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The 6th International Conference on Environmental Science and Civil Engineering IOP Publishing
IOP Conf. Series: Earth and Environmental Science 455 (2020) 012208 doi:10.1088/1755-1315/455/1/012208

ISM Based Method for Risk Management of International

EPC Projects

Yimeng Song* and Shengyue Hao

School of Economics and Management, Beijing Jiaotong University, No.3
Shangyuancun, Haidian District, Beijing, China
Email: [email protected]

Abstract: In recent years, with the continuous development of the international engineering
contracting market, the industry's requirements for projects have also increased. It has gradually
evolved into an international engineering procurement model with higher risk response
capabilities and more complex project models. Due to the long construction time, large scale,
fixed contract amount and other characteristics of international EPC projects, China's
international EPC projects still face multiple risks. This paper uses an Interpretative Structural
Model to analyze the risk factors of international EPC projects. Then, construct a project risk
model to consider the optimal strategy of risk control from a holistic and systematic perspective.
It also puts forward effective risk management and control measures to provide a reference for
risk assessment under the international EPC project management mode.
Keywords: EPC Project, International, Risk Management, ISM, Risk Factors, Risk Control.

1. Introduction
With the acceleration of economic globalization and the in-depth development of China's “One Belt and
One Road” policy, the strategy of “going global” has become the primary mission of China's main
project contracting enterprises. International EPC projects as a comprehensive social activity, which
integrating politics, economy, technology, management, organization and culture aspects, there are still
many potential risks. The risk management theory of “understanding the potential risks of the project,
preventing them in advance, and taking effective measures in a timely manner” is undoubtedly the
prerequisite for good performance in international EPC projects [1].
At present, many scholars have conducted in-depth analysis of international engineering risk
management from the risk management theory and basic methods perspective. In PMBOK, which
formulated by Project Management Institute (PMI), the risk management process is divided into six
parts: risk planning, risk identification, qualitative risk analysis, quantitative risk analysis, risk response
plan, and risk monitoring [2]. In China, the book Project Risk Management divided project risk
management process into risk planning, risk identification, risk estimation, risk evaluation, risk response,
and risk monitor the six phases [3], as shown in figure 1.
In recent years, scholars at home and abroad have paid more attention to using different research
methods to conduct in-depth discussions on the risk factor identification, risk analysis and evaluation,
and risk control methods of EPC projects. In the research methods of risk factor identification, foreign
scholars mainly use Delphi method and analytic hierarchy process to identify risk factors [4], and
conduct a comparative analysis of the survey results [5]. In China, major methods are study on establish
a risk index system from the EPC general contractor perspective [6]. In research methods of risk analysis
and evaluation, the existing international research hotspot is use of fuzzy comprehensive evaluation
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The 6th International Conference on Environmental Science and Civil Engineering IOP Publishing
IOP Conf. Series: Earth and Environmental Science 455 (2020) 012208 doi:10.1088/1755-1315/455/1/012208

methods to evaluate the EPC general contractor risk probability of occurrence [7]. The widely used
method in China is to conduct an empirical analysis to accurately evaluate the procurement risk of EPC
model [8]. Moreover, some foreign scholars combine the risk decomposition structure with the work
decomposition structure to construct risk decomposition matrix, in order to better evaluate the risk
factors of EPC projects [9]. Domestic scholars are based on the characteristics of EPC projects formulate
corresponding risk response strategies and control methods [10].

Figure 1. Steps of Risks Management in Construction Project.

There are abundant existing researches on risk factor identification, evaluation, and control methods
but in the process of risk management, research on the dynamics and integrity of the project are
insufficient. In addition, ISM have ability to quickly identify the structural relationships of influencing
factors under complex conditions. It can directly describe the intersection of risk factors, interactions
and the process of risk transmission in the project, especially has many advantages in the risk
management. Therefore, apply ISM to risk management of international EPC projects will assist projects
in risk identification, risk assessment and risk control.

2. ISM for Risk Factors of International EPC Projects

Interpretative Structural Model (ISM) is a structural modeling tool to analyze problems related to
complex socio-economic systems developed by Professor Warfield [11]. In this model, risk factors of
international EPC projects are combined with the ISM model. Then, the interaction relationship between
risk factors will be systematically combed by qualitative analysis.

2.1. Identify Risk Factors of International EPC Projects

According to review of existing literatures and detailed classification is carried out based on the
identification of risk factors that may occur in project according to Flanagan and R. Norman (1993) [12].
The list of risk factors and content in international EPC project as shown in table 1.
The risk issues faced by international EPC projects are complicated. It should be analyzed at different
levels to find out the direct and root causes of the risk factors affecting engineering problems.

2.2. ISM for Risk Factors of International EPC Projects

There are many risk factors relate to international EPC projects, many of them are difficult to directly
quantify. There is a relationship of interaction and mutual influence among the factors. Therefore, ISM
can be used to study the affecting of risk factors to international EPC project.

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The 6th International Conference on Environmental Science and Civil Engineering IOP Publishing
IOP Conf. Series: Earth and Environmental Science 455 (2020) 012208 doi:10.1088/1755-1315/455/1/012208

Table 1. List of Risk Factors.

Initial Factor Content
political & legal national political system, government policies, laws and regulations,
P
risk government's attention and intervention, international relations
socioeconomic system, economic structure, economic development
E1 economic risk
status, exchange rate, tax rate, inflation, foreign exchange control
contract price, contract clause, claim clause, guarantee clause, design
C1 contract risk
standard, contract termination clause, currency selection, claim clause
social security, cultural differences, customs, educational levels,
S1 social risk
religious beliefs
climate conditions, geological conditions, epidemic diseases, disaster
N natural risk
emergency response
professional capabilities, data provision, design changes, late payments,
O owner risk
maintenance frequency
design plan, procurement preparation, use of tools, construction
general
C2 organization ability, operation and maintenance, worker training,
contractor risk
subcontractor management, communication ability
supply system supplier selection, logistics and transportation, supply capacity, quality
S2
risk of building materials

2.2.1. Establish a Binary Relationship. The binary relationship is a relationship rule between any two
elements that need to be discussed according to the research purpose, including the relationship of
influence, inclusion, membership, and causality. Use ISM to gradually study the relationship between
each element, associate each element in the system factor set with the other (n-1) elements, determine
whether there is a direct binary relationship between them, and use the form of an adjacency matrix to
represent:
𝐴 = （𝑎𝑖𝑗 ）𝑚×𝑛
1 （Si has influence on Sj ）
𝑎𝑖𝑗 = {
0 （Si has no influence on Sj ）
The factor set of a system composed of P, E1, C1, S1, N, O, C2 and S2 was obtained and the
adjacency matrix was established:

2.2.2. Calculate the Accessibility Matrix. By performing a Boolean operation on the matrix, A, we can
get the matrix A’:

2.2.3. Rotation Method for Extracting the Accessibility Matrix: Result First Extraction-Cause. First
Extraction. Those steps are presented as follows:

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The 6th International Conference on Environmental Science and Civil Engineering IOP Publishing
IOP Conf. Series: Earth and Environmental Science 455 (2020) 012208 doi:10.1088/1755-1315/455/1/012208

Step 1: Result-First Extraction.

Key Factors R(ei) Q(ei) T(ei) R(ei)= T(ei)
P P, E1, C2 P, S1, N P ≠
E1 E1 P, E1, C1, S1, N, O, C2, S2 E1 R(E1)＝T(E1)
C1 E1, C1 C1, S1, N, O, S2 C1 ≠
S1 P, E1, C1, S1, O, C2, S2 S1 S1 ≠
N P, E1, C1, N, C2, S2 N N ≠
O E1, C1, O, C2 S1, O O ≠
C2 E1, C2 P, S1, N, O, C2 C2 ≠
S2 E1, C1, S2 S1, N, S2 S2 ≠

Step 2: Cause-First Extraction.

Key Factors R(ei) Q(ei) T(ei) Q(ei)= T(ei)
P P, C2 P, S1, N P ≠
C1 C1 C1, S1, N, O, S2 C1 ≠
S1 P, C1, S1, O, C2, S2 S1 S1 Q(S1)＝T(S1)
N P, C1, N, C2, S2 N N Q(N)＝T(N)
O C1, O, C2 S1, O O ≠
C2 C2 P, S1, N, O, C2 C2 ≠
S2 C 1, S 2 S1, N, S2 S2 ≠

Step 3: Result-First Extraction.

Key Factors R(ei) Q(ei) T(ei) R(ei)= T(ei)
P P, C2 P P ≠
C1 C1 C1, O, S2 C1 R(C1)＝T(C1)
O C1, O, C2 O O ≠
C2 C2 P, O, C2 C2 R(C2)＝T(C2)
S2 C 1, S 2 S2 S2 ≠

Step 4: Cause-First Extraction.

Key Factors R(ei) Q(ei) T(ei) Q(ei)= T(ei)
P P P P Q(P)＝T(P)
O O O O Q(O)＝T(O)
S2 S2 S2 S2 Q(S2)＝T(S2)

2.2.4. ISM Structure Diagram. According to the above level division, the final diagram is established,
as shown in figure 2.

2.3. Analysis of ISM Result

As can be seen from the structure diagram of the ISM model in figure 2, the model is a four-layer
hierarchical structure model and risk factors are divided into four levels.

2.3.1. From Level 4 to Level 3. According to the structure diagram, social risk (S1) is likely to cause the
political and legal risks (P), owner risks (O), and supply system risks (S2). Natural risk (N) is likely to
cause the owner risks (O), and supply system risks (S2). Social risk (S1) and natural risk (N) are the
deepest influencing factors of the project. Contents of social risk (S1) and natural risk (N), which mainly
included language, culture, religion, education level, local climate, hydrology and geology, social

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The 6th International Conference on Environmental Science and Civil Engineering IOP Publishing
IOP Conf. Series: Earth and Environmental Science 455 (2020) 012208 doi:10.1088/1755-1315/455/1/012208

security, epidemic diseases and disaster emergency systems are all uncontrollable risk factors, should
be avoided as much as possible.

Figure 2. ISM Structure Diagram.

2.3.2. From Level 3 to Level 2. As can be seen from figure 2, political and legal risks (P), owner risks(O),
and supply system risks(S2) have different tendency. Political and legal risks (P) is likely to cause
general contractor risk (C2). Owner risks(O) and supply system risks(S2) both likely to cause contract
risk (C1) and general contractor risk (C2). In level 3, risk factors have multiple effects on international
EPC projects. For example, the unstable political environment and inadequate legal system will increase
the risk of contract risk or contractor risk. Therefore, a good political environment, integrity of laws and
regulations, professional capabilities of owner, and a stable supply system can effectively prevent risks
occur and decrease probability of contract risk and general contractor risk.

2.3.3. From Level 2 to Level 1. As shown in figure 2, influenced by all factors in Level 2. Concretely,
contract risk (C1) will trigger the contract price, contract clauses, claim clauses, guarantee clauses,
design standards, contract termination clauses, etc. General contractor risk (C2) would make economic
risk (E1) with construction organization capabilities, operation and maintenance, worker training,
subcontractor management, and general contractor communication capabilities. Economic risk (E1) is
the most basic and direct risk factor that affects international EPC projects.

3. Strategies of Risk Management in International EPC Project

The complexity of international engineering EPC project risks is the particularity of the type engineering.
In view of eight risk factors, find out strategies to break risk constraints, reduce project life cycle risks,
improve work efficiency, and ensure project quality, so as to ensure the smooth progress of the entire
project is necessary conditions for target controllability.

3.1. Exchange Rate Risk Transfer

During the contract negotiation, under the circumstance of the depreciation of US dollar, the payment
made by the owner to the contractor should be made in Euro or fixed exchange rate of RMB to US dollar,
so as to transfer the exchange rate risk to the owner. At the same time, the subcontract is paid in the
same currency as the owner's contract, allowing the subcontractor to share the exchange rate risk with
the general contractor.

3.2. Add Price Adjustment Clauses and Withdrawal Mechanism Clauses to Contract to Avoid Risks
The price adjustment clause is stipulated in the contract that when the increase in labor and raw material
prices causes the contractor's cost to increase to a certain extent, the contractor may submit a certain
amount of compensation to owner. According to investigation of the local market, consider all kinds of

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The 6th International Conference on Environmental Science and Civil Engineering IOP Publishing
IOP Conf. Series: Earth and Environmental Science 455 (2020) 012208 doi:10.1088/1755-1315/455/1/012208

risk factors as comprehensively as possible, and appropriately increase the bidding quotation when
necessary. The withdrawal mechanism clause means the contract cannot be continued due to force
majeure. The two parties should clearly terminate the withdrawal mechanism in the contract clause to
ensure that the contractor’s investment is reasonably compensated.

3.3. Strengthen Procurement Management

Strengthen the qualification evaluation of equipment manufacturers, strengthen the strength of
equipment supervision and manufacturing, and ensure that the quality and progress of equipment
materials meet the needs of the project. Strengthen communication between design and procurement,
and strengthen communication between procurement and logistics. Strengthen the project logistics
management, and select the logistics companies with good reputation and ability, especially those with
logistics and transportation experience in the country where the project is located, and understand the
local customs operation process and habits as subcontractors.

4. Conclusion
This article uses the ISM model to analyze the risk factors of international EPC projects systematically,
which directly reflects the relationship between risk factors of international EPC projects. Therefore, it
helps project managers to find the fundamental and important factors that relate to international EPC
projects. At the same time, it provides a new analysis idea for the risk management of international EPC
projects. Risks are unavoidable in the construction process of international EPC projects, which needs
to be estimated in advance. Understanding the complexity and diversity of risks in international EPC
projects soberly, improve risk assessment and prevention capabilities, and establish a scientific risk
management system to effectively avoid and diversify risks and improve international competitiveness.

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