Contracting/commercial strategy for the 21st century
David A. Roberts
If the contract is to be reimbursable, no opportunity exists for contractors to include contingencies for such risks as reworks, warranty, insurance deductibles, and so on. The margins on a significantly reduced turnover fail to encourage such risk taking.
Many court cases have been reported in which the management contractor has fared badly. With a reimbursable contract, contractors remain potentially liable, and such liability is not restricted to that of a body-shop contractor.
Surprisingly, clients now approach contractors to ascertain suggestions on the type of contract to let.
This opens up a set of common, but divergent problems including:
- Risk control
- Price control (cost – client capex/opex and contractor turnover/ profit)
- Availability of construction and operation contractors
- Ability to carry out difficult to insure work (UK scaffolding companies finding it difficulty to obtain employers liability coverage).
Can both parties mutually satisfy their requirements? I believe a contractual and commercially viable accommodation can be reached.
With a contract let on cost-plus-target basis (target bid by the contractor – if the developer is able to prepare a budget for sanction, the contractor can calculate target cost) such cost is controlled by commonality of interest. To minimize the budget, the "cost plus" strategy must cascade as far as possible down the chain to avoid incurrence of risk-related contingencies at multiple levels with multiple mark-ups. A client's budget will still contain the usual contingencies for the overall project (the contractor remaining incentivized by an allocation system of costs against relevant targets in target-based contracts).
To manage risk in large and complex projects and minimize the cost of such control requires innovative ideas.
Traditionally, risks were covered by insurance policies or devolved to various contractors (hopefully still solvent and existing and/or insured possibly 20-30 years later when claims arose). Many such policies duplicated coverage or left certain risks uncovered.
Serious consideration must now be given to project life insurance.
Operators/developers have large international portfolios in some of which they may only be minor joint venture partners. Most have sufficient business in construction and operation insurance to generate market interest in mutual agreement of a suitable scheme. Alternatively, consideration could be given to managed mutuals or captives.
As Ken Arnold stated in his article, I trust these comments will result in a dialogue leading to a workable and mutually acceptable solution to contracting in the offshore industry in the 2lst century.
David A. Roberts
Senior Consultant, Brewer Consulting
davidr@brewerconsulting.co.uk
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Volume 63 Issue 7
July 2003
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