Best Practices in EC Collaboration - BCG Study a Nov08

5/28/2018 Best Practices in EC Collaboration - BCG Study a Nov08

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Best practices in E&C collaborationLessons from industry leaders

November 2008


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1Best practices in E&C collaboration - BCG Study A Nov08.ppt

Context and objectives of this study

High interest in topic from BCG clients in Oil & Gas, Mining which contract EPC services

Typical questions around collaboration between owners and E&C contractors include: How to get best access to EPC resources for planned projects?

What are the best practices to avoid inefficiencies in the collaboration?

Which engagement models create a win-win and unleash trapped value?

In this study, we will address the following themes:

Challenges in the current environment

Best practices for creating value

Implications for your company

Objectives of this study:

Provide comprehensive view on collaboration dynamics and both parties perspectives

Identify best practices and advanced collaboration models

Highlight opportunities to improve value creation in EPC collaboration


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Focus of this study

Focus of this study

Challenges in E&C contracting, e.g.: Cyclicality Talent shortage Project size and complexity


Analysis of current market participants'practices and perspectives

Identification of 'best practices' anddiscussion of implications

Supporting data and analyses based oninterviews and market research

Implications for your company E.g. potential areas for you to specifically

focus on

Not in focus, just "adjacent" insights

Not in focus, just "adjacent" insights

Operational optimization E.g. no tactical advise on specific tools,

processes, templates, etc.

Regional strategies, analyses No separate analysis of specific regions, no

recommendations for region-specificstrategies

Sector-specific strategies, analyses No separate analysis of specific industry

sectors, sub-sectors, or technologies

Collaboration down the supply chain E.g. no detailed discussion of situation on

equipments or commodity market

Focus of this study

Can provide only selected insights into adjacent topics


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Study included cross-section of EPCs and customers

Actual interviews are a sub-set of all companies listed

IOCsIOCs NOCsNOCs MiningMiningEPCsEPCs

7 44 3Number ofcompaniesinterviewed

Sample

Companies

Total number of companies interviewed1 : 18

1. Actual number of interview is >20, due to interviews with neutral industry experts, and partially interviews with multiple executives from the same company


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Agenda

Challenges in E&C contracting




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Cycle drives challenges, collaboration should look beyond

Summary of challenges in current environment

Cyclicality is a key driver that shapes the collaboration with E&C contractors

E.g., influence on contracting models, challenges, types of projects

Soaring demand for E&C service has created a tight, "overheated" market

Difficulty to access EPC talent, especially experienced resources

Dramatic cost increase, and long lead times for key pieces of equipment

Projects becoming more challenging overall bigger, more frontier, more complex

Scarcity of natural resources forces owners to exploit more remote resources

High commodity prices make more remote projects economically viable, and ask for fast execution

Key challenges are partially driven by up-cycle, but some are more structural in nature

Access to talent central challenge called out in almost all interviews Risk-reward sharing second most quoted challenge less driven by cycle

Improved collaboration models should create win-win value that outlasts cycles

Particularly given the most current market changes


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Cyclicality key driver of EPC collaboration

Demand forE&C services

Time

Difficulty to get (experienced)E&C resources

High prices, long lead times Contractors can cherry-pick

...

Contractors need to "fill the shop" High risk allocation to contractors

Strong owner negotiation power ...

'Up-cycle' 'Down-cycle'

Typical characteristicsof respective cycle

Note: Simplified illustration


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Source: ENR; Stifel Nicolaus report; Fluor Sept 2006 Cost Evolution Report

E&C demand has soaredwith commodity prices

E&C demand has soaredwith commodity prices

Cost has dramaticallyincreased...

Cost has dramaticallyincreased...

...and so have lead times forkey pieces

...and so have lead times forkey pieces

"The rule of thumb for anew refinery was $10,000

per barrel of daily capacity,now it's $25,000"

-3

0

3

6

9

12

15

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008E

-3

0

3

6

9

12

15

18

21

24

27

30

33

36

Commodity price cycle drives project demand

E&C sales growth andcommodity price index

2006

2005

Typical lead time (weeks)

0

20

40

60

80

100

120

Pipe

material-

seam

less

Fabrica

tedstructural

Valve

material

Pres

sure

ves

sels

Pumps

Compres

sors

Exemplary

U.S. commodity price index, Y/Y %, 10-yr avg

E&C company revenues, Y/Y %, 10-yr avg


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Increased demand has outstripped supply

Contractors' backlog1 up 40% in 2007 from2006 and more than 100% from 2001

Contractors' backlog1 up 40% in 2007 from2006 and more than 100% from 2001

Customers consistently cited supplyshortage in current market

Customers consistently cited supplyshortage in current market

"The engineering market is so overheated thatgetting contractor resources is a challenge"

"The resource shortage will continue andprobably get worse"

"The industry has seen projects postponedbecause of scarcity of supply for equipment the lead time for some critical equipment is fouryears"

1. Backlog as reported by companies; non-GAAP metric which may have variability in reporting across firmsSource: Company Annual reports; Investor presentations

2

6

3

6

3

10

445

9

7

15

566

1111

24

0

5

10

15

20

25

Fluor ShawGroup

JacobsEngineering

WGI FosterWheeler

URS Corp

2001

2006

2007

Backlog ($B)


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Risk increasing as projects become bigger and more

frontier, more complex

Today's risk factorsToday's risk factors

More complex and one-of-a-kind

Today's projects often include newunproven technologies and processes

Larger than ever before Even for proven technologies and designs,

the scale of today's projects is dramatically

larger

More challenging environments Today's projects are extremely frontier as

companies are forced to go farther andfarther to develop new resource supplies

Quick-to-startPressure to start projects before final scoping,

to capture period of high commodity prices

Example: water depth for oil fieldshas dramatically increased

Example: water depth for oil fieldshas dramatically increased

As overall risk increases,risk allocation is increasingly important

Source: Infield Systems Rice Global Forum presentation


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Access to talent and risk/reward sharing major challenges

Top-of-mind challenges in contractor/customer relationship

ContractorsContractors CustomersCustomers

0 25 50 75 100

% of companies who identifiedas major challenge

Talent

Risk/rewardsharing

Agree oncommon goals

Disconnectbetween sr. mgt.and procurement

0 25 50 75 100

Access totalent

Risk/rewardsharing

Coordination withequity partners

Legal constraints

Source: BCG interviews (Contractor N = 7, Customer N = 11)

% of companies who identifiedas major challenge

Otherone-off

mentions

Competition with low-cost entrants

Lack of trust

Management commitment

Customer bureaucracy

Equipment shortagesOtherone-off

mentions

Internal coordination

Negotiating contracts

Completing projects on time/budget

Lack of internal skills

Systems integration

Scarcity of equipment


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Two key challenges emphasized in interviews

Sample quotes detailing 'Talent' and 'Risk/Reward' as two biggest challenges

"In this high demand environment, there are not enough experienced people togo around. So you vacuum clean everyone off the prairies and put these

inexperienced people onto projects" "Our challenges are almost entirely related to getting the appropriate types of

people to support the projects when you need them"

"There are too few people and even with penalties you often don't get thepromised team"

Talent

Risk/Reward

Sample quotes

"Risk and reward sharing is still an issue. Reward is not commensuratelyallocated between supplier and consumer, at least commensurate with how risk isallocated"

"Some of the imbalance in sharing value and risk still exists, despite a bettermarket"

"If you can give the contractors more predictable returns, striking a better tradeoffof the risks, there is a win there"


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Cycle can change very quickly

Recent market turmoil brings insecurity about future of capital projects and E&C demand

Oct.23:SuncorEnergydelays

constructionofoilsandsupgrader for

C$20.6billionVoyageurexpansionby

oneyearto2013.

"The present financial crisisputs all current planning and

predictions into question"

"Given the market turmoil we arewondering if we have the right strategy"

"We would have saidsomething very different

2 weeks ago"

Oct21:Freeport-McMoran saiditwould

delayexpansionplansatitsSierritaand

BagdadcopperminesinArizonaand

wouldpushbacktherestartofitsMiami

mineinthestate,cuttingabout$370

millioninplannedcapitalcosts.

Collaboration has to be designed to outlast cycle

"This is just a hiccup.Resources willremain scarce"

"The fundamental reasons for a strongglobal growth in demand for

commodities haven't changed"

Note: Status as of early November 2008Source: Google Finance; Reuters, interviews


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Agenda





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Companies very interested in improving collaboration,but often struggle to implement best practices

Interview participants showed high level of interest in topic

Issues addressed resonate with executives both on owner side and on EPC side

Correspond to real challenges and questions they are facing

General acknowledgement of value of best practices

Many are known to market participants, degree of implementation strongly varies

Only some practices with contradicting views on their value in industry

However, companies are struggling to make them work

Lots of experimentation, but difficulties remain, e.g. because of internal barriers

Most companies far from full implementation of all practices

Identified nine emerging best practices for E&C collaboration

Each one important for optimizing collaboration, but priority will vary by company

Need to be combined into cohesive collaboration approach


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'Best practices' for creating value in E&C collaboration

Risk / Reward sharingRisk / Reward sharing Long-term perspectiveLong-term perspective Deeper collaborationDeeper collaboration

Consistently use value, notjust cost, for all project

decisions

Value-based decision making1

Apply only appropriate risk

to contractor to createwin-wins

Risk allocation2

Structure incentives to drive

value-creating behavior

Structuring of incentives3

Match contract model withproject, market conditions,

and internal competencies

Contracting model4

Leverage synergies fromlonger-term commitments

wherever beneficial, feasible

Long-term commitments5

Invest in relationship

management beyondindividual projects

Relationship management6

Involve contractors early tofully leverage their value

creation potential

Early contractor involvement7

Increase transparency

towards partner as majorlever for better collaboration

Transparency in collaboration8

Integrate systems toincrease transparency and

leverage efficiencies

Systems integration9


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Consistently use value, not just cost,for all project decisions

1Value-based decision making

Statu

squo

Bestprac

tice

Samplequotes

Most project owners have "value perspective", but not always fully translated into action

All project owners work with NPV-based models, most claim to have "value perspective"

Sophistication of models and rigor with which they are applied to decision making varies

However, procurement departments sometimes just focused on upfront cost NOCs interviewed are constrained to first cost, with little or no flexibility

Project owner decisions don't always reflect the best opportunity to create value

Consistently use value, not just cost, for all project decisions

Make sure to identify and incorporate all key drivers of value creation for projects

Incorporate those drivers into a sophisticated model and set of metrics

Use model for value-based decision making in all project stages, e.g. supplier engagement

Discuss value creation opportunities with suppliers to improve collaboration and align on goals

Assure that project decision drive optimum holistic value, not just lowest immediate cost and effort

"Not every owner gives value to brand, reputation, quality and experience. Too many decisionsare made on price alone. Buying at the lower price may not be the best answer"

"In several client organizations, there is a big distance between operations and procurement.They [procurement] are more concerned about the process than about the results"


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Mismatch between corporate philosophy on value andEPC engagement process

Customers say they have a holisticphilosophy on value ...

Customers say they have a holisticphilosophy on value ...

"We look at NPV, VAR, lifecycle costs. Whilewe focus on low CapEx, we are quite willing toinvest upfront for lower costs later"

"To think about value, we use a sophisticatedmodel that considers total cost of ownership of

a project, future market expectations, andscenario testing"

"We consider value the same as othercompanies: we use NPV"

... but contractors identify narrowfocus in selection and engagement

... but contractors identify narrowfocus in selection and engagement

"Not every owner gives value to brand,reputation, quality and experience. Too manydecisions are made on price alone. Buying atthe lower price may not be the best answer"

"You've got management standing up and

saying we're going to work on buildingrelationships and then procurement focused ongetting 10 bids and the lowest cost"

"Negotiations are still seen as a battle ratherthan a struggle for the most value creatingoutcomes"

"There is a big distance between operationsand procurement. They [procurement] are moreconcerned about the process than about theresults"



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Broad value perspective at top doesn't alwayspermeate to EPC decision making level

Upfrontcosts

Completiontimeframe

Project lifetimeNPV

Operating cost,performance

Impact beyondsingle project

Seniormanagement

Operationsgroup

Procurementgroup

Value definition "lost in translation" within organization

Projectmanagement

Value definition used for decision making


Illus trative

Area of focus Adjacentlyconsidered


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Three key elements of fully leveraging value potential

Use a broad perspective of value that incorporates important drivers, e.g.:

Contractor experience: "With good planning and a global supply chain, you can savemany months on a project, and months are worth money"

Impact of time: "If delays occur, we have tremendous losses"

Future costs: "Downstream is clearly ready to trade of capital cost forreliability and output performance"

Use value perspective for decisions at every corporate level and project stage, e.g.:

In procurement group: "There is a big distance between operations and procurement.They [ procurement] are more concerned about the process thanabout the results"

In project team: "Our value calculations currently do not include erosion of NPVof not signing contract, cost of delaying project start"

Use discussion about value drivers as a collaboration tool, e.g.:

At project start: "A major challenge is the need to have common goalsbetween both parties"



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Apply only appropriate risk to contractorto create win-wins

2Risk allocation

Traditionally, risk allocation to contractor has mainly reflected negotiation power

Exaggerated risk allocation in the past lead to (almost) bankruptcies and project crises

Today consensus on both sides that risk allocation should reflect asymmetry in business models

Strong trend towards reimbursable contracts has reduced risk on EPC side some say too much NOCs legally constrained in risk allocation disadvantage in access to EPC talent

Appropriate allocation of risk still named as one of the key challenges by many interviewees

Apply only appropriate risk to contractor to create win-wins

Should allocate only risk that EPC can carry and influence

Candid and detailed upfront discussion of risks considered key to a successful collaboration

Releases tension and thus improves collaboration, takes away risk of EPC bankruptcy

Helps to avoid high contingencies in pricing

Improves access to EPC talent - fair risk allocation seen as key incentive by contractors

"We can apply fair risk to contractors, it's best for everyone, best for long-term collaboration"

"Now companies have a greater understanding in sharing the risk, particularly because of thehighly inflationary period that we've gone through"

"Our suppliers aren't able and shouldn't get near the levels of risk we are willing to take. We havethe scale, revenues, resources to take the losses"

Statu

squo

Bestprac

tice

Samplequotes


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Multiple elements constitute potential risks and rewards

RiskRisk

Equipment prices, lead times

Commodity prices

Design errors

Force majeure

Execution mistakes

...

Most elements eventually translate

into a rather immediate financial risk

RewardReward

Incentives

Avoid penalties

Moderate risk allocation

Better collaboration

Repeat business

...

Longer-term perspective possible

repeat business strong motivator

2Risk allocation


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Asymmetrical business models and scale...

Average large EPC firm1Average large EPC firm1 Average large Oil & Gas company2Average large Oil & Gas company2

Annual revenue

Annual net income

Assets

Cost of examplerefinery project

Consensus exists on asymmetry but not on implications

1. Average of companies including AMEC, Fluor, Foster Wheeler, Jacbos, and KBR 2. Average of companies including BP, Chevron, ExxonMobil, Royal Dutch Shell and TotalNote: Data for FY 2007. Example companies selected based on size and oil & gas focus.Source: BCG Bench

10% projectoverrun

$4.3B

$8.7B

$212.5B

$280.3B

$0.4B

$5.0B

$0.5B

$25.9B5.1% margin 9.3% margin

Net income afteroverrun ($0.1B)

$25.4B9.1% margin

From 5% margin tooverall loss for

EPC

0.2 percentagepoints lower margin

for customer

2Risk allocation


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...lead to challenges in risk / reward allocationAs expected, access to talent greatest challenge in current market environment

NOC

E

F

G

IOC

A

B

C

D

H

I

JMining

A

B

C

EPC

E

F

G

D

Access toEPC talent

Risk / Rewardsharing

Coordination w/equity partners

Legalconstraints

OverarchingOverarching Sector-specificSector-specific Company-specificCompany-specific

Negotiating contracts

Internal coordination

Lack of internal skills

Contractor systems integration

Align on common goals

Projects on time and budget

Scarcity of equipment

Disconnect between customer'smanagement and procurement

K

2Risk allocation


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"Appropriate" risk allocation important for good outcomes

Consensus that customers can bear majority of risk because asymmetrical business models

"Risk sharing should be more like 90/10 for the oil company. They can take much bigger risk than theEPC whose balance sheet can be wiped out by a single project failure"

"Our suppliers aren't able and shouldn't get near the levels of risk we are willing to take. We have thescale, revenues, resources to take the losses"

Risk allocation has typically followed negotiating power of cycle, with the exception of contracts withlegally restricted NOCs

"Now companies have a greater understanding in sharing the risk, particularly because of the highly

inflationary period that we've gone through" "Our contracts have unlimited guarantee. Many companies have issues with this"

"The pendulum has swung too far now. We are unable to even negotiate "appropriate" risk allocation"

An appropriate risk allocation is a major lever for improved collaboration

"A lot of supplier tension is due to mistakes in structuring risk and rewards" "Taking away risk from EPC firms releases tension and facilitates better collaboration"

"We can apply fair risk to contractors, its best for everyone, best for long-term collaboration"

"Owners think they can bundle all the risk and then shove it to the contractors. Instead they should thinkabout what is sensible and what will work best"

2Risk allocation


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General acceptance that owners should bear most riskBut some feel current market has allowed contractors to accept too little risk

NOC

E

F

G

IOC

A

B

C

D

H

I

JMining

A

B

C

EPC

E

F

G

D

K

Point of viewPoint of view

Contracts have unlimited liability for contractor1

Not discussed

Customer today bears most of risk because contract model

Pendulum has swung too far

Too much risk for EPC is bad for both

Less risk for EPC releases tension, facilitates better collaboration

Sharing should be 90/10 for oil company, customer can/should take more risk

Liability of contractor is usually limited to 10%

Can't find any EPC willing to share risk, be accountable for engineering product

EPCM firms can't handle all the risk of larger projects

Owners should bear disproportionate risk

Most clients try to push as much risk to contractor as possible

Not discussed

Some risks, eg force majeure, must be taken by customers

Risk averse; only wants risk for measurable upside

Risk averse; bad for both when things go wrong if contractor bears risk

At times customers take advantage of cycle and contractors

Owner should take most risk, not everyone in company understands this

2

Owner shouldtake majority

of risk

Contractorsaccept too

little risk now

Owners try topush risk tocontractor

Note: Law limits to "reasonable" liabilities, but most contractors have problem with lack of clarity

Risk allocation


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Structure incentives to drive value-creating behavior

3Structuring of incentives

Wide range of practices and experiences when it comes to using incentives

Many owners use some form of incentive scheme; NOCs are usually prohibited from using them

Some positive experiences, but undesirable unintended consequences dominated in others

Usually structured to increase contractor pay incrementally rather than share value upside Contractors say repeat business is a stronger motivator than project-specific incentives

Many inefficiencies because of badly structured incentive schemes

Structure incentives to drive value-creating behavior

Consider incentives primarily for projects with solid reference lines and sufficient scoping

Consider negative behaviors that could be encouraged, be open to option of not using incentives Use discussion of incentives as a tool to align with contractor on project goals

Use asymmetrical incentives "carrot bigger than the stick"

Create a win-win potential by using a well-structured and well-aligned incentive scheme

"Incentives get the contractor to put his best people on the project"

"We have done things that we thought were not possible"

"Pay them to finish quickly, and they finish quickly but do a poor job. Pay them to be safer, andthey just underreport"

"You should use a long-term relationship as incentive"

Statusquo

Bestprac

tice

Samplequotes


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Mixed use of incentivesFew interested in more than incremental incentives

Incentive typeIncentive type

70-80% of our project professionals would saythey are not effective

QuotesQuotes

It's clear that we don't let the EPCs participatein our NPV upside

Allowing incentive structures is part of our pushfor regulatory reform

We would like partnerships to share risk and

reward on a project... would like if they werewilling to take equity positions for their services

We have no problem with telling and sharingupside potential and cost saving opportunities

None

Mining

H

I

J

NOC

E

F

G

IOC

A

B

C

Incremental NPV share Equity stake

On the surface, it seemed like it made alot of sense ... but on the cost piece it drove

behaviors that were contraryto what was intended

?

D

?current use trend interested in usingwill not use

K

3

We haven't set up the incentive scheme yet, butif we can save $20M by finishing earlier, we'd

be willing to share a substantial amount

Structuring of incentives


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Owners using incentives can be categorized into two campsCorporate culture and legal restrictions are main factors

IncentiveIncentive

Share NPV

None

Incremental

Equity Stake

Owner viewOwner viewDescriptionDescription

No use of performance-basedcompensation

Incrementally increase EPCcompensation for meetingperformance targets, eg,

55.5% margin to complete early

Increased compensation basedon additional value created forowner by EPC, eg, 20% of NPVgenerated by early completion

Give contractor equity share forservices or jointly investing onproject and sharing the equity

Source: Interviews

Sample quotesSample quotes

"Pay them to finish quickly, and theyfinish quickly but do a poor job. Paythem to be safer, and they justunderreport"

"When incentivizing EPCs, we have todo it through their lens, their businessmodel"

"We have no problem with telling andsharing of upside potential and costsaving opportunities"

"We would like partnerships to sharerisk and reward on a project. We wouldlike if they were willing to take someequity positions for their services."


Degreeof business

model blending

Owner carries mostrisk, therefore

no NPV sharing!

Offering minorityshare of NPV upside

creates win-win


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Incentives must be carefully structured when used

"Without a baseline, it's only a guess how to structure incentives. It

can make sense after you have more information"

I wouldn't link cost performance to a fee incentive until you are

thirty or forty percent engineered-don't do it early"

"They worked well for safety ... and we would have paid if they

finished early and that would have been a worthwhile thing. On

the cost piece, drove behaviors that were contrary to what was

intended."

Use for projects with known time and cost baselines

Use only when project is sufficiently defined

Choose target metrics carefully

Essential to structure incentives in the right way, e.g.:

"Incentives get the contractor to put his best people on the project"

"Pay them to finish quickly, and they finish quickly but do a poorjob. Pay them to be safer, and they just underreport"

"You should use a long-term relationship as incentive"

For some, incentives have driven high performance

But incentives can also drive contractors tounproductive behaviors

Overall, repeat business and a strong relationship are

probably more productive incentives

Incentives do drive behavior, but can be in a productive or unproductive way

"We are not allowed by law to have incentives structures"

"We do incentives when it's contained, away from NPV"

"We have done things that we thought were not possible"

"70-80% of [Company] project professionals would say they are

not effective"

NOCs are usually prohibited from using incentives

Use is focused on incremental fees to contractors,

rather than sharing value created for the owner

Opinions on effectiveness vary

Incentive structure are common in contracts, but opinions on them and usage intensity varies



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Some guidelines for structuring effective incentives

Only introduce incentives for budget/schedule when there are clear baselines and project scoping

"There needs to be a solid baseline for schedule and budget. It's best to agree on a best-in class timelineand a fair pay for that first, and then incentivize any performance beyond that"

"One of the main reasons things go wrong is there wasn't adequate definition at the start. The customerhasn't done enough to take out the unknowns by himself or with the contractor"

Keep incentive structure measurable and simple

"They have to be measurable targets"

"Sometimes they are too complicated, and people don't really understand how they work"

Consider negative behaviors that could be encouraged and monitor for them

"Pay them to finish quickly, and they finish quickly but do a poor job. Pay them to be safer, and they justunderreport"

Don't limit the contractor's upside based on his project liability

"The carrot needs to be bigger than the sticks if there are any sticks"

Consider discretionary incentives for performance for soft areas

"We have some incentives where they can earn more fee if things are going well in about 20 areas safety , reporting, staffing at sole discretion of us as the customer"

Use a discussion about incentives as a tool to align with contractor on project goals

"We're just trying to understand, 'Do you care more if it finishes a day earlier or a costs a dollar less?'"

Partial list, based on interview results 3Structuring of incentives

C t ti d l


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Match contract model with project,market conditions, and internal competencies

4Contracting model

Many factors influence contract models used beyond cycle and negotiating power

Market environment has made reimbursable contracting dominant today

Company culture, regional norms and customer industry often dictate contract model

Contracting model determines roles of contractor and customer Not everyone is satisfied with contracting models applied, and the implications for his company

Usage of inappropriate contracts create inefficiencies in collaboration, high contingencies, etc.

Match contract model with project, market conditions, and internal competencies

E.g., reimbursable / convertible lump sum for incompletely scoped, large, or one-of-a-kind projects

Reflect market conditions in contract structure, e.g. volatility in equipment and commodity prices Match contract model with internal resources and desired level / mode of engagement

Don't easily accept cost-plus as the only choice, even in overheated market conditions1

Working with the "best" contracting model as described above will create value for both sides2

"With lump-sum, if you don't have good scope, and if you don't have a stable environment, you'regoing to get a contractor who is going to play some games"

"Cookie-cutter plants lend themselves more towards lump-sum"

"We need to be an 'intelligent client,' engaging deeply in the supply chain and managing multipleinterfaces. This, for us, goes hand-in-hand with reimbursable contracts"

1. E.g. also consider convertible lump sum agreements, unit price clauses, adjustments for commodity prices, etc. 2. E.g., generally higher contractor margins in lump sum agreements

Statusquo

Bestprac

tice

Samplequotes

Contracting model


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Contracting model central element in collaboration

DriversDrivers OutputOutput

Contractingmod

el

Negotiation power

Type of project

Regional /Sector habits

Legal environment

Owner's strategy

Compensation structure

Project transparency

Contractor margin

Motivation structure

Owner resource requirements

4Contracting model

Most"visible"factors

"Hidden"factors

4Contracting model


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Move towards reimbursable contracts not just amatter of negotiation power

Drivers of contracting modelDrivers of contracting model Key trendsKey trends

Negotiation

power

Type ofproject


Legalenvironment

Owner'sstrategy

Traditionally, owners "pushed away" risk

High usage of lump sum in down cycle

Few concerns about "bearable" risk Power play, not driving towards win-win

Project characteristics determine best model

The more "unknowns," the better suited aproject is for a reimbursable contract

Lump sum powerful wherever manageable

Sectors, regions with preferred models, e.g.:

Reimbursable contracts in the U.S.

Lump sum in Asia, Europe

EPCM contracts in mining

Partially contract model is prescribed legally

NOCs often forced to do lump sum Allocates high risk to contractor

Also other contract terms strongly affected

Collaboration philosophy drives models

High engagement clients prefer reimbursable

Lump sum requires less owner resources andrisk, but also grants less insight and influence

Up cycle increases contractors' negotiation power

Contractors reject too risky lump-sum agreements

Moderate contract risk helps get EPC resources Some contractors do reimbursable only now

Project becoming less feasible for lump sum

Projects become larger, more complex, more frontier

High speed-to-market requires reimbursable contract

Convertible lump-sum agreements as viable option

Partial changes, but basic characteristics remain

"Regional / Sector-typical" contract models remain

Contractor influence on contract model oftenmainly through choice of sectors, regions served

Legal restriction can become a major obstacle

Limits access to EPC resources Sometimes forced to use "inappropriate" model

Push to modify legislation in some regions

Owners adjusting their strategy to market situation

Need to build up internal resources and skills tosuccessfully manage reimbursable contracts

Some contractors offer lump sum as differentiator

4Contracting model

4Contracting model


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Negotiationpower

Type ofproject


Legalenvironment

Owner'sstrategy

"Lump-sum agreements are ok, but they require a very precise knowledge of cost, which ishard to acquire in long-term, complex projects"

"Cookie cutter plants lend themselves more towards lump sum

"We used to be able to demand that contractors sign our contracts. Now contractors can betougher, e.g., refuse certain types of liabilities and warranties"

"Customers mostly decide on the contracting model. It's carved in stone"

"By law, we have to do lump-sum agreements with an unlimited liability of the contractor. Manycompanies have an issue with this"

"In most Middle Eastern states, articles of incorporation force the owner into lump-sum model""We need to be an 'intelligent client', engaging deeply in the supply chain, and managingmultiple interfaces. This for us goes hand in hand with reimbursable contracts"

"With reimbursable contracts, we have been forced to a more hands-on model because thehands-off model was not yielding adequate results"

Quotes supporting the drivers of contracting model

4Contracting model

"You can control the contract models based on the geographies and markets you engage in"

"In a broad sense, I would say U.S. contractors are not as comfortable with lump-sum turnkeycontracting as they are in Europe and Southeast Asia"

4Contracting model


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Reimbursable contracts are on the rise

Contracting practicesContracting practices

The world used to be lump sum. Nowcontractors can afford to be tougher

QuotesQuotes

We are moving away from lump sum,because EPCs can't assume that risk

By law, we can't do reimbursablecontracts

Most contracts are EPCM, but even EPCcontracts are mostly reimbursable

We do a lot of one-of-a-kind project,which lend themselves more for

reimbursable contracts

All Lump-sum

AllReimbursable

We have a mandate not to bid on lump-sum in natural resources

We mostly do lump-sum agreements,pricing in risk as a premium

NOC

IOC

Mining

EPC

The vast majority of work in our office is

fully reimbursable contracts

4Contracting model

MostlyLump-sum

MostlyReimbursable

E

F

G

A

B

C

D

H

I

J

A

B

C

E

F

G

D

K

4Contracting model


37/69


Preferred contract type varies across firmsRegional characteristics reflected here

0%

20%

40%

60%

80%

100%

Aker

Solutions

Amec Wood

Group

KBR Tec hnip

Contract types(% of 2007 backlog1)

Contract types(% of 2007 backlog1)

Cost reimbursable Fixed price

"We reduced the risk in our project portfolio by shifting themix to include more reimbursable projects"

KBR 2007 Annual Report

"Technip's strategy is to give preference to progressiveturnkey and cost plus fee contracts"

Techip, 2007 Annual Report

"[Now we can] combine variable and fixed pricing elementsin order to get a better allocation of risk without eliminatingthe opportunity for the premium pricing available byassuming manageable risk"

CB&I 2007 Annual Report

"Almost all contracts for projects in which the JGC Group

participates are lump-sum, full-turnkey contracts. However,to enable hedging of some of the risks in these contracts,the Group uses cost-plus-fee contracts"

JGC, 2008 Annual Report

1. Includes Government contracts which typically are cost reimbursableSource: Company annual reports, 10-Ks, Deutsche Bank

4g

Jacobs Foster Wheeler

Fluor Shaw JGC

4Contracting model


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Contract mix has shifted to reimbursable in recent years

European E&C industry mix of lump-sum vs. cost-plus, 2004 - April 2008

Note: Total contract values exclude day rate contracts on offshore vesselsSource: Deutsche Bank

4g

5Long-term commitments


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Leverage synergies from longer-term commitmentswherever beneficial and feasible

5

Varied use of long-term commitments, but industry standard is transactional

Customers usually select contractors through bidding on project-by-project basis1

Frame contracts are valuable, say both sides, and are commonly used by IOCs

Multi-project commitments exist and value is recognized, but only used in specific niche situations Challenges of defining and establishing longer-term commitments are widely recognized

Still plenty of opportunity to establish longer term agreements and leverage specific synergies

Leverage synergies from longer-term commitments wherever beneficial and feasible

Be realistic about what you can or want to commit to even if market conditions change

Use frame contracts to build relationships and become a preferred partners Actively identify specific synergies and tailor long-term agreements around them2

Invest in long-term collaboration and repeat business even without formal agreements

Create both direct efficiencies as well as long-term planning security for both sides

"We generally want long-term relationships. They are an incentive for our contractors, and theallow us to standardize processes, reduce fighting, set-up safety initiatives, have access to abetter team, and invest in the supply chain and local content"

"There's a bit of 'first come, first served' here: an EPC contractor can only have exclusiveagreements with a few customers"

Stat

usquo

Bestpractice

Samplequotes

1. Sometimes splitting projects into phases with bidding rounds for each 2. E.g. execution of similar projects / repeat use for same technology, process and systems standardization



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Relationships can be tactical or strategic in natureTraditionally, collaboration with EPC contractors rather transactional, even adversarial

Short-term

relationship

Long-termrelationship

Historically most used wayof contracting, short-term

(one project) perspectiveProject-by-project

Frame agreements

Strategic alliances

Equity stakes

Accepted by both sides asvaluable step, numerousexamples where put into

practice

Only feasible in selectedcases, some exampleswhere put into practice,experimental stage

Views on value andfeasibility vary widely, onlyfew examples where putinto practice

DescriptionDescription ExamplesExamples QuotesQuotes

NOCs (as required bylaw)

Almost all IOCs, allmajor EPC providers

Selected examples withvery specific scope (seebackup slides)

None observed

"You have to make themarket work, for suppliers

not to become lazy"

"They are the license tohunt, but not to kill thebeast"

"The savings start showingup almost immediately ... itbecomes trivial to applyeverything to next project"

N/A

5



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Companies moving towards a longer-term perspectiveHowever, binding long-term agreements only seen as feasible in very specific cases

Both customers and contractors value long-term relationships:

"We generally want long-term relationships. They are an incentive for our contractors, and they allow us to standardizeprocesses, reduce fighting, set up safety initiatives, have access to a better team, and invest in the supply chain and localcontent"

"We want to build a long-term relationship with our customers, rather than chasing project after project."

Fixed commitments are not considered feasible in most cases, ...

"Long-term commitments are hard to do, because of multiple project partners, and legislation around competitive bidding."

"You have to make the market work in the long term, for the suppliers not to become lazy."

"Fix long term commitments would be great in theory, but I don't think it's realistic. We need our customers to want to dobusiness with us, not to be contractually obliged to."

"Commitments are not sustainable through the cycle: as soon as they are not beneficial for one party anymore, they willbe broken"

... but many moving towards nonbinding frame contracts:

"We are in discussion with one of the major EPCs to form an alliance it would formalize the process and fix fees, but itwouldn't be biding. It would give the contractor the right of first look and the right of refusal."

"Long-term contracts can work, but only based on preference, not a fixed commitment."

"We are the only IOC left without any frame agreements with EPC contractors, but we are moving there

There is an opportunity to move beyond this, but only in very specific cases

"There's room to do more, but it requires opportunities."

"We have 70% of our business with clients in a long-term relationship, but only 5% in a really close, partnership type ofcollaboration"

"There's a bit of 'first come, first serve' here: an EPC contractor can only have exclusive agreements with few customers."

5Long-term commitmentsFrame agreements


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Most IOCs and contractors are using frame agreements

NOC

IOC

Mining

EPC

Contracting practicesContracting practices QuotesQuotes

Tactical Frame c. Exclusive JVWe are the last of the majors not to have

frame agreements in place

We generally want long-term relationshipswith our contractors

By law, we are not allowed to engage in long-termagreements with contractors

Sin

gu

laragreem

en

ts

of

oth

ercompa

nie

s

men

tione

din

inte

rvie

ws

We have considered long-terms agreements, buthaven't decided yet

You still have to work on it, signing the contractalone doesn't get you there

We establish frame agreements as long as theymake sense financially

Biggest challenge is that your [equity] partnersdon't want to use your frame contract supplier

We're not necessarily a company that goes outand seeks long-term partnerships

"\We have a global agreement for [our division] forall of our upcoming projects

I think there is a place for those kinds of frameagreements, if the client was able to deliver more

on their side. Indicational

E

F

G

A

B

C

D

H

I

J

A

B

C

E

F

G

D

K

5Long-term commitmentsFrame agreements


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Investments in defining commercial and legal standards

Given large portfolio of projects, customers recognize importance of working closely with a small group of contractors

"Massive portfolio of projects, increasing desire to work with a limited number of contractors which have similar strategicdirection, way of working, priorities"

Defining standard commercial and legal terms creates efficiencies and consistency in dealing with contractors...

"Lets have one big fight and then focus on getting the work done"

"We are creating global commercial principals to deal fairly and consistently with our suppliers"

"Makes final sale a little bit easier; you don't have to put everything on the table for every project"

"Frame agreements drive repeat business, increases confidence in building up resources"

...but some not all willing/ able to make investment

"We are a fairly new company, so we don't have a high level of standardization in our contracts. No time or resources forthat"

Most players entering into frame agreements

"We are the last of the majors not to have frame agreements in place"

"The benefit of frame agreements is that it gets the procurement guy out of the way. It lets us talk to the real customer" "Are entering into frame agreements with selected EPC firms. Take out inefficiencies"

Source: Interviews conducted Sep-Oct 2008 , BCG analysis

Frame agreements typically used to define standardcommercial and legal conditions

5Long-term commitmentsStrategic alliances


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Some examples for strategic alliances (I)

Strategic alliance covering all Canadian projects

Formed Alcoa Hatch Engineering Alliance delivering engineering and projectmanagement for Alcoa Australia and Canada

Long-term strategic partnership to facilitate the development of Xstrata Copper'spipeline of copper projects. Involves the innovative concept of designing areplicable copper concentrator and other facilities that could be applied toXstrata Copper's individual projects

Industrypartner

Industrypartner EPC(M)EPC(M) Relationship scopeRelationship scope

Strategic partnership incl. capital improvement projects, studies and engineering

projects in Canada, Peru, Alaska, Washington

5Long-term commitmentsStrategic alliances


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Some examples for strategic alliances (II)

Partnership to develop major mining projects. Objective is to double Areva'suranium production capacity in the next five years, starting with approximately 10new mining operations, mostly in Africa. Created a joint venture under the nameTSU Project

Strategic partnership and award of program management contract for Khalifa

Port and Industrial Zone

Strategic partnership with Munich, Germany's E.ON Energie to test carboncapture technology for coal-fired power plants

Gasification technology alliance to facilitate the development, design andconstruction of new projects utilizing ConocoPhillips' E-Gas Technology

Industrypartner

Industrypartner EPC(M)EPC(M) Relationship scopeRelationship scope

5Long-term commitmentsStrategic alliances Deep-dive example


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Xstrata-Bechtel strategic partnership

Partnership detailsPartnership details

EPC Customer: Xstrata

EPC Firm: Bechtel

Announced: December 5, 2007

Scope: Mining projects in Peru and Argentina;creation of replicable copper concentrator

Duration: 10 years

Expected benefits: reduced lead time,engineering time, and costs for individualprojects

Notes: Includes further alliances for technicalsupport and the procurement of majorcomponents with Siemens (electricalequipment) and FLSmidth (crushing and millingequipment)

Partner and industry viewPartner and industry view

"We are very excited about working with

Bechtel to develop this innovative approach toproject development which will maximizeXstrata's copper production cost effectively inthe shortest possible time." CEO of XstrataCopper

"Working with a world class company likeXstrata to develop a replicable copperconcentrator design for their portfolio of projectshas the potential to fundamentally change theway projects are delivered in the copperindustry." President of Bechtel Mining &Metals

Sources: Bechtel and Xstrata press releases (12/5/07), FLSmidth press release (3/13/08),

5Long-term commitmentsStrategic alliances Deep-dive example


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BP-EPC firms agreement

Partnership detailsPartnership details

EPC Customer: BP

EPC Firms: Amec, KBR, and WorleyParsons

Announced: June 3, 2008

Scope: Enginering and project management foroffshore projects worldwide

Duration: 4 years + option for 2 more

Expected benefits: allow BP to accessinternational resources for projects where andwhen needed

Notes: BP has a substantial number ofoffshore development projects planned for thenext 10 years, primarily across Angola, Asia-Pacific, Azerbaijan, Egypt, Gulf of Mexico, theNorth Sea and Trinidad.

Partner and industry viewPartner and industry view

"If you are switching contractors all the time,

you don't learn from one development to thenext, and even if you don't mean to, you canrepeat the same mistakes that other peoplehave made." COO of Amec's naturalresources division

"Although we see no immediate need to changeour numbers, we see this as a majorendorsement for AMEC and potentially acontinuing trend in the industry to concentratehigh quality, lower risk repeat work with fewercompanies." Dresdner Kleinwort analyst

Source: Financial Times, KBR press release, Reuters

Project synergies and scope determine5Long-term commitments


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Project synergies and scope determinethe benefit and size of prize for collaboration

Synergies

High

e.g., sametechnology or

required expertise

Low

e.g., standardizingT&Cs, volume

leverage

ScopeNarrowe.g., one BU orregion, fewprojects

Broad

e.g., multipleBUs or regions,

many projects

Complexity ofbundling volumeincreases with

scope

1. 'Scope' can be thought of as overall business volume (in $), whereas 'Synergies' will translate into a cost reduction (% of efficiency) on the $ volume in scopeNote: Indicational placement on matrix based on limited public information about alliances. See previous slide for description of alliances depicted.

$1

%1

C t t l ti it i f l t l ti hi



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Contractor selection criteria for long-term relationshipsAs observed in our interviews

Key questionsKey questionsExample quotes

not representative of mainstream opinion of interviewees

Example quotes not representative of mainstream opinion of interviewees

Relevantexperience

Geographicreach

Proprietarytechnology

Riskappetite

Engagementmode

Capacity to

execute

Interest inLT relations

Pastrelationship

Which contractors focus on the industry andhave experience in these types of projects?

Which contractors' geographical footprintsmatch the geographies of the project pipeline?

Which contractors have the necessary or bestproprietary technology for the projects?

Which contractors are comfortable with thelevel of risk associated with the projects?

Which contractors have experience with theenvisioned project engagement model?

Which contractors will have resources available

in the future to execute the pipeline of projects?

Which contractors are strategically interested ina long-term relationship?

Which contractors has the owner worked wellwith in the past?

Selectioncriteria

Selectioncriteria

"These are long-term relationships. They can't becooked up overnight. They have to be with an

organization that you know very well"

"We look for companies, number one, who have atrack record and experience in the specific areaswe're looking at"

"We don't have the people and geographical spreadthat other major EPCs might have"

"Many times it comes down to a specific technology.The 'same' technology is being offered by 4 or 5companies in the world but they are not the same"

"Eastern contractors like the Japanese aresignificantly less risk-averse and willing to do projecton a turn-key basis"

"If you do too much EPC work, you don't get highermargins so we try to do more engineering andproject management work"

"You need to be clear about what their capacity is

and ability to deliver"

"Others are more inclined to be in partner-typerelationships. We're not necessarily a contractor thatgoes out and seeks long term partnerships"

Invest in relationship management6Relationship management


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Invest in relationship managementbeyond individual projects

Agreement on importance of building relationships, but wide range of practices

Consensus on need to develop strong relationship across organization at all levels

Relationship is maintained on a project by project basis in most cases

Large projects automatically get top management attention

Relationship issues, e.g. trust, openness, and access to top management,

identified as barriers to successful and efficient collaboration

Invest in relationship management beyond individual projects

Make relationship management a top priority within organization

Dedicate resources to maintain and build relationship Provide top management attention and involve all levels of hierarchy

Build contractor relationships across organization incl. functional groups, BU and geographies

Create solid foundation for collaboration that translates into tangible efficiencies

"Client relationship management is key to value-adding EPC approach"

"You need corporate support, its important that everyone feels like its important"

"The management teams have to come together and share strategic plans and the relationshiphas to be kept very fluid. You can't leave it to lower levels"

"An IOC invites our senior management to their retreats to discuss challenges going forward"

Statusquo

Bestpra

ctice

Samplequotes

Strategic focus and consistency key elements

6Relationship management


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Strategic focus and consistency key elementsof relationship management


Build acrossorganization

DescriptionDescription FindingsFindings

Involve all parts of theorganization including:functions, departments,BUs and geographies

Engage alllevels ofhierarchy

"We need a strong relationship from the top of the company down to theoperational teams"

"The management teams have to come together and share strategicplans and the relationship has to be kept very fluid. You can't leave it tolower levels"

"An IOC invites our senior management to their retreats to discusschallenges going forward"

Relationships developed atall levels of theorganization; requires topmanagement attention

Prioritize

"Client relationship management is key to value-adding EPC approach"

"You need corporate support, it's important that everyone feels like itsimportant"

Clear organizationalcommitment torelationships management

"We need to build a coherent supplier relationship model with thecorporate center and the assets"

"For me its very important if things don't work, I can call HQ whereverthey are"

Dedicateresources

"We have one dedicated person that oversees the relationship"

"It's kind of like a marriage, it takes a lot of work. You have to work hardto make it work, a lot more than a regular relationship; but the benefitsare worth it"

Dedicated resourcesinvested in maintainingand building relationships

Consistency

Strategicfocus



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Trust frequently mentioned in collaboration discussions

Trust in an important part of building a collaborative relationship...

"Trust is seen as the most important ingredient to a successful relationship, starting from the top"

"We need to build trust in the entire organization you cannot do that in headquarters"

"It's about building trust and showing that we can help our clients perform better"

"Trust can only build up with time and with behavior of both sides with no surprises"

...mentioned as an important collaboration barrier

"There is a lack of trust. Concept of 'good faith' is the most fundamental thing"

"One of the things that gets in the way is mistrust. Both sides have probably done something to earn it"

Trust is not just a "soft" factor but can create real tangible efficiencies

"We would be able to get 10% or more [efficiency] through more trusting relationships"

"Many control instances could be saved (in lump-sum contracts) if we had more trust. We would be ableto increase our efficiency"

"Have to be experienced and familiar with contractor; trust is important" "I emphasize trust, because if contractors work with a client they can trust, it does make a difference"

"With a good, trusting relationship, can find out about problems earlier and mitigate them for both sides"



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Some steps for better relationship management

Dedicated executive sponsor for relationship

Create and maintain an on-going customer/supplier plan

Annual meeting (discussion of planning, backlog, strategy)

Systematic schedule of communication / meetings

Carefully managing "people" aspect (continuity, succession planning)

Conduct review of each project upon completion

Annual independent internal review of relationship

Annual customer/supplier survey

Make trust an explicit goal and act accordingly

. . .

Involve contractors early to fully leverage7Early contractor involvement


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y y gtheir value creation potential

Agreement on value of early contractor involvement, but not much put into practice

Agreement on value creation opportunity, e.g. through influence on design or project selection1

Many contractors expressed interest to get involved early in project life

However, NOCs and "smaller" companies expressed lack of interest from contractors

Reasons: e.g. financially not attractive, or impedes them from bidding for execution phase

Missed opportunity to leverage contractors know-how

Involve contractors early to fully leverage their value creation potential

Involve contractors early in project life when ability to influence cost and value engineer is highest

Include contractors in internal discussions to prioritize projects and optimize resource allocation Evaluate synergies of working with same contractor in all project phases vs. market leverage

Combine with initiatives around relationship management (#6) and transparency (#8)

Make the best decisions in the early phase where ability to influence value / cost is greatest

"We could offer influence into how we structure projects to better suit their business needs"

"We could share future project pipeline, continues dialogue on upcoming projects, joint businessplans"

"We are interested in participating in internal discussions, early in design to help steer processwhere we can deliver most value"

Sta

tusquo

Bestpra

ctice

Samplequotes

1. E.g., some customers invite contractors to internal strategic discussions

Early involvement key for influencing7Early contractor involvement


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project cost and value creation

Cost influence curve

Time

High High

Low Low

Ability

toinfluencecost

ProjectExpenditure

Projectcost

Costinfluence

Start Complete

Pre-feasibility

FeasibilityFinal

designContractorselection

Execution

Source: Kwame Building Group

7Early contractor involvement


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Companies struggle to achieve early involvement

Benefits of early involvement are recognized...

"We are interested in participating in internal discussions, early in design to help steer process where wecan deliver most value"

"We are trying to help clients define what is in their backlog. We are creating a front-end consultingbusiness to create value for our customers"

"We can tell them more of our strategic plans and where we go, so they can coordinate their resources"

"Some EPC firms have realized that they need to do it to get leverage for being chosen for next projectphase"

... but not often realized because roadblocks exist

"Some customers don't want a contractor to get too close because it could give them unfair advantage ina competitive bidding process"

"EPCs are mostly not interested to be involved in early stages, because they can sell very few man

hours there and it requires high profile people. Economically, the execution phase is much moreattractive for them"

"There is little interest from EPC firms to participate in FEED stage because this restricts their ability toparticipate in the EPC contract"

Increase transparency towards partner8Transparency in collaboration


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as major lever for better collaboration

Limited overall transparency and openness in relationships

Customers generally do not share pipeline with contractors, some IOCs do with select contractors

Contractors want more insight into project backlog to manage resources

Customers seldom share project financials, and mostly do not want to in future

Especially for lump sum, contractors provide little information on project status and costs

Lack of trust and openness cited as major barrier to collaboration

Increase transparency towards partner as major lever for better collaboration

Share project pipeline information with selected group of contractors to improve resource access

Discuss main value drivers in project, with or without sharing specific financials Develop trusting relationships so contractor will flag problems early when they are manageable

Improve overall collaboration through extended, more timely, more proactive information exchange

Information provided makes collaboration more efficient, and allows to identify add'l opportunities

"We want more predictability from sharing backlog to help understand the number and type ofupcoming projects. That would be more valuable than higher margins"

"We can offer transparency on strategic plans so firms can coordinate resources"

"We would like closeness, transparency and trust"

"Where there are working relationships, usually there is good information sharing

Sta

tusquo

Bestpra

ctice

Samplequotes

Most potential for transparency on backlog, project progress

8Transparency in collaboration


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p p y g, p j p gIntensified discussion of financials also has value potential, but lower chance of implementation

O

wnertransparen

cy

Contractortransparency

Project

economics

Backlog,project pipeline

Project cost,SCM access

Project progress

ValueValue FeasibilityFeasibility

Contractor can improve resourcecoordination

Facilitates early involvement

Helps to align on common goals

General willingness by customersto "give this" as part of a

collaborative relationship

Coordinates project goals andpriorities

Potential for value engineering,better trade-off decisions

Limited willingness to share valuemodels or detailed financialinformation

Allows for earlier mitigation andresolution of problems

Better trust and coordination

Traditional lump-sum contractorculture: grant limited insight intoproject progress

E.g. possibility to leveragematerial and equipmentpurchasing beyond single project,limited by customer scale

Possible, but contractor usuallynot structured for this


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Integrate systems to increase transparencyd l ffi i i

9Systems integration


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and leverage efficiencies

Absence of integrated systems partially due to low priority, partially implementation difficulty

Internal systems integration within organizations is a challenging issue of its own

Customers and contractors expressed difficulties integrating systems across their organizations

Partially expressed disappointment about promised vs. actual options from contractor side

Many owners, both large and small, say they have not even invested in this topic yet

Limited insight into important sources of information, inefficiencies of manual data exchange

Integrate systems to increase transparency and leverage efficiencies

Standardized and updated progress tracking reports help identify and manage roadblocks

Increase transparency through access to real-time cost data Identify value creating opportunities by accessing shared KPIs

Decrease amount of manual interaction necessary for data exchange

Improve timeliness and extent of info exchange, and ease of access

"Obviously if you standardize and replicate and make cost savings as a result, that's going to bebeneficial"

"Standardizing ways of working allows for less errors and less resources spent on rework"

"Our systems across the assets and with the EPC companies are not linked"

"Contractors' claimed to have integrated system that easily linked to our control system. It turnedout to be an Excel solution"

Sta

tusquo

Bestpra

ctice

Samplequotes

Agreement on benefits of mutual investments in systems,b t diffic lties implementing

9Systems integration


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but difficulties implementing

Despite wide agreement on potential to create value from standardization...

"Obviously if you standardize and replicate and make cost savings as a result, that's going to bebeneficial"

"Need to look at smart document transfer far too many hard copies of documents going around. Butquite some progress in the IT world"

"Standardizing ways of working allows for less errors and less resources spent on rework"

"We are implementing a mid-ware that resides between us and the contractor"

"By linking files, when the contractors updates his equipment list, anyone who is accessing that systemcan see that equipment list real-time"

"There is an opportunity to standardize components, repeat teams and create efficiencies"

...stakeholders have experienced difficulties in implementing

"How easy to do that [standardize systems] across projects, I'm not sure"

"Our systems across the assets and with the EPC companies are not linked"

"Contractors' claimed to have integrated system that easily linked to our control system. It turned out tobe an Excel solution"

"We don't have the resources to invest in common systems with EPC firms"

"Sharing systems would be a huge issue for us to tackle"

"We are not allowed by the law to make any long-term investments"


Increasing use of common platforms in project mgt9Systems integration


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Increasing use of shared or proprietary software

Amec (proprietary)

Total, AnadarkoPetroleum, VECO(acquired by CH2MHill)

Bechtel, Duke/FluorDaniel, and GE

Power Systems

User(s)

Fully integrated project management softwareConvero

Project collaboration and execution software that handlesprogram portfolios, schedules, costs, resources andcontracts for all sizes of projects. Also provides riskmitigation information.

PrimaveraPrimeContract/P6

Provides secure online workspaces for collaboration ondesign, construction and operation of large, complex

capital projects (eg. documentation and action tracking)

Citadon

DetailsPlatform

Source: Company web sites, interviews

Citadon was used by a consortium of 4 companies to build ahydro-electric power plant for Tractebel in Brazil

completed 6 months ahead of schedule

"We believe strongly that web-based communications areindispensable to speeding the design and construction

processes while at the same time improving quality"Program Manager, major construction company

Agenda

Version for E&C customers


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Agenda



Implications for your company (for discussion)


For discussion


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The best practices discussed are all important levers for creating the most efficient,mutually beneficial collaboration between E&C contractors and their customers.However, the priority of each practice and the room for improvement along each of thenine will vary by company.

In order to determine the implications for your company, we suggest an examinationalong three steps:

First, assess your current situation for each practice, determine the improvement potential

compared to best practice, and discuss your priorities and aspirations Then, examine your company's current initiatives and analyze if they cover all important

levers and are effective in addressing them

Finally, evaluate your progress on analyzing the supply market and selecting contractors toengage with to implement best practices for collaboration

We would be more than happy to discuss with you what these study results mean foryour company. Please do contact us with any questions, or to schedule a discussion.You will find our contact info on the last page of this presentation.

A

B

C

Assess your specific situation along nine best practices

For discussion A


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Assess your specific situation along nine best practices

1

Aspiration?Aspiration?Improvement potentialImprovement potentialCurrent situationCurrent situation

2

3

4

5

6

7

8

9

Value-baseddecisions making

Contractor risk

allocation

Structuring ofincentives

Contractingmodel

Long-termcommitments

Relationshipmanagement

Early contractorinvolvement

Transparency incollaboration

Systemsintegration

Deeper

collaboration

Long-term

perspective

Ford

iscus

sion

Risk/Reward

sharing

Evaluate current initiatives identify room for improvement

B For discussion


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Evaluate current initiatives, identify room for improvement

What major initiatives do you currentlyhave for E&C collaboration?

What major initiatives do you currentlyhave for E&C collaboration? Sample questionsSample questions

How many of the nine best practices doyour initiatives address?

Do the initiatives address collaboration ina cohesive and comprehensive way?

Are the initiatives fully leveraging the

best practice opportunities highlighted?

Are you moving fast enough with them;are you seeing the expected progress?

Are they correctly prioritized?

What obstacles (internal or external) doyour initiatives face?

Are the initiatives robust if marketconditions change?

Fordis

cussion

Discuss progress on implementation with contractorsBased on supply market analysis and segmentation and selection of contractors to engage with

C For discussion


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Based on supply market analysis and segmentation, and selection of contractors to engage with

E&C contractor market analysis Sample questions

E&C contractor market analysis Sample questions

How complete is your central insight intowhat business is done by eachorganizational unit or region with specificcontractors?

How detailed have you profiled EPCcontractors, assessed their skill andcommercial profile, and evaluated theirstrategic importance for your company?

In which way have you segmentedcontractors and defined a supplier strategybased on their relevance (e.g. supplier

portfolio matrix / strategy)?

Contractor engagement Sample questions

Contractor engagement Sample questions

How much internal preparation work wouldneed to be done before you would feel readyto engage with contractors about advancedcollaboration (e.g. long-term agreements)?

Are you already in discussion with specificcontractors about new ways of engagingbeyond a specific project?

What do you perceive as the majorroadblocks in such discussions?

Your specific situation might have different challengesand spur different questions let's discuss

We would love to discuss E&C collaboration more with you


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We would love to discuss E&C collaboration more with you

Jim HemerlingJim Hemerling

Senior Partner andManaging Director

Overall Study Lead

Two Embarcadero Center

Suite 2400San Francisco, CA 94111USA

+1 415 732 [email protected]

Christian KoeppChristian Koepp

Project Leader

Americas Study Lead

Two Embarcadero Center

Suite 2400San Francisco, CA 94111USA


Benedikt SobotkaBenedikt Sobotka

Project Leader

EMEA Study Lead

Devonshire House

Mayfair PlaceLondon W1J8AJENGLAND


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Best Practices in EC Collaboration - BCG Study a Nov08

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