Choosing the best contract model for tapping a contractor as well as getting them involved early in the first stages of projects can alongside with added transparency through digitalization and standard metrics improve chances of project success.
Experts discussed during a recent Reuters Events conference their approaches when it comes to tapping engineering, procurement and construction (EPC) partners, as well as using technology to increase visibility to participants in a petrochemical complex construction.
Finding a common metric to compare contractors as well as considerations before setting up incentives was also part of the discussion.
EPC vs. EPCM contract
Thomas Abel, senior vice president of projects at Borealis, has had experience with both EPC and EPCM contracts.
With EPC an owner has the advantage of having one contact point which is one contractor that subcontracts suppliers, services and labor. In an EPCM the contractor only acts as consultant.
Borealis signed an EPCM for a PDH (propane de-hydrogenator) project in Europe, and has EPC accords for a U.S. cracker and polyethylene project in a venture with Total, as well as in other petrochemical projects in Abu Dhabi.
With an EPC contract “the advantage is that the contractor bears the risk.” Yet, this isn’t a guarantee against unforeseen variations.
Even with an EPC “strong change and claims management and steering committees need to be in place,” Abel said.
An EPCM has its own advantages like “you can start quicker,” he said.
Borealis has an EPCM for its project in Belgium in part because labor legislation restrictions in Europe.
With EPCM “a pitfall is you don’t have the commercial competition” as multiple bidding processes with EPC contracting and subcontracting bring costs down, Abel added.
Also, with an EPCM, the contractor “does its business by selling the hours to the client” so the motivation to keep timelines is not as strong.
A common metric to compare quality, cost, production and scheduling performances across diverse projects can help both contractors and owners, said Taylor Auburg, vice president of projects at Freeport LNG.
“You have to have a common metric to measure things consistently between companies over time,” Auburg said.
For example with safety, “incidents per 200,000 worked hours” is the one standard metric across industries and countries. But when it comes to comparing contractors performances there hasn’t been a standard.
“A lot of people look at cost-size of the project,” he said.
“You need to go a little bit deeper than that in order to have a commonality, a common factor, a way to normalize the variances between projects,” he said.
For example, corporate specific guidelines can assign relative difficulty levels, measured through a points system, for equipment pieces and infrastructure components like towers, pumps, and control buildings.
Under these guidelines, planning, equipment list, and every part of a project has a point value assigned that “is not based on dollar value or throughput, but on the complexity,” he added.
The Construction Industry Institute (CII) offers guidelines under its Engineering Productivity Measurement Procedure (EPMP).
Contractors can use the guidelines evaluate changes in their performance over time. They can then show clients how they are getting better even if they had bad projects before.
Contractors can also identify and show performance changes for example after the start of the use of 2D CAD, or 3D CAD.
EPC contractor involvement in FEED
For Meridian Energy Group it was important to have the EPC contractor involved from the earliest design stages, said Charles Schwenck, chief commercial officer at this company planning a refinery in North Dakota.
“That required to start with a front end engineering design package on a reimbursable cost basis to get to a project definition. We wanted to make sure that we did so with a contractor who could also be the turnkey EPC contractor,” Schwenck said.
Another emphasis was assuring “that we had an open book process, that it is collaborative, that everything is done where we see it happening with all contingencies identified and justified,” he added.
James Richard, construction manager at Shell, said that in cases where a FEED contract may not make it possible to include contractors early, hiring them as consultants could be a possibility, he said.
Kristopher Lengieza, business development director at Procore Technologies, stressed the need for “early engagement by all stakeholders, contractors, engineering procurement.”
Using technology tools like Advanced Work Packaging is all about “making sure that we have transparency that you can share that information across stakeholders,” Lengieza said.
Eric Crivella, director of business development for Digital Construction Works, also stressed the role of technology in the need for coordination and sequencing.
“Going digital is all about creating close feedback loops,” he said.
“You are really striving for being more predictable and the only way you can get there is through a model centric approach, taking advantage of creating a virtual construction model that integrates the various project IT systems, materials, management system, schedule , alignments, the equipment list,” Crivella added.
“You are creating a digital twin of the asset as you go along during construction,” he said.
Defining the scope and risk
Scope definition is the first thing that needs to be considered before a contract, said Michael Dailey, vice president and general counsel at Air Liquide.
“There is a notion out there that you can use alternative contract approaches to address situations where you may have a less defined scope. However, the better defined the scope, the more certainty,” Dailey said.
There is a tendency to grab the last contract used and reuse it for the next project simply because it worked well, he said.
“Its’ much better for the owner and the contractor if they sit together and determine what the real risks are for that project, and if there are steps that can be taken before that contract to reduce that risk,” Dailey said.
Another issue to consider is properly setting up incentives. Tying them to a specific step may lead to attention directed to moving faster just within a specific area.