Contract Strategies for Major Projects by Edward W. Merrow

Author:Edward W. Merrow [Merrow, Edward W.]
Language: eng
Format: epub
ISBN: 9781119902102
Publisher: Wiley
Published: 2022-11-28T00:00:00+00:00

Partnering/Long‐Term Alliances

Partnering refers to long‐term, multiproject relationships between an owner and a contractor. The relationships are often dubbed “alliances,” but the form is quite different from one‐off IPD/alliancing. This model of contracting involves signing a multiyear multiproject contract between an owner and a contractor, usually an EPC. The typical contract length is five years and is renewable by mutual consent. The contractor is usually involved in front‐end loading and carries on to do detailed engineering and construction. Some agreements guarantee the contractor a minimum level of work each year, but most do not.

The partnering form became popular for major industrial projects during the 1990s in the United States. At that time, there was an over‐supply of EPC contractors in the market, and most contractors were very hungry for work. When the industrial projects market started to accelerate after 2003, the approach was largely abandoned except for site‐based small project systems where it continues to be a staple. Our sample of major industrial projects from this century has no examples of partnering form projects.

When the contracting approach was in use during the 1990s, IPA conducted a series of studies trying to understand whether it was a superior form.15 Some examples were indeed spectacular performers. One large chemical company executed all of its projects in the United States and Europe with three partner EPC contractors in long‐term partner alliances. The owner maintained a strong engineering and projects organization that followed strong practices. Five‐year contracts were executed with the three partner contractors, and projects were allocated among the three based on expertise. A certain amount of competitive tension was maintained in the three‐contractor arrangement.

We also found that for every partnership like the previous one, there was one that produced poor project results. For example, another major chemical company had a long‐term relationship with a single contractor that produced projects that averaged more than 30 percent more than industry average cost while producing persistent underruns! That systematic over‐capitalization contributed to the demise of the company. The partnerships were a study in extreme contrasts; some brilliant project results were obtained, and some very poor project results were produced.

The differences in the two sets were clear. The strong partnerships had strong owner project organizations with a very strong focus on front‐end loading excellence. The partnerships producing poor project results had been used as a vehicle for downsizing and outsourcing engineering and project skills by the owners. It left the owners easy prey for contractors who overestimated projects, brought in underruns, and pocketed out‐sized profits. Second, the strong partnerships had very active relationship management on both sides. This was relational contracting at its best. Both owner and contractor understood that maintaining the partnership was going to take significant work. Third, the owners in successful partnerships always stayed in touch with the market. They would bid the occasional project out on an EPC‐LS basis to see if the partner EPCs were producing competitive results. When more than one partner contractor was involved, they would introduce a measure of competition between them, giving more work at the margin to the contractor performing better.

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