Contracting Economics of Large Engineering and Construction Projects

Abstract

Large Engineering and Construction Projects (LECPs) form an important area of economic activity, covering a range of different artefacts. These projects have in common that they are massive undertakings, spanning long time periods and they involve large capital investments. Uncertainty and risk are the ruling paradigms. In the oil, gas and petrochemical industry, Engineering Contractors (ECs) play a key role in the development and implementation of the LECPs for processing facilities. The contract between owner and EC formalises their relationship, specifying the obligations and liabilities of the parties as well as the allocation of risk. The contracting process (covering the entire project life-cycle) comprises an important governance mechanism on LECPs. An experience-based theoretical framework of contracting for LECPs is developed by analysing and modelling contracting strategies and tactics and validation through normalised data. The research considers: 1. Contracting and market conditions; 2. Competitive lump sum bidding; 3. Reciprocal dependency between owner and EC; 4. Relational risk in cooperative contracting; 5. Earned value and cost phasing; and 6. Contract types and performance. The findings provide guidelines for effective contracting (efficiently with the ability to adapt to changing circumstances), facilitating the development and execution of LECPS faster and at lower cost than with traditional approaches.