In project cargo logistics, members of the transport logistics supply chain share, transfer and “push down” risk in a web of complex relationships. These relationships are evolving and project forwarders are being asked to take on more risk even as their roles narrow, at least according to some of the speakers on a panel on project transport risk management at the Breakbulk Americas Conference in Houston earlier this month.
“The amount [of risk] is up,” said Pat Roche, vice president, project and energy services, Expeditors, a freight forwarding company. “EPC [engineering, procurement, and construction] contracts are evolving.” Elements that have become more open-ended include execution of performance bonds, cargo lien waivers, and indemnification clauses, he said.
In the past, said Dennis Devlin, director-industrial projects USA, Geodis, a global freight forwarder, a project forwarder typically handled all of a given project’s logistics. Now, owners and EPCs may take vessel chartering and other elements out of their forwarding contracts. “I don’t know how to calculate costs if I don’t know what I’ll be responsible for,” he said. At the same time, “contacts can include flow-downs that don’t make sense for transportation contracts, or irrelevant items [rust; machinery issues]. … More definition means less risk.”
“What should be included in risk analysis?” asked Jake Swanson, global sector head, EPC Projects, DHL Industrial Projects, a global forwarder, who acted as panel moderator.
“What risk are we talking about? Reimbursable [contracts] versus lump sum? Risk flow-down? It’s tough to identify the actual source. Is it assumed or actual? Is the contract upstream [between the project owner and EPC or other subcontractors] nonnegotiable?” said Corey Henry, regional senior logistics manager Americas, McDermott, an EPC.
"Is anything really non-negotiable?” Devlin said.
“You do always have a choice,” Henry said.
Key: identifying risks in advance
Identifying risks in advance is key, said Joye Runfola, senior project logistics specialist, Americas Procurement, Air Liquide USA, a global manufacturer of industrial gases because there are so many vested interests involved in project cargo movements.
One issue is that contract language originating from the project owner or EPC can be slanted toward purchasing (procurement) rather than transport, Swanson said.
Creating better contracts can be a challenge because it involves educating internal colleagues, including legal teams and those working with service agreements, Henry said. They “don’t understand the difference between ordering from Amazon and shipping a reactor from China,” Henry said. “...We need contracts geared toward logistics, not services.”
Unacceptable contract terms that he’s seen, from his project forwarders’ perspective, have included ‘unlimited liability’ and alternative definitions of force majeure, Devlin said. “There’s already a definition of force majeure. We don’t need a new one.”
A strong contract includes project specifics and a carefully defined scope and is well negotiated, said Leandro Brusque, supply chain manager for Ocyan, a Brazilian oil and gas services provider.
You can never transfer 100 percent of risk, Runfola said, whether you are shipper or owner. The question is, how good are the various supply chain partners at managing their share?
From the EPC perspective, said Henry, he must share transport risk because he doesn’t control transport once he’s handed it over to his project forwarder.
However, when transport is divided, with some in the hands of the EPC and some in the hands of the forwarder, said Devlin, “our insurers have trouble with split responsibilities.”
“If a contract [with subcontractors] comes back with no markups, does that create concern?” asked Swanson. All of the panelists agreed that it does.
If there are no markups, Henry said, “that means they didn’t understand it, and it makes me doubt they can fulfill the scope.”
“No red lines? None? I doubt they can do it,” Runfola said. “Are they just trying to get the work? A strong contract has some negotiation in it.”
“There is real risk in the trend of accepting contracts as is,” Devlin said.
“A well-negotiated contract is a healthy contract that promotes communication,” Roche said.
“I try to have early engagement and make sure the subcontractors know and accept all terms and conditions,” Brusque said.
There are no standardized contracts, and robust vetting of the financial health of customers is key, Roche said. “We are all impacted by risk. Sustainability is the big question mark.”
Project forwarders have been operating on thin margins in a bad market for a long time, the panel of forwarders agreed. As the market turns, they are likely to start saying no to project logistics contracts that push an “unsustainable” amount of risk down to them and their subcontractors. Better margins and a more equitable sharing of risk will delineate the contracts they choose.
Contact Janet Nodar at email@example.com and follow her on Twitter: @Janet_Nodar.