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Does the type of contract we use make a difference?

June 21, 2012

This question is attracting more and more interest and is an area on which IACCM is building a body of knowledge. Increasingly, we face the question ‘what is the best form of contract to use?’ Hidden in this is a broader question of different relationship strategies and, of course, the impact of specific strategies on terms and conditions.

All of these questions are important because we have growing evidence about the very real differences that our choices in this regard have on the outcome of the project or transaction.

I thought it might be of interest for me to share a specific example that comes from research into EPC contracts. One of my contacts  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 %;

Mixed Approach– S = 91 % ; Failure = 9%

EPC Lump-Sum – S = 39 %; F = 61%.

I think a key challenge when analysing this data is to understand the connection 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.

There is growing understanding that contracting strategy and practices influence the behaviors on which outcomes 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 all contracting professionals to take lessons from other industries which undertake similar forms of contract and handle similar levels of complexity; we have a long way to go in developing a coherent answer to the questions that users of our services increasingly pose.

 

3 Comments
  1. Ian Heptinstall permalink

    Interesting data from IPA Tim.

    How have they defined “Alliance”? I find it counter-intuitive that where the financial interests of the key contractors are aligned with the objectives of the ultimate project owner, then the failure rates are highest. It certainly is at odds with my experience with aligned project contracts

    Or did they mean something different?

    IanH

    • I am not sure whether it is their definition, or perhaps how the participants described it. However, it does accord with other research which suggests that senior management might think they have formed ‘an alliance’, but they do little to ensure that their organisation actually has ‘alliance capability’.

  2. Tim,

    I agree with your recommendation. Construction professionals should look onto examples of other industries both for strategic guidance and contract drafting examples. Model forms are nice to have but expensive in the end if they are not in line with the parties business models.

    @briclawyer

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