepest pocket sponsors
bearing the full risk of the project. Non-recourse/limited recourse financing is exceptional. However,
despite the sponsor equity support, Contractors still suffer from heavy financial costs worsened by a
tightened financial market. Furthermore, lenders continue to seek the availability of any third-party
financial guarantees assuring project delivery.
Thus, an important consideration is to be paid to project financing techniques (models and process),
which become a major competitiveness factor for EPC Contractors. Sure it depends on the sector,
location, size… Nevertheless, throughout the project planning process, the project management team
needs to prepare responses/scenarios for the following points:

 Cash call/ Cash stock amount and period identification

 Financial costs estimation
 Inter-Project financing alternative
 Financial costs tracking and monitoring
 Project Bankability Improvement
Based on the above inputs, the Contractor’s decision-makers implement their strategy to fund projects.

II. PROJECT CONTROLLER INVOLVEMENT

In general, the involvement of the project controller in financial matters is very limited. The financial
department of EPC Contractors leads the negotiation with lenders to find project financing ways based
on forecast project cash flow statements. It is rare to see a Project Manager or a Project Controller
setting around the same table with lenders to negotiate a project financing plan. This may be explained
in part by:

 Company Organization/Culture
 Project Team background
In such organization, the control of the financial cost is very limited for the project management team.
Inputs are provided by the financial department and recorded as Actual Cost by the project team.
Budgeting and monitoring financial costs are mostly out of project control responsibility.
However, most of the inputs and the documents used during negotiation with the lenders are
developed and provided by the project control team.

Zaher Drira 2 March 2022

 EPC Projects Financing: Project Controller Role

1. CASH CALL/CASH STOCK AMOUNT AND PERIOD IDENTIFICATION

Based on the project schedule, the project budget, the progress measurement system, and the
contract payment terms, the project controller develops a Project Forecast Cash Flow. Different
scenarios to be analyzed: Optimistic, Realistic, and Pessimistic.

4000 EPC Project Cashflow Scenarios

3000

2000
Excess Cash amount/periods
1000

-1000

-2000
Cash call amounts/periods
-3000
Realistic Pessimestic Optimistic

-4000

Figure 1: Example of EPC Project Cash Flow Scenarios

As illustrated in the above graphic each scenario will generate Excess Cash Amount/Period and
Cash Call Amount/Period. The contractor’s decision-maker will seek to ascertain the best
alternative complying with Contractor Project Targets. (Financial, strategic, commercial,
development…).
Each scenario will generate financial costs, which shall be well estimated by the project controller.

2. FINANCIAL COST ESTIMATION

Knowing that currently due to multiple constraints and risks, project financial cost could reach
more than 5% of the project budget. Considering the high competitiveness of the market, for some
EPC Contractors, this rate could present the project profit mark-up. Thus, the proper assessment
and control of those costs become a significant competitiveness factor.
For several EPC Contractors, Project Cost Control Cycle Approval is based on the following rule:

 The approval of any Cost Engagement is conditioned upon the related amount to be
invoiced.
 Each spent amount should generate revenues.

Zaher Drira 3 March 2022

 EPC Projects Financing: Project Controller Role

Cost Code Description BAC AC ETC EAC VAR BILLABLE

0 1 200 ENGINEERING $ 1 500 000,00 $ 635 000,00 $ 862 400,00 $ 1 497 400,00 $ 2 600,00
0 1 400 MANAGEMENT $ 700 000,00 $ 213 080,00 $ 490 000,00 $ 703 080,00 $ -3 080,00
0 1 600 PROCUREMENT $ 22 870 000,00 $ 8 643 256,00 $ 13 005 000,00 $ 21 648 256,00 $1 221 744,00
0 1 620 LOGISTIC $ 2 050 000,00 $ 519 820,00 $ 1 500 980,00 $ 2 020 800,00 $ 29 200,00
0 1 800 CONSTRUCTION $ 11 420 000,00 $ 654 050,00 $ 11 103 000,00 $ 11 757 050,00 $ -337 050,00
0 1 800 1 Civil Works $ 3 997 000,00 $ 380 506,00 $ 3 616 494,00 $ 3 997 000,00 $ -
0 1 800 2 Mec & Pip Works $ 1 713 000,00 $ 104 150,00 $ 1 622 850,00 $ 1 727 000,00 $ -14 000,00
0 1 800 3 Sructural Works $ 2 855 000,00 $ 169 394,00 $ 3 012 000,00 $ 3 181 394,00 $ -326 394,00
0 1 800 4 E&I Works $ 2 855 000,00 $ - $ 2 855 000,00 $ 2 855 000,00 $ -
0 1 840 INSURANCE $ 800 000,00 $ 154 030,00 $ 612 000,00 $ 766 030,00 $ 33 970,00
0 1 900 FINANCIAL COSTS ????? ????? ????? ????? ?????

Figure 2: Example of Project Budget Tracking

Project financial objectives shall be precisely defined for the project management team at an early
stage (implemented on Project Charter). Such information will be highly helpful for project
management to consider while developing, tracking, and updating the Project Execution Plan.
Moreover, financial matters could be implemented as constraints/risks (threats or opportunities)
on the project schedule to be monitored and tracked during the project execution. Execution
sequences, priorities, performances, resources, and material mobilization…to be reviewed and
tailored to comply with financial objectives.
There are mainly (not limited) two major inputs to take into account during financial costs
estimation:

 Contract management cost impact estimation (liquidated damages, Indemnities…)

 Cash flow financial cost estimation (Credit, overdraft facility, currency trend…)

For experienced project controllers, the cost estimation/analysis for the first input is not very
complicated. Many tools and techniques could be highly reliable and relevant (e.g: Primavera Risk
Analysis, Monte Carlo Simulation…).
However, regarding the financial cost estimation, project controllers are required to collect the
updated parameters on the financial market to provide a reliable estimation. (e.g: IRR, short-term
interest rates fluctuation, currency trend). There are also many tools and software that could be
helpful.

Once the financial costs are estimated and budgeted, the project controller needs to ensure close
follow-up to all driving factors. (Schedule, risks, changes, procurement plan, time extension, extra
work…)
Project cash flow remains dynamic throughout the project lifecycle. Therefore, the cash flow burn
rate needs to be well monitored during all project phases.

Zaher Drira 4 March 2022

 EPC Projects Financing: Project Controller Role

3. INTER-PROJECT FINANCING ALTERNATIVE

Faced with the high financial costs incurred, Project Controller needs to find/create an alternative
to cover such extensive expenses. Various options could be analyzed:
Re-schedule: Execution/Constructability review to update the work sequence execution. Cash
flow should be updated accordingly.
PMS/Payment terms review: Subject to Client approval
Generate Extra Outcome: Keeping cash
surplus either during the project starting
period or throughout the project life cycle
give adequate assurance for the project team
and Contractor also. Furthermore, for the
Contractor, this status gives a leeway to
maintain the overall cash flow balance.
During period X, the Cashflow surplus
amount of Project P1 will be used to cover
the cash call amount of project P2.
In addition, this kind of financial Figure 3: Example of Inter Projects Financing Figures
mechanism will enable the Contractor to
limit the sourcing from the financial market given a competitive advantage.
However, this alternative shall be well assessed by the project controller:
If the surplus cash is invested in the short-term, how much it could generate?
As is the case for the cash call period, conversely, a scenario throughout the surplus cash flow
period could be analyzed also. Financial cost supported during the cash call period could be covered
by cash flow excess already generated.
Project controllers need to estimate potential outcomes in case that cash surplus will be invested.
For this, project controllers shall interact closely and continually with the financial department to
collect data about short-term placement conditions. (Sectors, rates, risks...).
For non-recourse financing projects, the estimation result could be considered as expected revenue
covering financial costs. In addition, the estimated amount could present a significant argument
during negotiation with lenders.
Concretely, to maintain the overall cash flow balance, the Contractor uses a cash flow surplus of
Project “P1” to cover the cash call amount of Project “P2” and vice versa. However, this
mechanism has a cost: eg:

 If the amount was used to expedite PO and avoid currency devaluation impact
 If the amount was used as a monetary incentive for early completion
 If the amount was used to finance trading operation
 Knowing the currency trend, is there any exchange rate profit (postpone works and
consequently the payment)
Zaher Drira 5 March 2022
 EPC Projects Financing: Project Controller Role

For EPC Contractors, the inter-project funding model shall be properly evaluated. The project
controller may refer to “A prime lending rate” or “below-market interest rate” to estimate
outcomes generated by cash flow surplus during a specific period.
These rates could be discussed, fixed, and reviewed on yearly basis during PMO meetings
based on internal and external parameters.

4. FINANCIAL COSTS TRACKING AND MONITORING

As per the remaining cost accounts monitoring, to avoid budget overrun, project controllers, are
concerned to keep project financial costs under control throughout the project life cycle. For this,
the main component to be properly tracked and monitored is the project cash flow statement.
Therefore, to ensure financial costs tracking and monitoring, project controllers need to ensure a
close follow-up to all cost account spending plans affecting project cash flow balance.
Any deviation or risk shall be early anticipated/highlighted. Impact also needs to be well assessed
and analyzed and an action plan to be implemented to mitigate risks. The EVM (Earned Value
Management) is one of the key instruments contributing to implement a financial cost controlling
system.
However, the project controllers need also to raise/evoke any financial opportunity likely to
generate unconventional financial outcomes (internal/external) enable to cover project financial
costs.

Figure 4: Financial Costs Monitoring and Tracking Process

5. PROJECT BANKABILITY IMPROVEMENT

Zaher Drira 6 March 2022

 EPC Projects Financing: Project Controller Role

Although the following list of the inputs set forth is by no means exhaustive, once properly
analyzed, project controllers will be able to provide liable data to enhance project bankability.

Project Bankability
- Owner/Authorities
- Location
Contract Bankability
- Political situation - Lenders assess the risk allocation between the
- Social matters contractor and the project owner
- Authorizations - Lenders focus on ability of Contractor to
- Dispute resolution (Laws, Liquidated damages..)
claim:
- Price and Currency
- Currency risk * Additional cost
- Smilar Project experience * Time extension
- Contractor technical capability * Extra work
- Project Key persons
- Main Suppliers/Subcontractors - Payment terms/ Forecast Cash flow
- Detailed Execution Strategy/Schedule - Lenders want to know Contractor
- Risk Rgister performance based on relevant experience
- Single point responsibility
-…

Figure 5: Project and Contract Main Bankability Inputs

Referring to the range of factors/indicators lenders assess project bankability and accordingly the
funding plan and cost will be defined. Certainly, most of the above-listed factors are not controlled
by project controllers (defined from the bidder phase/ linked to the project environment).
However, Project controllers need to improve project bankability while developing/providing
detailed information able to support Contractor negotiators to enhance their position during
negotiation with lenders.
- Project Detailed Schedule: Shall reflect project execution strategy. Main milestones (internal
and external) to be implemented. Risks and constraints shall be highlighted. The proper project
schedule will give an idea to lenders about the Contractor’s capability to claim changes, time
extension, extra works, and additional cost.
The grounds on which the EPC contractor can claim schedule time extension or additional
cost become very limited. It’s one of the major roles of the project controller to raise any
opportunity to enable to proceed with a claim.
- Project Risk Register: External and internal risks shall be well monitored and risks impacts
(cost and time) to be analyzed and highlighted.
As the project progresses, new risks may appear, and risks identified previously may disappear.
EPC risk identification requires a continual update.

Zaher Drira 7 March 2022

 EPC Projects Financing: Project Controller Role

- Main Suppliers/Subcontractors: Project controller need to support the project team to

select qualified suppliers/subcontractors (creditworthy and financially sound
supplier/subcontractor), and to execute a long-term supply agreement (if needed)
- Progress Measurement System (PMS): Although the payment terms are often defined
during the bidder phase, project controller needs to develop suitable PMS enabling Contractor
to maintain the cash flow balance.
- Currency Risk: project controller need to collect maximum data about project currency.
(devaluation/depreciation risks, convertibility risk, transfer risk, inflation risk…). These kinds
of risks (threats/opportunities) affect directly project budget and cash flow. Project controllers
shall early anticipate such risks and action plan to be implemented.
e.g: expedite foreign PO placement (engineering priorities), offshore reserve account (country
laws), postpone the works…
- Project Cash flow: Based on project schedule, on PMS, and on payment terms project control
team develops project cash flow. As is the case for project schedule, various scenarios are to
be analyzed. Project Cash flow presents one of the main arguments during negotiation
with lenders.
While preparing the above-listed document, project controller must always bear in mind
that the purpose of those documents is not limited to the project management process.
However, it’s also extended to bring significant support for the project financing process.

Zaher Drira 8 March 2022

 EPC Projects Financing: Project Controller Role

III. CONCLUSION

The involvement of project controllers in project financing matters presents meaningful support to
achieve project targets. Financial cost tracking and monitoring are one of the important tasks among
the list of responsibilities to be performed by project controllers.
Although project-financing decision/plan is often under Contractor Top Management responsibility,
also the project-financing map depends on company projects portfolio management, project
controllers are required to:
 Ensure good estimation and monitoring of the financial costs
 Raise the hidden financial incomes (inter-project financing)
 Improve project bankability: enhancement of negotiation terms with lenders
 Good assessment of projects risks and take advantage of opportunities (e.g: delay of non-
critical activities could constitute a significant financial opportunity)

Local currency
Vs
Foreign currency

T1 T2 T3
Figure 6: Currency and Schedule Trend Analysis

EPC Contractor needs to take all financial opportunities enable to generate additional incomes. While
improving their bankability and ensuring proper control of tools and parameters, Project controller
shall consider EPC Projects as a short-term investment allowing to generate investment incomes.
EPC Contractors need to ensure continuous financial training for their projects controllers who are
also called to develop their financial knowledge and be always updated with financial market data.
Beyond financial targets, having an efficient financial costs control system consists also a major
tool/input for contract management process (e.g: claim including moratorium interest estimation).

Zaher Drira 9 March 2022