IACCM Forum

There is growing understanding that contracting strategy and practices influence the behaviors on which outsomes depend. This is obviously a topic that goes far wider than oil and gas, yet from which oil and gas should learn. For example, the strategy related to risk allocation or compensation methods will alter the way the relationship develops and is managed, creating environments that may be highly collaborative or where the atmosphere is one of blame.

Therefore I recommend you may want to take lessons from other industries which undertake similarly complex projects, and apply them oil and gas.

Specifically, someone recently referenced a book by Edward Merrow – IPA - Industrial Megaprojects – 2011.which studied 318 projects with costs from 1,000 MM to 20,000 MM USD. 

Chapter 11 – pp 253 to 303 addresses the issues of the various contracting forms, currently adopted EPC projects.  

Some numbers:

1- Adoption:

EPC/EPCm reimbursable – 25%

Alliances – 12%;

Mixed Approach – 10%;

EPC Lump-Sum – 53%.

2- Contract and Project Outcomes – Success / Failures:

EPC/EPCm reimbursable – S = 78 % ; F = 22 %

Alliances – S = 8 %; Failure = 92 %; ==> an astonishing high number of failure;

Mixed Approach– S = 91 % ; Failure = 9% ==> An surprising good rate of success;

EPC Lump-Sum – S = 39 %; F = 61%.

I think a key challenge when analysing this data is to understand the conenction between contract strategy and organizational capability / commitment. Our research suggests that many times the problem is that they are not aligned; specifically, different strategies depend on different tools, resources and staff attitudes. If we design for one relationship buit put in place an infrastructure for another, failure rates will be high.

Thank you Tim. such amazing figures. i never expected the success rate for alliancing/partnering to be so low. Will surely look out for this book.

Just also wondering why halliburton announced that they would stop receiving projects on EPC contract terms.

The percentage is indeed surprisingly low. My hypothesis is that often management calls something an 'alliance' when in reality they have not commited the resources or systems to support it. But this certainly needs investigation and you may want to consult an expert, such as Prof Tyrone Pitsis, for his view.

On the Halliburton question, I guess we could ask them - they are members! You may want to use the member network facility, but let me know if you need help on this.

Hi Tim/Chioma and others,

The statistics Tim cites is very interesting and seems logical - however, the EPC Contract is what prevails in Middle East and nearby regions - Shell or BP or others have not moved to a reimbursable basis - in fact, they are passing on more and more risks to the Contractor than earlier - reasons being they think that EPC Contractor has more resources or capablility or ability to bear these risks - like local country specific issues - one can bribe and resolve a problem which BP or Shell wouln't like to do - or the local influence in getting things done is more possible by EPC Contractor than them - I do not know - but despite the failure rate you mention, this is the trend

Regards

B.R.Srikanth

I agree - in some countries the epc lump sum model is all that is used. However there are often huge claims and the perception that such claims are "contractors risk" and "included in his price" are often not the case and settlement of such claims often moves to the next project with that contractor.

You also pay a huge premium for such strategies as the contractor has to build all this risk into the lump sum price.

Lump sum epc is a good model if the design and sow is mature and there is competition its not such a good model if this is not the case.

Industry elsewhere has been looking at other contract/commercial models that allocate risk to the party who can control such risk and commercial models (such as reimbursable target price) which in some cases realize a cheaper final price.