...an important part. Owners in the industry have been contracting out the implementation of these projects to engineering and construction contractors (ECs) for a long time. During implementation the EC acts as main contractor on the project, carrying out (i) detailed design engineering; (ii) procurement of materials and equipment from suppliers; and (iii) management of the construction contractors. During the last decades, the same ECs also have become increasingly involved in the development of projects, when the geographical location of a facility, its functionality and other project dimensions such as (capital) cost, implementation time, organisational and institutional requirements, etc., are defined. While the cost of development is a relatively small (typically 1-3%) part of the overall capital cost, this project phase is critical to the successful execution of a project and it is in the owner's interest to engage the most capable EC. Early EC involvement enhances the cooperation between owners and ECs. However, it also creates a dilemma for owners (and ECs) with respect to selecting an implementation EC because it is difficult to create a 'level tendering field' when the development EC is in competition with other ('new') ECs. This dilemma has received relatively little attention in the literature.

The development work is mostly contracted out on the basis of a cost plus fee (CPF) contract. Project implementation is in many cases contracted out in the form of a (single) lump sum/fixed price (LSFP) contract for engineering, procurement and construction (EPC). With such an LSFP/EPC contract, the project (cost and completion) risks are born by the EC. This often leads to a confrontation between the owner and the implementation EC, when the project dimensions and/or business environment changes, while the contractual arrangement should instead facilitate a cooperative (owner-EC) project organisation (Turner, 2003). Forms of contracting aimed at facilitating this cooperation include in most cases risk sharing between owner and EC as well as a remuneration structure with performance related (monetary) incentives. These contracts have been discussed for a long time in the economics literature (e.g., Scherer, 1964; McCall, 1970; Shavell, 1979; Sappington, 1984) and during the last decade they have also attracted considerable attention from practitioners (Berends, 2000). In the United States, the Construction Industry Institute published a report exploring the benefits of partnering (Construction Industry Institute, 1991) followed by a second report (Construction Industry Institute, 1998). In the UK, the Latham report (Latham, 1994) has had a profound effect on the (contractual) relationships between owner and EC. However, many owners (and financiers) still prefer a single LSFP/EPC contract, unless forced to change by external pressures (Hobbs and Andersen, 2001) because they are afraid to lose the advantages of having single point (EC) responsibility and believe alternative forms of contract will reduce competition and increase cost.

In this article we analyse a specific form of cooperative contracting: cost plus incentive fee (CPIF) contracting for engineering, procurement and construction management (EPCm). In this approach an EC is selected for both development and implementation, while maintaining competitive market forces. This also addresses the 'level tendering field' dilemma outlined above. We particularly look at contracting as a mechanism to achieve governance: 'The complex process of steering multiple firms, agencies and organisations that are both operationally autonomous and structurally coupled in projects through various terms of reciprocal interdependencies' (Miller and Lessard, 2000, p. 135). We theorise contracting considerations on major engineering and construction projects we discuss and the effectiveness of strategic options available with respect to achieving governance during development and implementation.

The considerations are validated through a comparative analysis of three case study projects from the petrochemicals industry. Normally, such empirical studies are difficult due to intrinsic differences between projects, related to the dimensions functionality, organisation, cost and time. Also, in many cases objective performance data is not available. The case study projects (two executed on a CPIF/EPCm basis and one on a LSFP/EPC basis) are particularly suitable for a comparative analysis, because on all three projects:

(a) The functionality was essentially the same

(b) The owner organisation was the same

(c) Independent benchmarked performance data on cost and time is available.

The author was involved in the three case study projects as a (in-house) consultant for the owner organisation. Interviews with key members of the (owner and EC) project organisation were held to complete the understanding of the case study projects. Through an analysis of objective project performance data and a thorough understanding of the business environment and the way in which the case projects were developed and implemented, it is possible to draw generic conclusions from the study, despite the limited number of projects.

The observations are believed to be not only relevant for the petrochemical (and oil/gas) industry, but also for other (capital intensive) industries with major engineering and construction projects. The 'applied approach' (Chapman et al., 2000) used in the analysis facilitates the application by contract practitioners.

CONTRACTING STRATEGIES

The quality of project development is an important success criterion for major engineering and construction projects. The development EC should not only have the required conceptual design engineering capability, but also be able to incorporate during development 'implementation' considerations such as: (i) constructability of the design; (ii) integration with existing facilities; and (iii) interfaces with the various stakeholders in the project (i.e., governance capability). Having engaged an EC for development, the owner has the following options with respect to contracting out

(a) Negotiation with the development EC...

NOTE: All illustrations and photos have been removed from this article.



Looking for additional articles?
Search our database of over 3 million articles.

Looking for more in-depth information on this industry?
Search our complete database of Industry & Market reports by text, subject, publication name or publication date.

About Goliath
Whether you're looking for sales prospects, competitive information, company analysis or best practices in managing your organization, Goliath can help you meet your business needs.

Our extensive business information databases empower business professionals with both the breadth and depth of credible, authoritative information they need to support their business goals. Whether it be strategic planning, sales prospecting, company research or defining management best practices - Goliath is your leading source for accurate information.