Contracting/commercial strategy for the 21st century
David A. Roberts
As a 30-year veteran of the offshore and construction industries, I read with interest the recent article by K.E. Arnold (Beyond the Horizon, May 2003).
I detect a cycle in the manner the contracting players are developing their strategies, and a feeling of déjà vu prevails.
During the early 1980s most clients in the UK North Sea carried out developments by way of a management contract (on a reimbursable/plus fee basis), engineering contracts (usually let on the same basis) with a series of fabrication contracts for modules, jackets, helidecks, pipelines, installation, and tie-ins (predominantly let on a lump-sum basis) with certification, hook-up and accommodation contracts (let mainly on a reimbursable basis).
During the late '80s and the '90s, major contractors pursued a strategy of vertical integration, purchasing fabrication yards, specialist engineering firms, and major suppliers, forging links with installers and pipelay companies.
Simultaneously they promoted a "one stop" shop approach to better coordinate and integrate problems and transfer project risk to one main contractor.
Clients bought into this, and consequently, small players disappeared or were swallowed up.
Now the tide has turned. Major contractors are selling off or closing yards and subletting more complex elements of the design. This trend is partially driven by project location, the local content requirement in all tenders, and improvement of standards in emerging nations.
While the overall number of projects diminishes, those that remain are much larger and often include complex technical, logistical, and political challenges. As a result, increased contractor risk is spread over a smaller number of larger projects
To address this imbalance, alliances and partnering were tested with limited success. Purely incentivized contracts worked reasonably. The major problem was that, unlike other industries, there is no real financial inducement to the contractor beyond the construction and commissioning phase; thus opex suffers for lower capex.
Currently, major construction companies refuse to bid lump sum EPC/EPIC work.
This stance is driven by a number of factors, such as:
- Larger contracts with more risk
- Problematic geographic and political locations
- Tighter insurance market (CAR/BAR/PI)
- Greater transfer of risk to the contractor
- Longer design life requirements
- Functional specifications.
Contractors now offer to carry out engineering and management of procurement and construction (EPCm) contracts contracts on a reimbursable basis. How they can convince clients that they can manage these risks efficiently when they were previously unable to manage them for themselves remains a mystery. Clients' only other choice is to directly hire contract personnel.
Apparently, contractors failed to realize that clients would require similar obligations/liabilities under EPCm contracts as they did for EPCs and EPICs.
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Volume 63 Issue 7
July 2003
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