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Offshore Industry Contracting: Good Guidelines Overlooked

The offshore North Sea energy business constantly evolves, and has changed beyond recognition since my first job as a project engineer in the mid-1980’s. Many technological developments are highly visible, but the agreements created to deliver them have arguably moved backwards and do not unswervingly improve delivery objectives. The result has been cost inflation which, in these leaner times, merit close scrutiny as a way to scythe huge sums from development and operational costs. Such changes though will take courage at the highest level to challenge and change some protected interests and established practises.

The Procurement Service
The procurement process between client company and contractor – both administrative and legal – has become layered with such complexity that it has come to be renamed a strategy in the name of cost saving and quality improvement. Those who make their living from procurement will offer many anecdotes and perhaps some figures, to justify the need to invest in their services, but there is no dispassionate and impartial jury making any quantitative assessment on whether these aims have been fulfilled.

Through the last few decades, many administrative segments of the procurement business have prospered such as supplier portals and benchmarking services, along with law firms who will argue for their favourite contract term details. Each role is important, but in some cases has taken on an attitude of divine command rather than team contributor. The engineers and business deliverers who are actually to deliver the intended work have become side-lined, even deliberately excluded, from the activity, and the business has had to add costly layers of bureaucratic administration. Overhead costs have grown in the name of such compliance.

Contract Terms
In 2002 an oil major commissioned a study of the contracting environment. IMCA, the trade association of the offshore, marine & underwater engineering companies, used this as a basis for identifying the industry needs for the future. That study concluded that there was an inequitable balance of risk and reward for contractors, and that this situation was unsustainable. That view led IMCA to consult upon and devise some guiding principles in 2005 for contracting terms (updated 2014), expressed through the disarmingly appropriate acronym “FAIR”. These were not standard terms to be quoted verbatim like a standard form contract, but merely the principles which ought to shape such contract clauses. Let me make it clear that I have no association with IMCA or, so far as I know, with any of its constituent contributors, but I do have a past historical knowledge of their business area.

It is unclear how much buy-in there was amongst the IMCA group of contractor’s clients at tat time, but comparing then with now, the best that can be said is that commercially the situation has not improved. Instead, what have become boilerplate requirements and processes whose added value has long been forgotten, are now added automatically and have inflated process costs. These I will call “implicitly introduced waste”, much of which has mushroomed as the pursuit of laudable risk reduction aims such as personnel safety, spread to commercial risk reduction, fostering and feeding a climate of risk paranoia out of all proportion to operational risk.

Many clients came to place risk onto a contractor “because we can” (words quoted directly from a lawyer at a major infrastructure provider), with no interest or thought of whether it is appropriate. This is fundamentally the wrong attitude. There is no merit for the procurement professional in being able to say after a contractor fails to deliver, that this was a good outcome because “it wasn’t our risk”. The additional management costs alone – never mind the delivery schedule impact and direct contractor replacement cost –and ultimately replacing a contractor, far exceeds the saving said to be made and claimed at contract award to be a great success.

Implicitly Introduced Waste
There are many areas where implicitly introduced waste can be deleted if an economical common-sense approach is adopted instead of contrived processes. The multitude of procurement justifications now demanded, allegedly to prove impartial decision making, is only one area that is ripe for scrutiny. The shaping of contract requirements – who accepts what risks – is another. Basing a draft contract on the fulfilment of guidelines, such as those of IMCA, offers considerable scope to eliminate unnecessary detail and consequent cost. The changes needed would be to both contract structure and its detail.

This is not a call to do away with explicit contracts, but instead to write contract requirements and terms in a way that both client and contractor recognise to be appropriate and equitable, doing away with excessively risk averse structure or provisions.

Looking across other construction sectors, particularly building and utilities, similar trends of excessive client demands are observable. As examples, two prime subjects that have dominated client demands and contractor responses for some time are overall liability caps and insurance coverage.

It is quite staggering how some negotiators arbitrarily decide upon the overall cap on liabilities as a proportion of Contract Value. Such decisions, often attached to eye-watering sums of money at risk, are invariably arrived at through a custom-and-practise approach, with no consideration given to the work activities involved or their risks.

Similarly, the great strides made by the offshore industry through the Mutual Hold Harmless approach, promoted by LOGIC and widely adopted, have been gradually eroded and undermined as newer contract draftsmen, unfamiliar with their history, have introduced workarounds such as insurance exclusions.

Achievable Cost Savings
Cost has been inexorably added into the delivery system by these present day procurement strategies and processes. Inappropriately framed or over-demanding contract ITT terms are only one such source.

Major cost savings can be realised if these are simplified, and taken back to equitable and realistic instead of unnecessarily demanding requirements. Current standard tendering activities must be viewed much more objectively with a common-sense approach if implicitly introduced waste is to be removed from overall development costs.

This is only a part of the need for fundamental change; the attitudes of the people involved on all sides, and at all levels of business, is also crucial, but that is an entirely different – bigger – subject for discussion and change.

Finally, if such savings are to be achieved, it is clear that all sides must play their part; the client removing unrealistic needs instead of extreme risk aversion, and the contractor removing what would then be unwarranted risk cost provisions in similar measure.

Duncan's picture
Duncan Mather trained as an engineer before re-training as a solicitor. He is the founder of Oceaness Ltd