Project Contract Strategies
In the world of projects, contractual strategy if among the most important decisions. In this article, we’ll introduce the most commonly used contractual arrangements from the owner’s perspective.
The owner’s success in the project is about selecting the right partners and right strategy. Strategy for sharing the risks, responsibilities and rewards with the partners plays a key role in how project objectives and challenges are met. All these are defined firstly by the selection of contractual principle, and finally detailed in the contract.
There are several contracting options from project owner’s perspective from where to select. Selection criteria includes project financing and risk allocation, availability of contractors and bargaining power, knowledge and possession of proprietary technologies, and adaptability with time to market needs.
We talked to several different stakeholders who look for right contractual setup for their projects. The result of the discussions can be found in the following summary of strategies and their characteristics.
Typical Variants of contract strategies
Traditional
- Owner engages a design consultant (OE, Owner’s Engineer) to prepare concept-, basic- and sometimes also detailed design of the proposed project prior to the owner engaging the construction contractor(s). Sometimes referred as Plan-Bid-Build model.
EPCM, Engineering, Procurement, Construction Management
- EPCM contractor acts as the owner’s agent (in engineering, procurement and construction) and creates contractual relationships with suppliers and contractors on behalf of the owner. Contracts are done either directly between the owner and contractor and subordinated to be managed by the EPCM, or in some occasions (typically services) they may be included in the EPCM partner’s scope.
Alliancing
- Alliancing is a collaborative, incentive driven method of contracting, where all the participants work co-operatively to the same end, sharing the risk and rewards of bringing in the project within time and under cost.
EPC, Engineering, Procurement, Construction
- Owner’s signs an EPC contractor. The engineering and construction contractor will carry out the detailed engineering design of the project, procure all the equipment and materials necessary, and then construct to deliver a functioning facility or asset to their clients with guaranteed performance.
Typical strategy elements and impacts
Owner’s competence level and need for O/M: If owner has extensive domain knowledge, resources and access to resources, or need for the same resources during operational phase, it increases the capability and need for carrying the risk a lot.
Owner’s Bargaining power: This is a complex element, that depends on availability of competing technologies/suppliers (proprietary process technology etc.), volume and repeatability in future projects, and owner’s own capabilities. Bargaining power often correlates well with Owner’s own competence level.
Project Price/Cost: The cost of project is usually high in models where risk is shared (Alliancing) or contractor is carrying most of the risk (EPC). The risk is loaded with a price tag: Typically, the cost of EPC compared to traditional model can be more than 20% higher, however EPC comes with a performance guarantee which mitigates the risks. Cost of Alliancing has been statistically even higher than EPC.
Risks and Liabilities: In addition to project cost, this is the most influential factor. It affects – not only the direct project cost (budget overrun) – but also to the indirect costs and other risks related to time, quality and HSE. Typically, the owners are more risk averse the more project is financed by project financing instruments or direct debt.
Contractor availability: The ease of finding the right contractors and alliance partners varies a lot. Based on discussions, certain teams are easier to establish than others. EPCM contractors are often easier than higher risk carriers (EPCs). Alliancing is usually challenging, especially on small markets like Scandinavia.
Adaptability: Possibility to adapt to changes in scheduling, domain changes (e.g. supply/demand), and flexibility in selecting the contractor and suppliers. The environmental aspects are also requiring more and more adaptability as the legislation, funding and general acceptance and opinion are affecting into it. Also worthwhile considering is the overall quality of the investment. EPC’s typically aim for minimum-to-decent viable level to meet performance guarantee, while other models might prove better in that sense.
Prohoc offers services for all major project stakeholders. For the owner of small-to-mid scale projects, our ePCM -service can prove efficient when there is no need or possibility to grasp the benefits of EPC. We can work as owner’s Project Partner in a traditional setup, where the owner engages a design partner for the concept and basic design, while Prohoc takes care of the project, procurement and construction management.
Don’t hesitate to contact us!
