An Intricacy of Project Financing for Offshore Projects - Expanding a Tool for Better Project Management
Authors: Allen Paul S. 
Published: October 2008

The offshore industry is using project finance more extensively than ever before. Project financing requires the allocation of risks and rewards among the involved parties in a manner that is mutually acceptable. In other words, project financing strives to allocate risks to those who are best positioned to manage it. The task of managing risks and delivering to expectations is not new; but with issues such as interface management, minimizing change, and managing expectations better among stakeholders, an expanded tool is needed.

In reviewing project finance intricacies, by definition, we would look at the distinguishing details, ins and outs, workings, particulars, niceties and minutiae that one can anticipate having to deal with in financing offshore development. This paper focuses on one of those intricacies that can be used regardless of whether using conventional finance or project finance for any offshore project - the project finance discipline tool of project payment milestone schedules.

Introduction

This paper proposes an enhanced coordination schedule containing the ideas listed below that map line item contingencies, key decision points, contractor incentives, and project interface issues. By integrating the project payment milestone schedule with this enhanced coordination schedule the resulting tool is described as theMaster Coordination Timeline for better planning and execution.

The author recommends the development and use of this new tool by sponsors, project management, and lenders to plan, scope, align, monitor project development and execution, and improve processes of mitigating project risks, minimizing change, and managing stakeholders' expectations more successfully.

Using Project Payment Milestone Schedules as a Basic Requirement

Whether using conventional or project financing, the author recommends the use of this project finance discipline tool as a required basic. Requiring the use of Payment Milestone Schedules1 throughout the entire project by all the contractors, subcontractors, and suppliers involved will significantly eliminate the "gray" areas by removing the 'percent complete' argument.

This discipline improves the owner's ability to manage cash flow and project the cost of cash, influences the behavior of the various parties to the project, and implements a systematic methodology for successfully monitoring performance in project execution by tracking payment progess or lack of it.

From the contractors' side this discipline helps them in scope definition by requiring each task in the project to be broken down in monthly bite-size payment milestones by line item. This allows contractors to better manage cash flow, protect the cost of cash, exert more influence over their subcontractors and suppliers, and remove the contiguous area of contracting, i.e. percent complete.

The key to Payment Milestone Schedules (PMS) is the 'black and white' element. Either a task in the PMS is 'done or not done'. An example would be physical verification by an independent third party on the third Thursday of each month. Physical verification is a process of a check-off of expected payment milestones by physically viewing the actual milestone or document for satisfactory completion as required for payment