TP India Oil & Gas - Report Final_Corrected
-
Upload
vikas-khanna -
Category
Documents
-
view
220 -
download
0
Transcript of TP India Oil & Gas - Report Final_Corrected
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
1/105
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
2/105
EPC Market StudyTPIL Strategic Planning Confidential
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
3/105
EPC Market StudyTPIL Strategic Planning Confidential
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.
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
4/105
EPC Market StudyTPIL Strategic Planning Confidential
.
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.
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
5/105
EPC Market StudyTPIL Strategic Planning Confidential
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
6/105
EPC Market StudyTPIL Strategic Planning Confidential
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
7/105
EPC Market StudyTPIL Strategic Planning Confidential
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
8/105
EPC Market StudyTPIL Strategic Planning Confidential
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
9/105
EPC Market StudyTPIL Strategic Planning Confidential
1
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
10/105
EPC Market StudyTPIL Strategic Planning Confidential
2
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;
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
11/105
EPC Market StudyTPIL Strategic Planning Confidential
3
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
12/105
EPC Market StudyTPIL Strategic Planning Confidential
4
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
13/105
EPC Market StudyTPIL Strategic Planning Confidential
5
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
14/105
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
15/105
EPC Market StudyTPIL Strategic Planning Confidential
7
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:
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
16/105
EPC Market StudyTPIL Strategic Planning Confidential
8
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,
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
17/105
EPC Market StudyTPIL Strategic Planning Confidential
9
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.
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
18/105
EPC Market StudyTPIL Strategic Planning Confidential
10
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.
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
19/105
EPC Market StudyTPIL Strategic Planning Confidential
11
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.
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
20/105
EPC Market StudyTPIL Strategic Planning Confidential
12
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
21/105
EPC Market StudyTPIL Strategic Planning Confidential
13
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
22/105
EPC Market StudyTPIL Strategic Planning Confidential
14
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;
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
23/105
EPC Market StudyTPIL Strategic Planning Confidential
15
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,
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
24/105
EPC Market StudyTPIL Strategic Planning Confidential
16
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
25/105
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
26/105
EPC Market StudyTPIL Strategic Planning Confidential
18
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
27/105
EPC Market StudyTPIL Strategic Planning Confidential
19
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
28/105
EPC Market StudyTPIL Strategic Planning Confidential
20
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.
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
29/105
EPC Market StudyTPIL Strategic Planning Confidential
21
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.
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
30/105
EPC Market StudyTPIL Strategic Planning Confidential
22
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.
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
31/105
EPC Market StudyTPIL Strategic Planning Confidential
23
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.
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
32/105
EPC Market StudyTPIL Strategic Planning Confidential
24
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
33/105
EPC Market StudyTPIL Strategic Planning Confidential
25
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.
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
34/105
EPC Market StudyTPIL Strategic Planning Confidential
26
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)
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
35/105
EPC Market StudyTPIL Strategic Planning Confidential
27
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
36/105
EPC Market StudyTPIL Strategic Planning Confidential
28
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.
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
37/105
EPC Market StudyTPIL Strategic Planning Confidential
29
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
38/105
EPC Market StudyTPIL Strategic Planning Confidential
30
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
39/105
EPC Market StudyTPIL Strategic Planning Confidential
31
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.
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
40/105
EPC Market StudyTPIL Strategic Planning Confidential
32
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.
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
41/105
EPC Market StudyTPIL Strategic Planning Confidential
33
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
42/105
EPC Market StudyTPIL Strategic Planning Confidential
34
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
43/105
EPC Market StudyTPIL Strategic Planning Confidential
35
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
44/105
EPC Market StudyTPIL Strategic Planning Confidential
36
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.
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
45/105
EPC Market StudyTPIL Strategic Planning Confidential
37
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).
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
46/105
EPC Market StudyTPIL Strategic Planning Confidential
38
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.
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
47/105
EPC Market StudyTPIL Strategic Planning Confidential
39
(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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
48/105
EPC Market StudyTPIL Strategic Planning Confidential
40
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).
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
49/105
EPC Market StudyTPIL Strategic Planning Confidential
41
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
50/105
EPC Market StudyTPIL Strategic Planning Confidential
42
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
51/105
EPC Market StudyTPIL Strategic Planning Confidential
43
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
52/105
EPC Market StudyTPIL Strategic Planning Confidential
44
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
53/105
EPC Market StudyTPIL Strategic Planning Confidential
45
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
54/105
EPC Market StudyTPIL Strategic Planning Confidential
46
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
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
55/105
EPC Market StudyTPIL Strategic Planning Confidential
47
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).
-
7/30/2019 TP India Oil & Gas - Report Final_Corrected
56/105
EPC Market StudyTPIL Strategic Planning Confidential
48
Additionally, the traditional method provides the owner with all the benefits of open
market competition. The open bidding procedure, in whi