EPC companies call to step away from high-risk contract models

As LNG projects around the world become multi-billion tasks, engineering, procurement and construction (EPC) companies raise concerns about high-risk contracts.

Speaking during Gastech’s EPC Global Leaders’ Panel conference sessions titled 'How can New Collaboration Models Support Greater Agility and Lower Costs Across the Industry?’, major EPC contractors laid out hurdles for the development of the LNG industry as it has in the past.

Andrew Wood, CEO, Worley questioned whether commercial contract models have served the industry well. His answer was a strong no.

“Projects that we work on have grown in cost and complexity, while the contracts are high-risk, limited returns - there has been a mismatch,” he said, adding that the projects are many times the size of the companies that are being asked to execute them.

“It we go down the lump sum contact road, where all of the risk is outsources - that’s really just not practical. Contractors can’t control all those risk, which are outside the capability of those projects,” he said.

Wood said that 65 per cent of all contracts fail, wether it is on cost, schedule, or performance metrics that are set.

Nello Uccelletti, President Onshore Offshore, TechnipFMC agreed with the need for a change to commercial contract models.

“Everybody’s looking at reducing cost and have a reliable project in a challenging environment,” he said. Uccellitti said the company is working with the technology available to it and involve in partnerships to delivery successful projects.

“We need to work closely with everyone in the supply chain - the partners, suppliers, contractors that are key to cost structure and reliable execution. We don’t have to get everyone involved in the early stage but we need to identify the key people,” he said.

Worley’s Wood said the size of large LNG projects are on average is about $5-15 billion, while the average market capitalisation of top EPC companies is about $5 billion.

“Most contractors can’t take a single project with the penalties set for that project - that’s how we’re living in this industry. We need to re-think the way we do contracts and that requires a level of cooperation. There are other models - it doesn’t have to be all risk, fully reimbursable contacts. This is not a healthy environment for the industry,” Wood said.