The news is out! Crown Estate Scotland has awarded option agreements to 17 projects totalling almost 25GW in its ScotWind offshore wind lease auction. This is huge news. With the rapid growth of the wind power industry and the need to meet the goals proposed by global leaders at COP26, the race is on!
But how can professionals in the wind industry ensure those projects deliver energy security throughout their design life without compromising plant performance, safety, and reliability?
Now is the time for developers, OEMs and contractors to align their contracting strategies and commercial agreements with duty holder obligations set out in key legislation such as the Construction (Design and Management) Regulations 2015.
Failing to bring about front-end alignment often disaggregates project finance from project delivery. This increases projects costs, compromises project delivery and, ultimately, long-term asset performance.
In this blog, we examine the effect of contracting strategies on delivery risk and how to leverage legislation to systemically mitigate it. If you prefer to watch it instead, here is the video.
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Contractors play a significant role in project success and safety performance
In the midst of a contractor incident or accident, how many times have you heard the statement, ‘that’s a safety problem’? For us, one is too many.
Renewable companies spend significant resources:
- prequalifying contractors,
- developing and distributing detailed Employers HSE requirements to Tier 1 contractors,
- devising creative safety key performance indicators, and
- rolling out expensive safety programmes on capital intensive projects.
Despite these well-intentioned motives, it is almost impossible to link these classical initiatives to the systematic identification of failure potential and occupational injuries.
Common types of contracting strategies
Multi-contracting pervades the engineering construction marketplace. It involves the placement of multiple contracts being placed by a single client to several Tier 1 contractors. In renewable construction for example, Tier 1 contractors deliver specific work scopes of high value and typically include the civil contract, turbine supply contract (which may extend to servicing) and Balance of Plant Contract.
Multi-contracting is preferred as it reduces the high-cost margins associated with its EPC alternative, and it allows the client to carefully control costs and performance.
EPC contracts are often used when clients issue a functional specification to an Engineering Procurement and Construction contractor – also known as a design and build contractor.
This contracting method is often used when the client does not have the technical capacity or resources in-house to produce and manage the delivery of a detailed design or they wish to ringfence project risk.
When comparing multi-contract with EPC contract strategy, what is clear is that the EPC offers better commercial and PMO alignment by placing these with a single party.
In the case of a typical multi-contract strategy, these relationships are split. The commercial relationship lies between the Tier 1 contractor and the client – who maintains financial control; whilst construction work control is exercised by a different party.
In practice, this split in control often produces several project delivery challenges as it also forces a split in the Tier 1’s objectives. Their business imperative is also to manage the contract and their project cashflow and their delivery imperative is to satisfy the independent PMO. Theoretically, the Client and PMO should share common project delivery objectives – but for several reasons, many real-life cases have proven that this theory does not play out in practice – thereby creating goal conflict.
What effect do they have on risk?
So where does risk come from? Given that in large projects, it is often the lower-tier contractors who provide the construction resources, it is their employees who are exposed to risks arising from poorly planned work. If Tier 1 contractors are directing their management resources to fulfil the contract requirements fewer resources are dedicated to work planning and execution. Add to that picture the effect of poorly planned simultaneous activities and construction interfaces, the levels of risk increase exponentially.
Construction safety regulation in European countries have recognised this since 1992 and, therefore, require a strong co-ordination and co-operation on construction sites delivered through competent and capable main contractors.
Main contractors who can exercise both financial and project management control over other contractors have greater leverage to plan and control work activities. Remove their financial leverage and even their initiatives become subordinate to the client’s direction over a project.
Clients exercising control over the primary risk precursors such as project schedules, budgets, critical paths and cashflow unwittingly undermine the scheduling, work planning, work permitting, and other control systems implemented by the main contractor. The consequences of which are not only unsafe working arrangements but also poor overall project control.
Mitigation through alignment
Dual systems of control such as these can be avoided by adopting the right approach to your contract strategy. Multi-contract strategies work very well when commercial and project controls are aligned. The need for competent and experienced resources at Client level in a multi-contract environment should never be underestimated.
Clearly nominating a 3rd party responsible for project control and assigning clear project delivery obligations of other Tier 1 contractors to them in contract is another way of tackling this problem, however, it requires the Client not to step into established systems of control to maintain its integrity.
Points to remember
We covered quite a lot of ground, so here are the main takeaways summarised for you:
Contracting strategies create systems which directly influence risk
A multi-contract strategy often disaggregates control over finances and construction operations
Skilled commercial and technical resources are required at Client level to align financial and project control
EPC contracts, whilst more expensive, offer a singular point of control with competent resources
If adopting multi-contract strategy, it is advisable to assign project management and control obligations to the main contractor in contract and direct other Tier 1 contractors accordingly
Failing to design out goal conflict places significant demand on Client Reps who are unequipped to unravel and resolve dysfunctional and unsafe systems of work on the fly
To put all the topics discussed here into practice, check out our CPD UK approved Construction Safety Law and Practice – UK Perspective virtual programme.
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