Productivity Alberta

In an industry that typically uses cost-reimbursable contracting methods, is there room or appetite to use lump sum contracting? What barriers prevent this type of contract from gaining more acceptance, and what productivity gains could be realized?

Download a full copy of the report or keep reading for a quick summary of its findings.

The majority of major construction projects in the oil and gas industry in Western Canada are undertaken in a negotiated cost reimbursable contract. This type of contract is used on limited defined and fast tracked projects.

The main goal of this report is to study the potential for lump sum contracting and to answer the question whether lump sum contracting increase the efficiency and cost and schedule predictability of on major projects in the Western Canadian Oil and Gas sector. Specific objectives of this report are to:

• Determine why Lump Sum contracting has not been favoured.
• Determine the willingness of operating companies and contracting companies to employ Lump Sum contracting strategies.
• Examine the existing industry impressions of the influence of Lump Sum contracting on project outcome.
• Identify the barriers that have prevented the effective use of Lump Sum contracting.

To achieve the above goal and objectives, the researchers chose a two-staged approach beginning with semi-structured interviews and then a survey. The interviews were conducted with a total of 10 senior managers. Common themes and questions stemming from the semi-structured interviews were used to create an anonymous survey. The survey was sent to 30 different companies and administered via e-mail, directing participants to an online survey.

The research findings can be summarized as follows:

• Cost-reimbursable type of contract is the most used in the Alberta Oil and Gas sector.
• Owner’s representatives show more interest in lump sum contracting than engineering contractors.
• Cost certainty for the owner, better scope definition and a focused team on same target are some of the advantages that were identified by participants.
• Participants identified some disadvantages such as it is too risky resulting in larger risk premium, cannot fast track and owner must relinquish control of project planning and execution.
• 92% of engineering contractors and 46% of owners believe that lump sum will increase cost of project.

• Industry participants identified the following barriers to implementing lump sum contracting:

  1. Field labour costs/constrictive labour environment.
  2. Stability of weather difficult to predict, thereby making productivity difficult to predict.
  3. Local construction culture favours cost-reimbursable which leaves engineering companies that choose to take on Lump Sum, with little ability to control construction risk.
  4. Module size constraints due to limitations with existing transportation infrastructure and no access to major waterways (such as, large rivers and oceans) for shipping.
  5. Client late changes.
  6. Lack of scope definition.

• The majority of engineering contractors did not show interest in lump sum for FEED, while showed considerably more interest in using lump sum for detailed engineering phase. Engineering contractors are also less interested in a full EPC arrangement.

• The report concludes with a summary and discussion of the findings and recurring themes:

  1. The desire exists for cost certainty on part of the owner.
  2. The desire exists for more clearly defined project scopes than the industry in Western Canadian Oil and Gas is currently providing.
  3. The Alberta labour market has serious challenges involving availability of skilled labour and inability to predict productivity.
  4. Western Canadian Oil and gas has large risks which, in a Lump Sum contracting situation would be met with large risk premiums.
  5. Engineering companies believe the operating company desire for large amounts of involvement in project execution will lead to undesirable events in a Lump Sum contracting situation.
  6. The desire for Fast Tracking is seen as a barrier to Lump Sum contracting.
  7. The desire by the operating companies to transfer risk.

To apply Lump Sum contracting, Western Canadian operating companies must realize that this type of contract is only used where the plans and specifications are complete and the scope of work is well defined. The requirement to have detailed plans and specifications complete before bidding and construction can begin is the biggest obstacle facing the Oil and Gas industry in Western Canada. The flexibility of this contract form is very limited. Any deviation from the original plans and specifications to accommodate a change must be handled as a change order. This may lead to considerable arguments over the cost of scope changes and extras and may create adversarial relationship between the operating company and the contractor.

Download a copy of the report.

Learn more

Register for an upcoming workshop in either Calgary or Edmonton to learn more about the report and how lump sum contracting may affect Alberta industry. More information here.