Cooperative Contracting on Major Engineering and Construction Projects

The development and implementation of major engineering and construction projects in the oil, gas and petrochemical industry takes a long time and is in many cases contracted out to a main contractor in the form of a (single) lump sum contract for engineering, procurement and construction. This often leads to an inefficient solution and a confrontation between owner and main contractor. We discuss the implications of early contractor involvement and describe an alternative form of contracting that provides an efficient solution and facilitates a cooperative owner–contractor relationship. The considerations are illustrated through a comparative analysis of three case study projects.

Notes

¹The outcome x of a certain event is efficient if it is feasible and there is no other feasible outcome y that gives all parties at least as much utility (value) as outcome x while giving at least one party strictly more utility than x (Campbell, 1995).

²Hidden action and hidden characteristic problems together constitute the family of principal–agent models. The principal is the party whose welfare is to be served and its welfare is affected by an agent who makes decisions on behalf of the principal.

³Many LSFP/EPC contracts nowadays contain exclusions or limitations of the EC's liabilities, particularly with respect to risks that are outside its control (e.g., wage increases). Consequently, the contract price is only partly ‘fixed’ (Berends and Dhillon, 2004).

⁴A CPFF contract provides a moderate cost incentive for the contractor, as a reduction of (job-hour) cost will result in an increase in profit margin.

^a Projects related to new manufacturing sites are colloquially referred to as ‘greenfield’ projects and those related to the construction of new facilities at existing sites as ‘brownfield’.

^b RFSU: Ready For Start-Up.