Optimizing EPC delivery for the future
Although engineering, procurement and construction (EPC) contracts are the most common form of contracting, they also experience a higher rate of delay and disruption issues. However, using dispute causation research and analysis can help refine and improve the execution of oil and gas and energy projects.
These solutions were the focus of the Rice Global E&C Forum’s roundtable webinar. The webinar, “How to best use lessons learned from the past to optimize EPC delivery in the future,” was presented by HKA Global. Caryn Fuller, Director, HKA Global, started the presentation with the challenges experienced by EPC contracting. “EPC projects experience a higher rate of delay and disruption issues,” said Fuller. “This often results in significant claims for both clients and contractors.” Based on general market research, the following challenges are rampant in EPC contracting:
- Only 25% of EPC project are completed within 10% of the targeted completion period
- 98% of the largest EPC projects are over budget or delayed
- 75% of major projects are at least 40% behind the adjusted schedule.
“By implementing methods to better provide costs and scheduling forecasting, having higher visibility of the project budget to enable more budget control and by improving profit retention of contractors can help minimize claims and improve cost savings,” explained Fuller.
Using HKA’s integrated research program (CRUX), the organization collects and analyzes data on the causes of claims and disputes on major capital projects. The CRUX 2020 insight investigated 1,185 projects across 88 countries, with a combined capital expenditure of more than $1.8 T. “On average, claim values reached over 56% of the project’s planned capital cost,” explained Fuller. “While changes in scope are still the most often to blame, design related problems are now entrenched near the top of the ranking.” The other most often reoccurring causes are poor management of third parties, inadequate contract management and efficiencies and workmanship.
Causation factors. CRUX separates the causes of claims and disputes into primary and secondary causation factors. Primary factors are key identifiable causation giving rise to specific contractual or legal entitlement to claim. Secondary factors are contributory factors that likely contributed to claims and/or disputes. HKA analyzed 195 EPC projects and identified 1,111 underlying causes of claims—673 were primary causes and 438 were secondary causes. The average cost claim was $140 MM, the average cost increase was 47% of the original contract and the average extension of time (EoT) claimed was 60% of the original contract period. From the study, management failure (contractor) had the highest percentage of both primary and secondary factors for the causation of claims. Specifically for the oil and gas industry, HKA discovered 832 primary and secondary causes of claims—532 primary and 300 secondary. The average cost claimed was $173 MM, the average cost claimed 70% of the original contract price and average EoT claimed was 70% of the original contract period. The top primary causes of claims were changes in scope, design information was issued late, access to the site/workforce was restricted and/or late and contract requirements were poorly drafted.
Many of the conclusions presented on primary and secondary causes of claims/disputes for EPC contracts were echoed by Charles Wilsoncroft, Partner, HKA Global. “The overall singular driver of claims and disputes for oil and gas projects is changes and scope,” said Wilsoncroft. “These are followed by contractual interpretation issues and contract management and/or administration failure.” When analyzing subsectors of the oil and gas industry, the primary causes of claims included:
- Petroleum refining: changes in scope
- Pipelines: unforeseen physical conditions
- LNG: adverse weather conditions
- Petrochemicals: late delivery of materials.
Finally, Julian Haslam-Jones, Director, HKA Global, provided several recommendations to help in the areas of scope changes, design and contract interpretation. These recommendations include:
- Changes in scope: Invest more time and effort in specification and front-end engineering and design (FEED) stage; change the procurement route to better suit FEED-stage information; and consider using a two-stage tender process to allow for expansion of requirements without contractor commitment.
- Design: Review oversight process and project controls related to design delivery; assess deign deliverables; and ensure design delivery team is fully equipped and has the resources to meet set targets and goals.
- Contract interpretation: Consider sing a standard form (e.g., FIDIC Silver) when drafting the contract; track all additions and amendments; and use targeted stress-testing exercises for all stages of the contract.
The Rice Global E&C roundtable is a monthly gathering to discuss the crucial topics affecting the engineering and construction industry. More information can be found by visiting forum.Rice.edu.
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