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The Risk Management of Thermal Power

Construction Projects in China: a Case Study

Zhen-Yu ZHAO, Zheng-Hao YUN Jian ZUO


School of Business Administration School of Natural and Built Environments
North China Electric Power University University of South Australia
Beijing 102206 P.R.China Australia

Abstract—In China, a large number of electric power projects The 2 × 300MW heat supply unit project of Baotou
are under construction as a result of huge energy demand. There Donghua Thermal Power Co., Ltd. is jointly invested by the
is an increasing need of risks identification and management China Huadian Corporation, the Beijing Energy Investment
during the development and construction process of power (Group) Co., Ltd. and the Inner Mongolian Mongolian
projects. This paper selects Donghua—a typical heat and power Electricity Huaneng Thermal Power Co., Ltd. The China
combined project in Northern China as a case study. Using Huadian Corporation is the holding company. The total
expert investigation method, the preliminary project risks list is investment of this project is 2.587 billion Yuan, out of 80% are
obtained and key risk factors are identified. A questionnaire bank loans. Baotou Donghua Thermal Power Co., Ltd. was
survey was conducted to gather views from experts with
established in July 2003 to manage the project according to the
experience in power plant construction practice, and then the
comprehensive evaluation of project risks is concluded. To deal
existing national infrastructure management system. All
with the identified high degree risk factors, a batch of risks non-client participating parties were selected via an open
controlling and monitoring measures and strategies are tendering approach.
proposed. The application of the measures is tested effectively to This paper adopts an expert investigation method to study
resist and control the project risks. The research results offer a the management of risks in the studied case. In the first stage,
valuable reference of practices that electric power projects experts from all the parties involved in the project were
involved parties need to master in order to control risks in surveyed in order to obtain a preliminary list of project risks.
Chinese market.
This is followed by another meeting which aims to identify the
Keywords : China , Thermal Power Construction Project ,
key risks. Experts’ comments were sought to evaluate the
relative significance of each risk factor. The significance of
Risk Management,Case Study
each risk factor is determined by its likelihood of occurrence
I. INTRODUCTION and impacts. Actions were taken to response these risks
accordingly.
Thermal power projects share common characteristics such
as long development period, tight project schedule, arduous III. RISK IDENTIFICATION
tasks and risky [1]. Thermal power projects are more risky As the fountain of risk management, risk identification
than other construction projects. Any accident happened will aims to identify and classify all kinds of potential risks at each
cause serious damage to the thermal power project such as the stage of the project [2]. This paper adopts an expert
decline of the economic efficiency and the potential threat to investigation method to identify risks. After all kinds of
the safety operation. Therefore, a set of risk analysis and information have been collected, a meeting was held with 19
management methods is required specifically for the experts that have worked on thermal power engineering
development of thermal power projects. Risk management
construction for more than 15 years (see Table Ⅰ). As a
consists of four stages, namely risk identification, risk analysis
and evaluation, risk control and risk monitoring (PMI 2004). result, a preliminary list of risks associated with the Donghua
This research reports the identification, forecast, analysis, Thermal Power Project is obtained (see Table Ⅱ). These risks
evaluation and effective management of those risks that have covered the whole life cycle of the project, from the design
potential to cause damages. As a result, project objectives are phase throughout to the operation of the power plant. Based on
achieved in a minimum costs. the preliminary risk list, the second meeting was held in order
to identify the key risk factors. Ten most authoritative experts
II. RESEARCH METHODOLOGY attended the meeting (see Table Ⅲ).
This research adopted a case study approach to investigate Experts identified the following factors as the major risks
the risk management practice in thermal power projects in associated with the Donghua Thermal Power Project.
China. As a typical heat and power combined project,
Donghua thermal power plant is selected for the purpose of (1) Steam engine room roof truss spherical grid structure:
this study. The research outcomes provide a useful reference to The steam engine room roof truss uses the spherical grid
the risk management of thermal power projects. structure which is the same as the one used in Xinfeng thermal

978-1-4244-4639-1/09/$25.00 ©2009 IEEE


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power plant. It is designed and constructed by the Jinzhong making reinforcement treatment to all support saddle of the
branch of the Zhuozhou Lantian Steel Structure Co. Ltd. steam engine room roof truss. All welding works should not be
During the construction of Xinfeng Thermal Power Plant, undertaken on site unless the relevant measures have been
quality accidents happened to this type of structure. As a taken.
result, the Architectural Scientific Research Institute suggests
TABLE I. RESPONSE PROFILE IN THE FIRST MEETING
TABLE III. RESPONDENTS PROFILE IN THE SECOND MEETING
Owner 6
Design institute 4 Owner 2
Supervision Unit 4 Design institute 2
Other consulting firms 5 Supervision Unit 3
∑ 19 Other consulting firms 3
∑ 10

TABLE II. THE PRELIMINARY RISK LIST

Major risk Major risk


Risk factor Risk factor
category category
a-1.Design errors or defects e-1.Poor coordination among Government,
a-2.Do not meet design requirements investors, design institutes, contractors and
(a) (e)
a-3.Do not consider the various circumstances of supervision units
Design Organizational
construction e-2.Inappropriate response to the poor
coordination
b-1.The wrong choice of contractor f-1.Unreasonable contract type
b-2.Unreasonable schedule (f) f-2.Contractual terms omission or mistake
b-3.Unrealistic schedule goal Contractual f-3.Unclear responsibility and duty
b-4 Outdated technologies f-4. Poor claim management
b-5.Unreasonable construction technical scheme
(b) b-6.Unreasonable new program and new
g-1.Shortage of personnel
Construction technologies
g-2.Project objectives and divisions are
b-7. Safety accidents (g)
indefinite
b-8.Ignore construction conditions Personnel
g-3.Key project personnel change
b-9. Steam engine room roof truss spherical grid
g-4.Low competency personnel
structure construction safety
b-10.Quality defects
c-1.Floods, earthquakes or other irresistible natural
disasters h-1.Equipment and material cannot be supply
(h)
(c) Natural and c-2.Unclear engineering geology and on time
Equipment and
environmental hydro-meteorological conditions h-2.Specifications,quantity,quality problems of
material
c-3.Adverse geological conditions equipment and material
c-4.The impact on surrounding environment
d-1. Improper equipment cost control i-1.No authorization
d-2. Coal price rise i-2.Lack of smooth communication with
(d) (i)
d-3. Inflation and rate change stakeholders
Economic Management
d-4. Funds are not available i-3.Lack of incentive and restrictive
d-5.No cost-control measures mechanism
(2) Project Schedule: If the project can not be completed on may have more than one project under construction. There is a
time, the funds can not be regained on time, which is risk whether or not the contractor can form a high quality
detrimental to the relationship between participating parties project team to the Donghua Thermal Power project and
and the project outcomes. There is a very tight project maintain this team throughout the project life cycle.
schedule, which reflects discretion between the planned
schedule and the actual schedule. (5) Poor coordination: The success of thermal power
project depends on the well coordination among all
(3) Coal price rise: The project commenced in a stage when participating parties, e.g. the coordination between owners and
China faced the electric power shortage and continuously superior departments, between owners and design institutes,
rising coal prices. Rising coal prices will inevitably increase between construction firms and supervision unit.
the cost of electric power production, and in turn reduce
corporate profits. In addition, other risks such as inflation, (6) Personnel risks: The success of project also relies on
labor costs rise and floating exchange rate need to be the efforts made by the project personnel. Low quality of
considered thoroughly as well. project personnel (the capacity, efficiency, sense of
responsibility, moral character) is a significant risk. The
(4) The wrong choice of contractor: The contractors with turnover of employees also presents a major risk to the project.
high construction competency and strong organizational
capability can better control the quality and schedule. (7) Natural risks: The bad weather conditions, such as
However, the tender prices of these firms are comparatively severe cold weather, rainstorm; unexpected geological
higher than those with low competency and weak conditions, earthquake, fire, lightning, affect the construction
organizational capabilities. In addition, the selected contractor of thermal power project.

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(8) Contractual risks: Major contractual risks include unexpected. The study adopts an expertise scoring approach
contractual terms omission or mistake, unclear terms, which has been used for risk assessment in the Olympic Venue
non-performance of the contract. The existence of projects [3]. In the risk assessment phase, 78 questionnaires
contradiction and ambiguity is often inevitable due to were distributed to experts and representatives from the owner,
numerous contract clauses. It also includes risks that are the design institute, contractor, supervision units, of which 64
brought by unclear responsibility and duty, poor claims were returned with a recovery rate of 82%. A comprehensive
management. risk assessment table is obtained. (see Table Ⅳ). Figure 1
demonstrated the risk assessment process. As in TableⅣ, the
IV. RISK ANALYSIS AND EVALUATION
overall risk degree of the Donghua Thermal Power project is
The Donghua thermal power construction project involves middle. Similarly, this method can be used periodically to
a number of parties and personnel. Various risks exist in every determine the risk degree of each stage of the project.
single stage of the project where these risks are highly

To determine the To determine the risk To calculate the To calculate the


risk weights f probability of value r risk fr risk degree Σfr

Figure 1. Risk assessment process

TABLE IV. COMPREHENSIVE RISK ASSESSMENT TABLE

Probability (r) Risk


Weights
Potential risk factors Lower Low Medium High Higher
(f) fr
0.2 0.4 0.6 0.8 1.0
Steam engine room construction safety risk 0.1 √ 0.1
Unreasonable schedule risk 0.1 √ 0.08
Material supply risk 0.1 √ 0.08
Various safety risk 0.1 √ 0.06
Contractual terms omission or mistake 0.1 √ 0.06
Coal price rise 0.05 √ 0.05
Design errors or defects 0.05 √ 0.04
Adverse geological conditions 0.1 √ 0.04
Organization incoordination 0.05 √ 0.03
Low quality of personnel 0.05 √ 0.02
Quality defect 0.05 √ 0.02
Natural disasters 0.01 √ 0.02
Inflation and rate change 0.05 √ 0.02
Personnel change 0.04 √ 0.016
Risk degree Σfr = 0.666
The client carries out detailed analysis and prediction of • Risk transfer, of the risk to a third party, for example
project risks, and develops the risk management plan by taking out an insurance policy or a penalty clause;
accordingly. The results show that the analysis and prediction and
are basically consistent with the risk management plan.
Although the risks of coal prices rising, materials supply, and • Contingency, where actions are planned and organized
unreasonable plan are slightly higher, the overall project risk to come into force as and when the risk occurs [5].
degree (0.666) is lower than benchmark set by the client. The As discovered in the risk assessment stage, the overall risk
risk degree is therefore considered as acceptable in this degree of the development is in an acceptable range. Donghua
development. Power Company identifies and analyzes every single risk
which may exist in the project process. Accordingly, the
V. RISK RESPONSE
company works out the plan to respond to these risk factors.
Risk Response is a strategy taken to manage a potential or Taking the nature of project risks, related factors and the
manifested risk [4]. The ways of responding project risks are: project environment into account, Donghua Power Company
takes the following actions to deal with the risks:
• Risk prevention, where countermeasures are put in
place to stop the threat or problem from arising, or to (1) The credibility of the construction companies is given
prevent it from having any impact on the project or a higher priority during the selection of selection process. The
business; client tends to choose the contractor with a good reputation,
advanced construction technologies and good construction
• Risk reduction, where actions either reduce the quality. The tender price is not the determining factor.
likelihood of the risk developing, or limit the impact to
acceptable levels; (2) Strict quality control in order to reduce the occurrence
probability of risks. All parties established supervision and
management systems and integrated quality management

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departments. The construction quality management system is During the construction stage, the major duties of risk
approved by clarifying the responsibilities of each party. The management personnel are:
proactive quality control is enhanced to ensure the realization
of the quality goal. • On-site supervision of the construction in accordance
with technical standards, norms, procedures and the
(3) Clearing the responsibility of all parties: In the approved design documents, construction organization
contract, the responsibility of all parties should be clear. design and construction standards mandatory
Contractual terms omission or mistake, unclear terms should provisions.
be avoided. When the contract risk occurs, the responsible of
all parties can be traced back in order to avoid evading • To inspect whether or not the onsite management
responsibility for one another. personnel and quality inspection meet the project
requirements,
(4) The purchase of insurance: Donghua Thermal Power
Company purchases the installation insurance, third party • To inspect whether or not the onsite management
liability insurance, social insurance and motor vehicles personnel and quality inspection can control the risk
insurance. The purchase of insurance can solve those risks appropriately, and
which can not be reduced. The potential credit risk of partners • To provide feedback to the risk identification and risk
are managed via requesting the counterpart’s guarantee. analysis process.
(5) A reasonable amount of venture deposit: From a Risk management personnel are responsible for
financial perspective, Donghua Thermal Engineering Co., Ltd. summarizing the lessons at the end of the project. This
sets up a contingency of 2 million Yuan to deal with information is added into the history database and will be used
unforeseen risks in the budget. The total construction cost is as a reference in future projects.
exceeded due to the issues associated with the construction of
the steam room, which is one of unforeseen risks. The VII. CONCLUSIONS
contingency was used for this matter.
As the project owner, Donghua Thermal Power Company
(6) Risk sharing co-operatively: As the owner, Donghua carried out a dynamic project risk analysis and evaluation
Thermal Power Limited Company shares the risk process throughout the whole project process, and provided
responsibilities with non-client. The risk sharing strategy timely responses. The comprehensive identification, analysis,
helps to strengthen the responsibility sense and enthusiasm to evaluation and effective disposal of potential risks enable
achieve a better planning and controlling of the project. The Donghua Thermal Power Company to achieve successful
party which bears the risk liability should have appropriate outcomes such as: zero accident rate, no rework due to
authority to control and deal with that risk. In addition, a management mistakes, and the completion of the project with a
proper incentive mechanism needs to be in place to motivate comparatively low cost. The experience concluded in this case
intelligent risk taking opportunities income can be gained [6]. study provides a valuable input to the risk management in
other thermal power projects. Further opportunities exist to
(7) Advanced technologies and organizational skills: have a comprehensive and systematic study of the risk
Advanced technologies and organizational skills help to reduce management during the feasibility study stage and policy
the probability and impact of potential risks. These include: environment. This helps to reduce the risk probability and lost
flexible and high risk resistance technical solution, pre-test due to these risks. The effectiveness of risk management can
technical simulation, reliable protection and safety measures, be enhanced as well.
effective technical and managerial personnel, effective
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