TP India Oil & Gas - Report Final_Corrected

7/30/2019 TP India Oil & Gas - Report Final_Corrected

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EPC Market StudyTPIL Strategic Planning Confidential

STUDY ON THE MARKET OF EPC CONTRACTS IN OIL AND

GAS SECTOR IN INDIAFIRST PHASE OF STUDY

PROJECT TIME FRAME

April 2010 to December 2010

PROJECT CO ORDINATORS

J Raja

S Ramachandran

PROJECT MEMBERS

RVM Sumanth Rao Socrates Chinniah

For the award of the

EXECUTIVE POSTGRADUATE DIPLOMA IN BUSINESS MANAGEMENT

LOYOLA INSTITUTE OF BUSINESS ADMINISTRATION

LOYOLA COLLEGE, CHENNAI


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BONAFIDE CERTIFICATE

This is to certify that the Summer Project / final Dissertation entitled < title

(use bold print; main title all capitals and subtitle with leading capitals)>

submitted by to

LIBA, LOYOLA COLLEGE, CHENNAI for the award of the diploma of Post

Graduate Diploma in Business Management is a bonafide record of research

work carried out by him (her) under my (our) supervision. To the best of my

knowledge, the contents of this report in full or in parts have not been

submitted to any other Institute or University for the award of any degree or

diploma.

The project work has been carried out at < name of organization/institution >

Chennai - 600 034

Research Guide(s)

Date:

Research Co-ordinator *

* External Guide at the organization


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EXECUTIVE SUMMARY

The project aims to identify the various EPC projects executed in India in the sectors

of Oil and gas, Refinery, Petrochemical and fertilizers during the past 5 years. The

identified data is to be used to identify the major players and the market share of the

EPC Contractors in India and also profile the competitors with respect to TPIL in EPC

arena in India. This study would be a pre requisite for framing strategy for TPIL to

become a leading and preferred engineered contractor in India. The project is carried

out as two phases.

The Project is carried out in two phases; First phase of study includes the collection of

secondary data. The second phase of study involves the collection of primary data

through the mode of questionnaire from the competitors and the clients for extended

data collection that will be used for analysis on the EPC market prevalent in India.

The Observations of the study are posted to management for further planning of the

Strategy of TPIL to become the most preferred contractor in India in the field of Oil &

gas, Petrochemicals, Chemicals and Fertilizers. The introduction to the research

consists about a description about the background of the study. The various objectives

of the study have been outlined.

The works of various theories pertaining to the subject has been discussed in this

section. This review was important to gain knowledge about the various theories,

concepts and the strategies that can help to analyze the issue and the subject of the

study.

The methodology has been utilized to conduct the study. The quantitative and the

explorative methodology is used in the study have been described along with the data

collection measures.


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.

The analysis and results and findings of the data collected through the primary and

secondary data sources have been shown. The analysis is followed by a conclusion to

the research. Thus, providing areas of the future study in the subject and explains the

various applications of the research.


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Table of Contents

CHAPTER 1 .................................................................................................................. 1

1. INTRODUCTION .............................................................................................. 1

1.1. Objectives of the Study................................................................................ 4

1.2. Limitations & Assumptions ......................................................................... 5

CHAPTER 2 .................................................................................................................. 6

2. LITERATURE REVIEW ................................................................................... 6

2.1. Introduction ................................................................................................. 6

2.2. Outsourcing value chain activities ............................................................. 10

2.3. Construction value chain integration ......................................................... 11

2.4. Upstream oil and gas ................................................................................. 12

2.5. Downstream EPC projects ......................................................................... 17

2.6. Typical Construction sequence in EPC projects ........................................ 20

2.7. Project Organization structure ................................................................... 20

2.8. Industry Trends and Productivity issues .................................................... 23

2.9. Common Management issues in EPC Projects.......................................... 24

2.10. Consultancy Problem definition ............................................................ 26

2.11. Common issues in concurrent development projects............................. 27

2.12. Lean approach to productivity improvement ......................................... 28

2.13. Analyzing information flow using Design Structure Matrix (DSM) ..... 30

2.14. EPC contracts ......................................................................................... 32

2.15. Contractor .............................................................................................. 58

CHAPTER 3 ................................................................................................................ 61

3. METHODOLOGY ........................................................................................... 61

3.1. Preliminary Study ...................................................................................... 613.2. Data Collection .......................................................................................... 62

3.3. Overview of Data Collected ...................................................................... 62

3.4. Data Analysis ............................................................................................. 64

CHAPTER 4 ................................................................................................................ 66

4. DATA ANALYSIS .............................................................................................. 66

4.1. ProjectTime and Cost:............................................................................... 66

4.2. Geographical Spread ..................................................................................... 674.3. Operating Company / Clients........................................................................ 69


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4.4. Competitors ................................................................................................... 71

4.5. Sectors ........................................................................................................... 84

CHAPTER 5 ................................................................................................................ 88

5. CONCLUSIONS............................................................................................... 88

5.1. Further Study ............................................................................................. 89

APPENDIX 1 ........................................................................................................... 91

References & Bibliography.................................................................................. 91

LIST OF TABLES


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Table 5.4.1 List of Variables 7

Table 5.4.2 Summary of Data Collection 8

Table 5.5.3.1 List of Operating Company 13

Table 5.5.4.1 List of Contractors 15

LIST OF GRAPHS / DIAGRAMS


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Graph 4.0.1 Methodology 4

Graph 5.5.1.1 Year Vs No Of Projects 9

Graph 5.5.2.1 Projects by Location 10

Graph 5.5.3.1 Companies Vs No of Projects 12

Graph 5.5.5.1 Sector wise classification 14


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CHAPTER 1

1. INTRODUCTION

In framing the issues in this paper, it is worth defining value chain, oil and gas market

sectors, and engineering, procurement and construction (EPC). These are further

explored in a review of literature. A value chain is a chain of activities. Products and

services pass through all activities of the chain in order and at each activity the

product gains some value. The chain of activities gives the products more added valuethan the sum of added values of all activities. It is important not to mix the concept of

the value chain with the costs occurring throughout the activities. A diamond cutter

can be used as an example of the difference. The cutting activity may have a low cost,

but the activity adds too much of the value of the end product, since a rough diamond

is significantly less valuable than a cut diamond (Porter, 1985).

Within the petroleum industry operations are typically divided into three main

categories: upstream, downstream and midstream. Searching for, recovery and

production of crude oil and natural gas are generally seen as activities relating to the

upstream sector. Processing, storing, marketing and transporting commodities that

include crude oil, natural gas, natural gas liquids (LNGs, primarily ethane, propane

and butane) and sulphur are actions associated with the midstream industry. The

refining of crude oil, and the sale and distribution of natural gas and derivative

products of crude oil are associated with the downstream oil sector. In defining EPC,

the key differentiator from other types of project management contracts is not that it is

a scope of work, not a form of contract, and requires a single responsibility. Normally

a construction contractor taking on an EPC contract assumes responsibility including

financial responsibility which brings an element of commercial risk which must be

carefully considered (Kentz, 2008).Returning to value chain, it can be argued that a

companys profits are only as good as its ability to create value for its customers (e.g.

Gibbon, et al, 2008). Porter (1985) defines it as a chain of activities through which a


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product passes through and gains some value. He has extended the concept beyond

the individual organization to larger interconnected system consisting of firms

supplies (and sub suppliers), its distribution channels and the firms client/customers.

And under this analysis, two central questions arise under the choice of a competitive

strategy:

1. Attractiveness of industry for long term profitability and the factors that determineit

2. Determinants of relative competitive position within an industry (some industriesare more profitable than others).

A firm needs to consider both the above questions. Competitive advantage

Grows fundamentally out of value a firm is able to create for its clients that exceeds

the firms cost of creating it.

Three generic strategies are proposed, much covered in the management literature:

1. Cost Leadershipit is perhaps the clearest of the three generic strategies.

Here a firm sets out to become the low cost producer in its industry. During the

analysis of cost, due recognition should be given to linkages between individual

activities;

2. Differentiation here the firm seeks to be unique in it industry along some

dimensions that are widely valued by customers. The firm is rewarded for this

uniqueness with a premium price;


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3. Focus this strategy is quite different from others as it rests on the choice of a

narrow competitive scope within an industry. Here the focuser selects a segment or

group of segments in the industry and tailors its strategy to serving them to exclusion

of others. The focus strategy has two variants. Cost focus and differentiation focus. In

cost focus a firm seeks a cost advantage in the target segment while in differentiation

focus; a firm seeks differentiation in its target segment.

It is in applying value chain concepts to the EPC sector that there is less published

work to draw on and there are some significant issues to consider. With the very basic

definition of project as a temporary endeavor, EPC value chain only exists for the

duration of the project (Cherns and Bryant, 1984). This short duration makes it very

important to have the systems effective and efficient at the first place, as the damage

control is never fast enough to catch up with the project duration. Al Naqvi (2009)

mentions that long periods of prosperity led to complacency as inefficient processes

and lethargic strategies became acceptable ways to conduct EPC business. As the

economy tightened, sectors restructured and competitive pressure mounted, the focus

is now shifting from thriving to surviving. The uncertain times can offer promisingopportunities to redefine the competitive landscape, to establish a long term winning

strategy and to create a sustainable competitive advantage. For this, the process starts

with analyzing and rethinking EPC value chain.

Construction industry clients are increasingly demand documented evidence of the

steps taken to deliver value. Although their understanding of value differs, the

engineering team (designers) requires broad and flexible measures to justify design

decisions in terms of value expectations of the project stakeholders. Saxon (2002)

noted that: the construction industry knows little of how it adds value to customers or

society.

Therefore, there is a need to understand what is meant by value within each project

and reflect that into design decisions. The objectivist view of value embedded in

traditional approaches such as value management must be complemented by a


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subjectivist view that accommodates the judgment of value that occurs within

relationships between facilities (and their embedded design solutions) and people

(Thomson et al,2006). In the EPC sector, the value chain members (if at all there is a

formal group in an organization) are often isolated from the engineering design. This

hinders design solutions that could yield better stakeholder value. Austin et al (2001)

proposed the concept of design chain, in which all value chain members are

engaged in collaborative design problem solving.

1.1. Objectives of the Study

The Objective of study are classified into Primary objectives and secondary objectives

Primary

The primary objectives of the study is to

Determine the size of Market in Onshore for Oil and Gas,Petrochemicals, Fertilizers and Chemicals for the past 5 years.

Identification of Market share of various EPC contractors in the field.

To determine the profile of various players in the Business.

Likely Market projections for the next 3 years

Secondary


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The secondary objective of the study is to

Profiling of Contractors who are in competition in EPC Sector.

1.2. Limitations & Assumptions

The analysis on the data is carried out with assigning equal weightage to the projects

rather than the cost of the project, due to the unavailability of the cost data, the cost

data is available for only less than 14% of the projects and hence the market share

through revenue could not be carried out.

When there are more than one engineering contractor have executed the job for the

operating company / client, the scope of work of the engineering contractors are notclearly identified and hence the scope is considered as the same for the contractors

data collected for data analysis.

The data that has been collected has been from various magazines, Journals,

Newsletters, Public domain of the companies, various publishing agencies. The

accuracy of the information and the reliability of the information are related with the

date of publication in the Magazines, Journals, Public domain


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controlling and simultaneous activities acceleration regarding project scope of quality.

EPC contractor commits to execute the parallel sequence of activities according to

project schedule. Several studies were done about the projects key success factors for

different situations and industries.

A project is an organization of people dedicated to a specific purpose or objective.

Projects generally involve large, expensive, unique, or high risk takings which have to

be completed by a certain date, for a certain amount of money, within some expected

level of performance. At a minimum, all projects need to have well defined objective

and sufficient resources to carry out all the required tasks. (Steiner 1969).

Other definition is offered by Cleland and Kerzner( Cleland & Kerzner, 1985): A

project is a combination of human and nonhuman resources pulled together in a

temporary organization to achieve a specified purpose. In EPC method engineering,

procurement and construction are done in one contract, engineering services is under

completion, and meanwhile procurement delivery, site mobilization, construction and

erection are done in parallel. Management has major role for coordination and

successful completion of EPC project. Using applied project management techniques

and organizations with project control and management experiences are pivot al basis

of these contracts. A company is successful who can manage engineering and

procurement to reach standards while reducing costs of procurement, understanding

the difference between tactical and strategic issues by managers is important.

They are both essential for successful project implementation, but differently affect

project toward its completion. Strategic issues are important at the beginning of the

project. Tactical issues become more important towards the end. A successful project

manager must be able to consider both strategic and tactical issues during the project.

Toward the project completion, tactical and strategic factors would have same

importance. It sees during the project, initial strategies and goals forms tactics. Based

on the discussion of strategy and tactics, following items can be regarded:


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1. Using a Multiple-Factor Model:

Project management is a complex task in which the manager must attend to many

variables. The more specific one can be with regard to the definition and monitoring

of those variables, the more likely a successful outcome for the project will occur. The

ten critical success factors are shown to contain a degree of sequentiality and these

factors become critical to project success at different points. It is important for t he

project manager to make use of a multiple-factor model, first to understand the variety

of factors impacting on project success, and then to be aware of their relative

importance across stages in the project process.

2. Thinking strategically early in the project life cycle

Strategic factors are important early in the project life cycle, during the

conceptualization and planning stages. These factors are the most significant

predictors of project success. Many managers make the mistake of not involving

members of their project teams in early planning and conceptual meetings. It is very

important that managers and project team members have common understanding

about the schedule and project goals. The more project team members are aware of

these goals, the greater the likelihood of their taking active part in the monitoring and

troubleshooting of the project.

3. Think more tactically as project moves forward in time

By the later work stages of execution and termination, strategy and tactics are of

almost equal importance to project implementation success. Project manager shifts the

emphasis in the project from "what do we want to do?" to "How do we want to do it?'.

Tactical success factors reemphasize the importance of focusing on the how" instead

of the "what". Factors such as personnel, client consultation, communication,


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monitoring etc are more concerned with attempts to better manage the project

implementation process.

4. Use tactics and strategies

Strong strategies or tactics by themselves will not ensure project success. When

strategies are strong and tactics are weak, there is a great potential for creating strong,

well-intended projects that never get off the ground. Cost and schedule overruns are

consequences of such projects. On the other hand, a project which starts off with aweak strategy and strong subsequent tactical organization has the likelihood of being

successfully implemented, but solves the wrong problem. Strategy and tactics are not

independent of each other. Hence, developed strategy in the earliest stages of project,

should be made known to all project team members.

5. Consciously plan for project team's transition from strategy to tactics

The project team leader needs to actively monitor his or her project through its life

cycle. An important method to manage the transition from strategy to tactics is to

make efforts to continually communicate the challenging status of the project to the

other members of the project team. The project team is kept aware of the specific

stage in which the project resides as well as the degree of strategic versus tactical

activities necessary to successfully sequence the project from its current stage to thenext phase in its life cycle. Finally, communication helps the project manager keep

track of the various activities performed by his or her project team, making it easier to

verify that strategic vision is not lost in the later phases of tactical operation.


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2.2. Outsourcing value chain activities

A firm may specialize in one or more value chain activities and outsource the rest. A

thorough value chain analysis can facilitate outsourcing decisions. A firms strengths

and weaknesses in each activity in terms of cost and ability to differentiate need to be

analyzed to arrive at outsourcing decisions. The following are some of the aspects tobe considered for outsourcing decisions:

Whether the activity can be done cheaper and better bysuppliers/subcontractors.

Whether activity is one of the firms core competencies from which stem acost advantage or product differentiation.

The risk of performing the activity in-house, if the activity relies on fastchanging technology or product sold in a rapidly changing market, it may be

advantages to outsource the activity in order to maintain flexibility and avoid

the risk of investing in specialized assets.


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Whether the outsourcing of an activity can result in business processimprovements such as reduced lead time, higher flexibility, reduced inventory

etc.

2.3. Construction value chain integration

Though the construction supply chain exhibits some characteristic differences from

other sectors (Koskela, 1997) there remain no compelling reasons for industrys

continuing inefficiencies. Egan (1998) argued that construction industry needs tointegrate its processes and products to ensure that better value can be delivered to the

client. This approach involves clients, designers, main contractors and sub contractors

working together as a unified team, rather than disparate collection of separate

organizations.

Many construction clients appear to distrust their main contractors who in turn

maintain arms length relationship with their subcontractors and suppliers (Geoffrey

&Andrew, 2005).

Despite the difficulties that industry faces, it is essential that it develops its sup-ply

chain practices to deliver value to the client rather than simply seek to generate short-

term savings (Lockamy & Smith, 1997).

Harland et al. (1999) have shown how figures can more readily attain long term cost

reduction by forming closer working relationships with key suppliers, which is highly

relevant for construction supply chain. Compared to other industries, construction

industry has been viewed as a slow learning industry.


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Although many engineers, project managers and contractors do not consciously

recognize a value chain, they all interact with it and make value chain management

decisions on a daily basis. Having real time information available at any time can

reduce lead time and increase accountability for tracking purposes. These decisions

can strengthen the value chain if they are the very right ones.

2.4. Upstream oil and gas

The upstream oil sector includes exploration, drilling and production of crude oil.Therefore, upstream oil sector is also known as the Exploration and Production (E&P)

sector. The upstream sector includes the searching for potential underground or

underwater oil and gas fields, drilling of exploratory wells, and subsequently

operating the wells that recover and bring the crude oil and/or raw natural gas to the

surface.

The midstream includes transportation and trading of crude oil to refineries.

The downstream oil sector is a term commonly used to refer to the refining of cru-de

oil and the selling and distribution of natural gas and products derived from crude oil.

Although the overall production of oil is driven by global demand, the value chain is

producer driven and many companies are vertically integrated and have control over

every level in the chain. The recent trend in the industry is for companies to merge to

expand their upstream levels instead of downstream levels.

Literature shows that there is less emphasis on increasing refinery capacity; and

companies are now focused more on exploration and production segments of the

value chain. According to an energy research firm John S. Herald Inc., worldwide


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upstream capital spending had been steadily increasing annually until the end of 2008.

Though the current global recession impacted it adversely, the trend in the last decade

gives enough reasons for EPC companies to focus more on upstream oil sector even

though they may not have good presence in upstream sector now.

The credit crunch and economic downturn of 2008 and 2009 have made a deep

impression across business sectors. Emirates Business (2008) reported that Gulf

down-stream oil projects are expected to be the main victim of the global financial

crisis as strong Asian demand for crude could keep upstream ventures on track,

according to a key Gulf investment bank. This is mainly because of a decline in global

demand, threat of oversupply of products such as, fertilizers, petrochemicals and

refined petroleum products and a decrease in margins due to decline in prices and

fixed feedstock prices.

On 23rd December, 2008, Downstream Today reported that, with global demand for

chemicals falling faster than it has in 20 years, 2009 is going to be a challenging year

for the petrochemical industry. It was a prediction that proved to be accurate.

Calling it "a massive footprint shift," Dow Chemical CEO Andrew Liveries

announced his company is likely to restructure operations worldwide to deal with

steep market declines and the global recession, Downstream Today reported. Liveries

added that the market is "as bad as we have ever seen it in our lifetimes," and has

never see so many regions decline simultaneously in the world. "We could be looking

at a couple years of tough and severe correction."

The downward trends in midstream and downstream sectors demonstrate how

important is for EPC companies to focus on upstream sector and diversify in every

available opportunity. Since the late 1950s till date, the Oil and Gas Industry has

continued to serve as the main stay of the Nigerian economy. The industry has widely

been acknowledged as the nations live-wire and literatures abound on its role and


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significance to the nation (Agusto, 2002; Atakpu, 2007). Furthermore, it is reported

that an estimated $8 billion is spent annually on servicing operations within the

industry and this figure is projected to hit $15 billion within the next few years

(Business Day, 2008). Regrettably, despite these huge sums of money spent in

servicing the industry, only very little proportion of the accruable profit is available to

indigenous oil servicing firms or spent in developing Nigerias industrial base.

Majority of the amounts are paid to foreign firms for services such as Fabrication,

Engineering Procurement Construction (EPC), Front End Engineering Design

(FEED), conceptual designs and seismic studies. This results in capital flight as the

profits from the contracts are repatriated abroad, where most of the equipment are

manufactured; thus providing employment opportunities for citizens of other

countries, and in most cases developed countries.

According to industry experts, the main reason for this situation is attributed to the

problem of low local content (LC), which is a situation where most of the service

contracts are awarded to foreign firms because local indigenous firms allegedly lack

the requisite skills, technical expertise, manpower and production capacity andcapability to compete favorably (Aneke, 2002; Ariweriokuma, 2009). Oladele (2001)

suggested that low LC in the Nigeria is due to: Deficient capitalization arising from

the tendency of Nigerian entrepreneurs to operate as one man businesses; Capital

and structural deficiencies associated with poor training and low managerial ability;

and Inability to attract funds due to lack of suitable collateral and positive corporate

image. In addition, Olorunfemi (2001) and Ogiemwonyi (2001) in similar papers

articulated the problems of low local content to the inability of commercial banks to

provide tenured loans to indigenous firms to execute projects; and that of Nigerian

firms to foster appropriate alliances and partnerships with foreign firms, stressing that

these collaborations needed to be facilitated by the government and the multinational

oil producing firms, respectively.

Furthermore, Heum et al. (2003) summarized the reasons for low local content to

include low technological capacity; lack of funding from financial institutions;


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inadequate and incoherent policies/legislations; inadequate infrastructure; unfavorable

business climate; lack of partnership between indigenous contractors and technically

competent foreign companies.

Historically, Nigerians have had very little share of the countrys oil wealth and there

was an urgent need to reverse this trend in the wake of her return to democracy in

1999. To address this anomaly, the Federal Government of Nigeria in early 2000

introduced the Local Content (LC) policy in the oil and gas industry, christened

Nigerian Content (NC). It was primarily aimed at enhancing increased participation

of local

indigenous firms and was targeted as a tool for transforming the industry through the

development of in-country capacity and indigenous capabilities in manpower

development, facilities and infrastructure towards ensuring higher participation of

local indigenous companies actively in the industry (Lawal, 2006; MacPepple, 2002

and Nwapa, 2007).

It was also aimed at reforming the industry into becoming the economic hub for

promoting higher SMEs participation, job creation and base for industrial growth; as

well as for checking capital flight from the country (Binniyat et al, 2008; Chukwu,

2005 and Gilbert, 2007). The crucial need for this policy was re-emphasized when the

Speaker of Nigerias House of Representatives was quoted in the media: it is

important to note that while the oil and gas industry clearly dominates the Nigerian

economy, a successful local content policy must be a part of a comprehensive

industrial and economic growth strategy for Nigeria as a whole It should include

both a plan for domestic capacity building and infrastructure development to broaden

the national industrial base (Business Day, 2008). On its part, the SMEs sector has for

long been recognized as the back-bone, engine-room and catalyst of economic growth

and development in several countries (Ariyo, 1999; Day, 2000; Ihua, 2005). SMEs

constitute a major proportion of all the businesses in most countries and play salient

roles in the area of wealth creation, provision of products and services, job creation,


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enhancement of better living standards and contribution to the GDP of both developed

and developing countries. Although while SMEs in developed countries tend to be

negatively affected by internal factors such as poor management capabilities and

ineffective marketing efforts; their counterparts in developing countries such as

Nigeria tend to face more challenges from external factors such as unfavorable

business climate, inadequate infrastructure and lack of social support (Ihua, 2009;

OECD, 2000; Okpara, 2000).

Nonetheless, literature is replete on studies linking entrepreneurship with economic

growth; as well as associating the pace of entrepreneurship development with

government policy. Researchers have focused on what have been termed

entrepreneurial environments, referring to certain factors that influence the

willingness in individuals to engage in entrepreneurial activities and business start-

ups. While these factors include the availability of legal and institutional frameworks,

organized markets, skilled manpower, experienced entrepreneurs and the personal

possession of certain skills, traits and motivation; nonetheless, the availability of

favorable government policy has also been identified as a critical factor toentrepreneurial development (Acs and Armington, 2004; Frese and De Kruif, 2000;

Gnyawali and Fogel, 1994; Wennekers and Thurik, 1999). Similarly, it was expected

that the LC policy would promote higher participation of small to medium-sized firms

within the industry and subsequently enhance value addition to the nation. According

to Heum et al.(2003), there exists several opportunities in the industry, through which

small firms can seek participation and contribute to economic growth, such as:

Fabrication and construction; Well construction and completion; Modification,

maintenance and operations; Transportation; Control systems and ICT; Design and

engineering; and Consultancy.

Despite these opportunities, the last couple of years have witness mixed reports and

speculations among industry stakeholders like the media, multinational firms and

regulators, as to the efficacy of the Local Content policy in meeting its objectives. The

initial target of the government was to achieve forty-five percent by the end of 2007


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industrialized facilities involves a specialized supply chain where EPC contractor acts

as the channel co -coordinator. The typical players involved in the value chain are

shown in Figure 4. It includes a swarm of players from process technology firms,

equipment manufacturers to construction sub-contractors. There are four key stages

involved in the execution of EPC project. We briefly discuss these four stages in the

Table 1 below.

The general flow of information between the various phases in an EPC project is as

follows (informational flow: figure 5).

This is only a general direction. In reality these functions are highly dependent and

overlapped. The information flows To and fro between these functions and are

explained in the following Units. It displays the extent of overlap between different

function in the form of Gantt chart


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2.6. Typical Construction sequence in EPC projects

The outcome of the first three phases provides the necessary work front for

construction. The construction involves the majority of time in an EPC project. The

construction in itself has a typical sequence which is shown below (See Figure

below).

2.7. Project Organization structure

The formal functional organization structure that executes engineering and

construction projects is shown in figure 8. This is the most commonly used structure

in the industry. In this section we will discuss about the key roles involved in

execution of those projects. Later in unit-5, let us see how this structure is reorganized

to form a value stream based organization structure.


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The project director/ manger (PM) is the top authority who executes the entire cycle

of EPC projects and wholly responsible for the profit from the project. There are

number of other managers from different functions giving support to the project

manager. (See Figure below)

The engineering division consists of several engineering functional disciplines. Each

of these functional disciplines is a team, directed by a senior lead engineer. Project

engineers are those who coordinate between those functional teams and regularlyassist the project manager in resolving the issues that pops up in a project. According

to Ballard & Howell (2003), project engineers are seasoned engineering leads and

report either directly to the project manager or to engineering managers.

Procurement manager handles a team, who are specialized in handling all supply

chain related activities like vendor identification, purchasing, coordination with

vendors and material handling etc.


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The construction manager is solely responsible for the on-site construction progress

and reports directly to the project manager. It involves managing various skills (from

labors to engineers), which is very different from engineering and procurement

phases. The Projects managers are the most powerful in a project, but when it comes

to reality they will have to cooperate with a matrix of other organization managers in

order to ensure smooth project execution. In addition to these functional departments,

Project control and planning group plays a significant role in executing the projects

smoothly. They are responsible to track the project progress in terms of schedule and

the budget, and report to the management if there are any deviations. Then

accordingly measures are taken to put the project back in track. They develop the

project plans, schedules and prepare the work break down structures for each

engineering functions. Later in section 4.2, planning and creation of

WBS along value streams is discussed in detail. There are also few other departments

involved in the front-end project bidding and project grant phase. Those groups are

estimation, budgeting and contracts management. Other supporting functions include

material management, Project IT, Quality group/ TQM.

Moreover, there is a practice of creating task force in order to accelerate the works in

larger projects. It is a cross functional team that comprises of engineers from different

functions. It is formed on the basis of the task that has to be accelerated. During this

phase, members are literally brought out of their functional discipline and located

separately. This team mainly focuses on the project progress rather than working for

their corresponding functional departments. This is the most preferred method for

project managers in critical situations and is hated by the functional heads as it

disturbs their regular working.


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2.8. Industry Trends and Productivity issues

This section gives a brief overview of common management issues and their root

causes from the industry. This will facilitate the process of finding lean literatures on

productivity tools.

2.8.1. Key Industry Trends

For the last few decades, there has been no change in the organization and structure of

EPC projects. But there is a drastic change and trends in the external environment

factors that have made the current organization structure unable to cope with them.

This has led to many common management and productivity issues. The key trends

that led to such issues are discussed in detail as follows:

Increase in Client Power: As the prospects of industry grew, there was a huge increase

in low cost contractors. This has led the clients to choose from many, based on their

expediency. This in turn has affected the EPC contractors, by increase in client

pressure to reduce the project cycle time and compress on their profit margins; in spite

of increase in project complexity. According to Repenning and Sterman (2001), the

major factor behind this trend is the lack of significant process or technology

innovation in the industry over the last few decades. Thus this imbalance between the

client and the contractors has led to less motivation for the contractors to invest in

productivity improvements. Increase in Global Execution: The distributed pattern of

petrochemical investment has led to execution of projects globally across the world.

Also, the increase in pressure of reducing cost has moved the contractors for

outsourcing in low cost countries. Result is the fragmentation of projects, where most

of the engineering and procurement activities are spread out to reduce the cost

(Backhouse and Brookes, 1996). This has led to various complex coordination issues

adding up to their regular work.


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Increase in project complexity: The intensification of petrochemical plants in both

scope (Client handover requirements and Safety) and scale have led to new challenges

in coordination (Ballard, 2008), which the current structures might not deal

effectively. Increasing IT complexity: Information flow is critical in such complex

projects. The range of IT tools from auto-simulators to 3D designs has fundamentally

changed the work process in this business by declining project performance rather

than increasing their efficiency. The reasons claimed for this are:

Reduction in computational cost of change has an impact on 'behavioralchange' where both engineers and clients can make frequent design

modifications.

IT has changed the meaning of 'Project deliverable', while project proceduresremain the same (George Reichard et al; 2007). For instance, the process

departments delivers P&ID as physical document, for which input information

are obtained from multiple engineering groups. IT has changed this into mere

report with no critical value added. Progress monitoring and control have also

become complicated due to this IT impact.

The software tools for these IT applications undergo a frequent change, whichmeans that a project with 2-3 years duration has to adjust to this IT changes

every 1-2 projects. These tools have still not yet grown to deliver full

productivity promises (Ballard, 2008).

2.9. Common Management issues in EPC Projects

Concurrent engineering: As discussed in the previous section, the increase in pressure

to reduce the cost, project cycle time in spite of increase in scale and scope of the

project has led the EPC contractors to parallelize the tasks heavily. To compress the


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project cycle time, the activities are overlapped in spite of being sequential (Ballard,

2001). This setup is called concurrent engineering.

Insufficient Traditional coordination mechanisms: Given rise to serious coordination

issues as discussed above, the traditional way of doing it is no longer sufficient

(Ballard & Howell, 2003). Earlier the execution was mostly sequential and it worked

well with the teams that located closely. However this cannot help in the current

situation, where concurrent engineering, globally distributed sites and outsourcing has

become very common. This again adds up to serious coordination issues, that only

pops up in the last minute and give rise to costly rework cycles.

Wrong incentives encouraged in the industry: As said earlier in Table 1, around 80%

of the project cost is represented by procurement and construction and while

engineering represents only 20%. But the engineering cost has direct influence over

the procurement and construction cost. The importance of this is not preached in

reality during project contract negotiations. During this process, both the contractor

and client are ready to compensate for the engineering cost incurred. This way of

emphasizing on controlling the project cost at expense of engineering costs, place the

project at risk. It also put the engineering leads in pressure to minimize the cost

incurred and will lead to issue like sub-optimizations that will have serious impacts on

the construction phase.

Unworkable budgets: Due to decline in pricing power as a result of poor performance

and industry changes, most of the EPC contractors tend to start a project with

schedule and cost budgets that are not attainable (Patty& Denton, 2010). This sort of

environment causes serious behavioral patterns into the teams; make them lethargic

about the targets as they know that it is not possible to achieve the targets. The

managers knowing this can even set tighter targets to the team and thus create a

negative spiral.


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Functional focus amplifies problems created by man-hour focus: The problem of

excessive focus on man hours is further amplified by with functional focus. Since this

business is characterized by low profit margin and evaluated based on the manpower

utilization(Costa,2009), the functional departmental heads are in a continuous

pressure to make their staffs fully engaged and get the job done in the minimum

period. This in turn doesnt provide enough time for the different functional engineers

in the review cycles, which can lead to finding of an issue at later stage. This can lead

to rework and can have serious impacts in the downstream activities. Thus this hides

the problem and creates a wrong sense of progress.

2.10. Consultancy Problem definition

Many of the issues discussed above have been encountered with Dodsal and develops

into two major problems: Project Overruns in terms of schedule and budget, ending

up in depletion of profit margins (Refer figure 9 above). The scope of this internship

program was to find ways to improve their operational efficiency and avoid overruns

in the project using lean principles. This report finds ways to address those issues by

using the following approach as shown (Refer figure 10)


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2.11. Common issues in concurrent development projects

Many problems that are associated with EPC project management in a concurrent

engineering setup has been explored deeply. According to Backhouse and Brookes

(1996), the execution of concurrent engineering setup doesnt succeed most of the

time because of misalignment with resources, metric, process, tools and also the focus

of the organization in the need of efficiency. He also adds that inappropriate

organizational structures, policies and decisions take place due to the mismatch

between the technical organization, dynamic complexity of the projects and alsomental models used by the managers.

DSM is a powerful technique that can be used by the managers to look at those

complexities in new perspective and can help them manage the projects efficiently.

Sterman (2000) describes about how to overcome the behavioral patterns that is been

developed from the sequential working, by analyzing an EPC paper mill project using

DSM. Ford and Sterman (2003) discuss the short sighted management policies as the


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reason for project failure. The project appears to be on schedule until 90% progress

and freezes. It is then completed after consuming about the two times the duration of

planned schedule. Repenning et al (2001) explains about the models that help

understand how fire fighting, recognition of unplanned allocation of resources are

discovered last in the project cycle and these are very familiar in concurrent

development projects. They explain about how the managers attempt to push the

resources to do a bit more in a short time , forms the basis for their decrease in

concentration to the upfront task and finally ending up with issues in downstream

activities.

Though the literature gives enough insights that can identify and resolve the problems

that occur in the engineering and construction projects, it is not easy for the

organization to utilize these recommendations to put them in action. Repenning and

Sterman (2001) calls this space between the accessibility to proven solutions and the

lack of ability to implement them as "improvement paradox". They propose that this

inability is not because of the specific improvement tool, but because of the influence

by th e physical and psychological factors and situations, in which the newdevelopment programs are introduced.

2.12. Lean approach to productivity improvement

According to Womack and Jones (2003), Lean Principles concentrates on five core

principles as shown below. It was derived from the highly successful practices of

Toyota production system. Being motivated by its achievement in the manufacturing

domain, this concept is being extended into the EPC projects (Lean engineering) and

an organization providing the environment for Lean engineering is developed (Lean

enterprise). This involves a huge impact on the organization and the implementation

can be achieved through a fundament shift in management attitude.


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Lean requires system wide thinking and decentralized action. Hence renovating the

current traditional approach with lean is very difficult and demands for process

preparations called stability conditions.

Marchini (2004) explains the importance of expanding lean thinking into the

associations between the different firms involved in the entire construction value

chain. Also there are several initiatives to adopt lean philosophy in engineering &construction industry, from industry key players. Lean Construction Institute (LCI)

plays a significant role in defining new lean tools and techniques for the industry.

Most of them has been adopted and in practice across the globe.

Most of the Lean experts and practitioners insist to look at a system as a whole,

before getting down to optimize any individual process or process group in it. It can

be accomplished by the use of value stream mapping. It creates an end to end process


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map of material and information flow in a system. Thus by creating a high level

conceptual view of a system, it promotes to identify areas where improvements can be

made to increase the efficiency. Without doing this, any improvement done in the sub

process doesnt work efficiently to bring end value for customers.

As a result, most of the lean practitioners and experts use value streams as the

opening step in implementing lean. According to Rother and Shook, (1999), Value

stream is defined as the set of activity involved in producing a finished good from raw

materials or bringing concepts to reality. The value stream analysis involves

elimination of non value added activities in the system process flow and makes the

system capable of reacting rapidly to the end customer. The first step in conducting a

value stream mapping is to create the current state of process map that capture the

flow of material and information in the system. It also captures other key information

that creates value and non value in the process. This information serves as the basis

for applying lean principles and enables creating a future state map with the proposed

process improvements. The most important thing in creating the future map is to

classify the activities into value added and non value added activities. The non valueadded activities can give rise to waste and supporting activities. These concepts are

very predominant in manufacturing sector and several initiatives are being taken to

extend these concepts into other areas. Morgan (2004) and McManus (2002) argue

about the implementation of value streams in product development in automotive and

aerospace industries.

2.13. Analyzing information flow using Design Structure Matrix (DSM)

DSM- Design Structure Matrix is a compact and also powerful method for analyzing

the information flow and dependencies between the components in a system. DSM isotherwise called as Dependency system matrix. It normally represents the components


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in a system as rows and columns in an n-square matrix. Rows and columns represent

information exchange and dependency relationships between these elements and their

corresponding intersection shows the interaction between them. The off-diagonal cells

in the matrix indicate system interactions. It captures interaction between the system

elements in such a way that, it brings out feedback iterations in the system design.

Petrakis and Pultar (2005) illustrate that, DSM also involves mathematical analysis

and many algorithmic tools which are used to improve the system design. Eppinger

(2001) provides an excellent overview of DSM. DSM representation is also used to

analyze various other factors such as project activities, process parameters, system

components or team organization. Many types of DSM can been seen based on the

system elements.

Coupled tasks are the most common feature in a concurrent engineering setup and the

resultant feedback loops that occur between the coupled tasks are called as iterations.

Iterations can be planned or unplanned. Unplanned ones cause delay in the projects.

Traditional planning process ignores such feedback loops which leads to rework and

hence causes delay in the project. Ford and Sterman (2003) uses systems dynamicsmodels in concurrent engineering setup to identify that, delay in discovery of rework

leads to unplanned Iterations.

The most important value of DSM is to see a complex system as a whole and

understand it. Traditionally, managers were not able to figure o ut complex systems,

but now using DSM, they can capture a complex system in a single view. By DSM

analysis of a single value stream, the root cause for rework in Engineering &

Construction projects has been identified for Dodsal management (Refer Unit 4).

Eppinger (2001) explains that DSM allows not only identifying the issues but also

helps mangers to fix them. McManus and Millard (2002) suggest, DSM is a useful

tool for mapping and analyzing value streams in product development and project

management where information flow is large compared to material.


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2.14. EPC contracts

2.14.1.Definition of contracts

Various definitions have been proffered by different authorities for the term

contract.

Sir William Anson, the learned English authority on the Law of Contract has defined

a contract as:

A legally binding agreement between two or more parties, by which rights are

acquired by one or more to acts or forbearances on the part of the other or others

An engineering contract dictionary defines a contract as:

A binding agreement between two or more persons which creates mutual rights and

duties and which is enforceable at law(Ir Harbans Singh KS 1, 2007)

2.14.2.Contract Elements

The legally essential elements of a construction contract include an offer, an

acceptance, and a consideration (payment for services to be provided). The offer is

normally a bid or proposal submitted by a contractor to build a certain facility

according to the plans, specification, and conditions set forth by the owner.


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Acceptance takes the form of a notice of award, as stated earlier. Consideration

usually takes the form of cash payment, but it may legally be anything of value (S. W.

Nunnally, 2007).

There are certain elements that must be present for a legally binding contract to be in

place.

According to Frederick E. Gould & Nancy E. Joyce, 2003 said that the first two are

the most obvious:

An offer: an expression of willingness to contract on a specific set of terms,made by the offer or with the intention that, if the offer is accepted, he or she

will be bound by a contract.

Acceptance: an expression of absolute and unconditional agreement to all theterms set out in the offer. It can be oral or in writing. The acceptance must

exactly mirror the original offer made.

A counter-offer is not the same as an acceptance. A counter-offer extinguishesthe original offer: you cant make a counter-offer and then decide to accept the

original offer.

A request for information is not a counter-offer. If you ask the offer or forinformation or clarification about the offer, that doesnt extinguish the offer;

youre still free to accept it if you want


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2.14.3.The Essence of a Contract

According to Frederick E. Gould & Nancy E. Joyce, 2003 said that the essence of a

contract has been judicially expounded to the following effect:

To constitute a valid contract, there must be separate and definite thereto; to parties

must be in agreement, that there is consensus ad idem; those parties must intend to

create legal relations in the sense that the promises of each side are to be enforceable

simply because they are contractual promises and the promises of each party must besupported by consideration.

All contracts are built upon the basic premise of the meeting of minds, the idea of

assent and agreement as to the same thing. Agreement is to be established based on

objective considerations such as conduct and not inferred from the mere mental

element of intent. The other ingredients, e.g. consideration, legality, etc are then

added on to reinforce and supplement the basic premise to ensure that the essence of a

valid contract is tenable at law.

2.14.4.Basic Elements of a Contract

According to Frederick E. Gould & Nancy E. Joyce, 2003 said that the basic elements

which are necessary for the creation of a legally binding and enforceable contract are

essentially as represented in figure 2.1 and listed here under:

A clear or firm offer or proposal

An unqualified acceptance of the offer/proposal


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Intention to create legal relations: both parties must show an intention to enterinto a legally binding agreement

Consideration: each party must contribute something in reciprocation of theothers promise

Certainty : the terms of an agreement must be certain or capable of being madecertain

Capacity : the parties must have a legal capacity to contract

Consent : the parties must contract with free consent, i.e. Consent must not beobtained by coercion, fraud , duress, misrepresentation, undue influence, etc

Legality : the contract must be formed within the boundaries of the law, e.g.Its object or consideration must not be unlawful

Possibility : the contract must be capable of performance both physically andlegally


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2.14.5.Types of contracts

Contracts based on the pricing/payment criteria

Contracts based on the method of contract procurement

Miscellaneous types of contracts

One of the principal methods of classifying contracts is based on the method by whichthe contract price is established and subsequently payment is made to the contractor.


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Here, although there exists traditional terminology to describe the methodology

adopted in specific applications, recent practices in the industry have led to the

blurring of precise definitions thereby creating considerable confusion on part of the

practitioners (Frederick E. Gould & Nancy E. Joyce, 2003).

According to Frederick E. Gould & Nancy E. Joyce, 2003 said that it is the intent of

this chapter to look at the traditional approach whilst at the time, to address possible

areas of confusion. The starting point is the further sub-classification of contracts

under this category into the following types:

a) Fixed price type of contracts

b) Cost reimbursement types of contracts

c) Miscellaneous type of contracts

Fixed price type of contracts

A fixed price contract is a contract in which the contractor quotes a price for the

whole of the work. In essence, the contractor takes the risk of judging how much

work is involved and its cost. In practice, if the contractor is entitled to a variation in

the contract sum. Then fixed price items may be defined as items paid for on the basic

of a predetermined estimate of the cost of the work, an allowance for the risk involved

and the market situation in relation to the contractors workload, the estimated price

being paid by the client irrespective of the cost incurred by the contractor (Frederick

E. Gould & Nancy E. Joyce, 2003).


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According to Frederick E. Gould & Nancy E. Joyce, 2003 said that the common

species of fixed prices contracts encountered in the engineering/ construction industry

include the following:

(a) Lump sum contracts

Lump Sum contract where a party undertakes to complete the whole of the work for a

stated and fixed amount of money payable by the other This is so even though it may

contain express stipulations permitting adjustment of the contract sum foreventualities such as variations, payment for extended preliminaries, etc. what is

important is that at the time of contracting, both parties must have agreed upon a lump

sum price to be payable for a defined scope/quantity of work to be undertaken. It

should be noted that most of the common Standard Forms of Contract used in the

country such as the JKR Forms, IEM Forms, etc are essentially entire contracts for a

lump sum with modifications to ameliorate to rig ours of strict entirety. The two

principal types of lump sum are with bills of quantities and with drawings and

specification.

(b) Measure and value contracts

This type of contract is utilized principally where the exact scope and quality of the

work cannot reasonably be determined accurately at the time of tendering. To enablethe tenderers to establish a price, a basic is provided by the employer in the invitation

to tender documents. Either during the currency of the contract or upon completion of

the works, the works are measured, valued or payment effected to the contractor. Such

contracts are common, rather than an exception in civil engineering and infrastructure

projects especially those involving earthworks, work below ground level, etc.

Measure and value contracts come in the two basic forms based on either a bill of

approximate quantities or a schedule of prices.


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(c) Turnkey contracts

Going under various labels such as package deal type of contracts, design and

build/ design and construct contracts, EPCC type of contracts, etc the defining

characteristic is the combining of all the fundamental tasks of the project, i.e. design,

production (construction or building) and management in a single package. The

contractor takes full responsibility and carries sole liability for design and

construction. In such typical contract, the employer approaches a contractor with a set

requirements may be mere brief statements or detailed specification, drawings,

schedules, etc depending on the nature and complexity of the project or the extent to

which the employer has the expression of his wants. The contractor responds to the

employer with an offer called the contractors proposals which will include

production as well as design work, contract price and the manner in which the

contract price has been calculated, e.g. the contract price analysis, etc. bills of

quantities are strictly not applicable in a Turnkey contract and if something akin to

these are used, they are merely for the purposes of the contract sum analysis or for

making payment to the contractor.

Though turnkey contracts can be on fixed price or cost reimbursement basis, the

accepted practice in this country favors the fixed price approach. The norm is for the

contractor to contractor to contract on the basic of a predetermined estimate of the

cost of the complete work. this is in line with the selling point of such an arrangement,

whereby the contractor bears all risks, inclusive of costs and pricing risks subject to

adjustments occasioned by variations ordered by the employer, extended

preliminaries, etc. another feature sometimes encountered in such contracts is a

guaranteed maximum sum, a sum offering assurance to the employer on his maximum

price exposure.

Cost reimbursement type of contracts


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Cost reimbursement is a term used to describe one of the two principal methods of

making payment under contract. Cost reimbursement contracts are not popular in this

country as it burdens the employer with all the risk and with no advance notion of the

eventual financial commitment. It general imposes no incentive on the contractor to

maximize efficiency and keep the costs down since he is already assured of his fee in

advance. Seemingly with this arrangement, the employer bears the brunt of this

disadvantage whilst simultaneously guaranteeing the contractor of his fee with little or

no attendant risks (Frederick E. Gould & Nancy E. Joyce, 2003).

The types of cost reimbursement contracts are:

Cost plus fixed fee contracts

Cost plus percentage fee contracts

Cost plus fluctuating fee contracts

Contracts Based On Method of Procurement

a. Traditional General Contracts (TGC)

Appearing under various labels such as general contract, employer-design contracts

and the like, traditional general contracts are basically characterized by the separation

of the design form the manufacture (i.e. construction or installation) elements of the

contract. The employer causes the design to be prepared by his professional designers

and thereby takes full responsibility for the design. Depending on the contractual

arrangement selected, the employer may also cause bills of quantities to be prepared(IrHarbans Singh KS , 2007).


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Under thus methods of contract procurement, the contractor builds or manufactures

what the designers have designed and/or specified. he is only responsible for the

material and workmanship aspects of the contract and for the performance of his sub-

contractors (inclusive of any nominated sub-contractors) not withstanding its time-

tested credentials such contracts are slowly losing favor with the onslaught of e.g .

package deal type, construction management, etc (IrHarbans Singh KS , 2007).

b. Management contracts

A management contract has been described as a form of contractual arrangement

whereby a contractor is paid a fee to manage the building of a project on behalf of a

client It is, in essence, a contract to manage rather than contracts build (Ir Harbans

Singh KS, 2007).

The characteristics of a management contracts are that the employer engages the

contractor design to participate in the project at an early stage contribute construction

expertise to the design and manage the construction process, the latter being

undertaken by a number of works (or trade) contractors. The management contractor

is paid a fee, which fee may be on a fixed lump sum basic or a pre-agreed percentage.

Depending on the nature of the contracts entered between the employer, the

management contractor and the trade contractors, the management contractor mayor may not carry liability for the defaults and/or omissions of the latter, delay

inclusive(IrHarbans Singh KS , 2007)

c. Construction management contracts


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According to IrHarbans Singh KS, 2007 said that as aptly named, construction

management contracts are a sub-set of the general corpus of management type of

contracts and such share common characteristics with management contracts

discussed above. There essential differences are namely:

The employer has direct contracts with the works/trade contractors

The employer pays such works/trade contractors directly

The construction manager us not liable for he acts and/or defaults of theworks/trade contractors

The construction manager essentially acts as a mere consultant instead of acontractor in the general sense

d. Package Deal Type of Contracts

According to Ir Harbans Singh KS, 2007 said this method of the procurement where

the contractor is responsible for both design and construction (and in some cases for

even financing, complete fitting out, technology transfer, etc). The common

variations include:

Design and Build (D&B) contracts

Design and Construct (D&C) contracts


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Engineering, Procurement and Construction (EPC) contracts

Engineering, Procurement, Installations and Construction (EPIC) contracts

Engineering, Procurement, Construction and Commissioning (EPC) contracts

Selection of the contractor is normally based on competitive tendering orNegotiation and payment effected on either an interim, milestone or lump sum

Basic.

e. Build, Operate and Transfer Contracts

According to Ir Harbans Singh KS, 2007 said that this novel method of contract

procurement surfaced on the local scene directly as a result of the governments

privatization policy. Under the scheme, the contractor is responsible for:

Financing the project at all stages

Undertaking the relevant design and construction

Operating and maintaining the works over a stipulated period


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On the lapse of the agreed period, reassigning it to the employer at no furthercharge

f. New Types of Contracts

According to Ir Harbans Singh KS, 2007 said that with the recent building boom, the

local industry experienced some non-traditional Forms of Contract procurement

including the so called Fast Tracking Contracts, Partnering Contracts and Fee

Contracting

Fast Tracking Contracts as their name aptly describes them are nothing morethan contracts undertaken on a fast track basis with overlapping or concurrent

stages instead of the traditional sequential of activities. The ultimate objective

is to complete the project in the shortest time possible.

Partnering Contracts are in essence an extension to the normal serial contracts.

Under this system of the contract procurement, over a pre-determined or an indefinite

period of time the contractor automatically receives all new contracts from the

employer with payment to be made by reference to an initially agreed formula.

Fee Contracting were made to introduce this species of the contract locally inthe late nineties, the economic meltdown at the material time thwarted such

efforts. Nevertheless it is one type contract that may become significant in the

near future involving large and technically complex projects.

Delivery Methods


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The term delivery method refers to the owners approach to organizing the project

team that will manage the entire design and construction process. This selection

process in governed to a large extent by risk but also by the owners desire to find a

method that will deliver the project on time, budget, and in a form that will meet the

owners needs most effectively (Frederick E. Gould & Nancy E. Joyce, 2003).A

number of proven strategies can be used to accomplish these ends. The three most

common are traditional, design/build and construction management. Combinations of

these strategies may be employed well. Each has its distinct advantages and

disadvantages, but the choice is not always clear and simple. The owner must

carefully weigh his or her options to ensure the right choice for the specific project

(Frederick E. Gould & Nancy E. Joyce, 2003).

Conventional/Traditional Contract

In this arrangement, the owner first hires a design professional, who then prepares a

design, including complete contracts documents. The design professional is typically

paid a fee that is either a percentage of the estimated construction cost or a lump sump

amount, or he or she is reimbursed for costs at an agreed-upon billing rate. With a

complete set of documents available, the owner either conducts a competitive bid

opening to obtain the lowest price from contractors to do the work or negotiates with

a specific contractor. The contractor is then responsible for delivering the completed

project in accordance with the dictates of he contract documents. The contractor may

choose to subcontractor much of the work or may have the forces in house to

accomplish the task. That choice usually depends on the contractor remains solely

responsible for execution of the work. This delivery mode become popular near the

turn of the twentieth century in response to the increasing specialization of the various

building profession and until recently it was the predominant mode of delivery

(Frederick E. Gould & Nancy E. Joyce, 2003). During the construction process, the

owner may hire the architect to administer the contract or may choose to have in-

house employees do this task. Administering the contract consists of observing the

work to monitor quality, carrying out the change order process, certifying payment to


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the contractor and ensuring that the owner is receiving the product called in the

contract documents. If the owner hires the architect, he or she does so through an

agency relationship that is, the architect is bound by the legal rules of this relationship

and as such is empowered to act in the owners name. The contractor, on the other

hand, is hired in a simple commercial contract and as such is charged with carrying

out the terms of the construction contract. There is no contract between the architect

and the contractor. The relationship is once in which the architects acts for the owner

during any dealings with the contractor. Nor are there contract agreements between

the architect/owner and the specialty subcontractors. The relationship exists only with

the contractor, who is solely responsible for the contractor performances (Frederick E.

Gould & Nancy E. Joyce, 2003).

2.14.6.Role of Owner, Contractor and Design Professional under aConventional Contract

Normally the outside independent architect or engineer prepares the plan and

specifications for the owner prior to tendering. This means that the architect or

engineer id legally responsible to the owner for design defects according to his

professional services contract. Generally, the design professional has no liability for

defective construction, other than for defects that should have been reasonably

observed from field services & inspections which he has carried out. Most important

of all, the independent architect or engineer has contractual obligations to protect the

owner. One result is that the architect or engineer frequently acts as agent for the

owner during construction phase (Bryan S. Shapiro, 1994).

Under a conventional contract, the owner employs plans and specifications by way of

a competitive bidding format to obtain tender bid and to select the successful

contractor. This means that the owner warrants the sufficiency of the plans (full

disclosure of information), and assumes any liability for defects n the plans and

specifications that he provides to the contractor. Conversely, the contractor is


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responsible for defective construction and workmanship, but has no liability for

design defects (Bryan S. Shapiro, 1994).

The typical construction contract approach leaves a big hole between the design

professional and the contractor. These two parties are not linked by contract: they do

not owe any contractual duties each other, although recent jurisprudence suggests that

in certain circumstances, the design professional may indeed owe a legal duty in tort

to a bidding contractor. Also, their bonding and insurance requirements are arranged

independently. Legally, in this typical construction approach, the design professional

and the contractor occupy positions that are on the opposite side of the table (Bryan

S. Shapiro, 1994).

Advantages

The traditional method is a known quantity to owners, designers and constructors. For

many years, the mode of delivery was the predominant one for the construction in the

United States. The procedures and contractual rules of conduct have been worked out

and are well understood. Many professionals prefer this well-d4efined relationship,

which reduces their level of risk because it reduces uncertainty. Under the right

circumstance, this means that a project is more likely to proceed smoothly from

beginning to end (Frederick E. Gould & Nancy E. Joyce, 2003).The mood also

contains considerable contractual protection for the owner. The allocation of risk for

construction performance rests almost completely on the contractor and

subcontractors. The owner is insulated from many of the risks of cost overruns, such

as labor inefficiencies, nonperforming subs, inflation and other vagaries of the larger

economic picture. In most instances, the owner knows the final cost at the beginning

of construction, and the risks of cost overruns are borne by the contractor. However,

the risk of cost increases depends to large extent on the accuracy and completeness of

the contract documents. If they are unclear or not well done, the changes that must

ensue can raise the owners costs considerably (Frederick E. Gould & Nancy E.

Joyce, 2003).


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48

Additionally, the traditional method provides the owner with all the benefits of open

market competition. The open bidding procedure, in whi

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TP India Oil & Gas - Report Final_Corrected

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