The Australian energy and resources sector has been experiencing unprecedented growth. At the end of April 2011, 94 energy and resources projects were at an advanced stage of development. These projects had a combined capital expenditure of $173.5 billion, up 31% from the previous six months and despite the fact that during that same six months, 10 projects with an estimated capital cost of $2.8billion were completed in Australia.
As these figures suggest, new development is on the rise. New capital expenditure in the mining industry is estimated at $55.5 billion in 2010/11, which is 53% higher than the previous year.
The majority of these projects are in Western Australia and Queensland. With such significant and concentrated development taking place, it is important to identify contracting strategies that strike a balance between allowing project owners to achieve value for money and allowing contractors to grow and prosper.
Not quite the full circle
Project delivery in the Australian construction industry has undergone substantial transformation in the past decade. The new millennium has brought with it significant changes in the approach to project delivery. Relationship based delivery models such as alliancing became exceedingly popular and swept through the construction industry. Ten years later, with a new financial crisis in play, we have seen a shift away from alliancing models towards other forms of relationship contracting. However the construction industry has not gone so far as to revert to the fixed lump sum contract.
Where is the balance?
The range of project delivery models utilised in the resources industry extends from fixed lump sum contracts right through to alliancing. Along the spectrum are models such as EPC, EPCM, PM and ECI – a world of acronyms.
The April 2011 edition of On Site examined the difference between EPC contracting and EPCM contracting (Read our article 'Demystifying EPCM contracts – What's in an 'M'?'). The substantive difference being that the EPCM contractor does not perform construction work and does not usually take full responsibility for delivering the completed project by a particular time, and for a particular budget. An EPCM contractor can still be incentivised to achieve good outcomes. Both models are utilised in the resources sector of the construction industry.
Another model that is used frequently in the mining industry is project management (PM). Project management gives the project owner an ability to retain a high level of control over a project, whilst using a project management firm to provide support in the delivery of the project (for example by letting and managing the contracts).
Early Contractor Involvement (ECI) is also becoming more common in the resources sector. It combines the principles of alliancing and traditional contracting in an effort to build longer term successful relationships between the parties, and as such provides a degree of balance. ECI involves engaging a contractor during the early stages of a project to assist in developing the design, a detailed project plan and a risk adjusted price for the delivery phase. This first phase of the process is often done in a competitive environment to assist with ensuring value for money.
The delivery (or second) phase of the ECI model is often carried out under a more traditional contract (such as a D&C or construct only contract). However this second phase contract has the added benefit (for better project time and cost certainty) that the risk adjusted price and contract terms are not agreed until all project risks have been jointly assessed. Unlike alliances there is no assumption that the risk adjusted price will be a cost plus amount and no assumption that project risks and rewards will be shared.
What model, when?
As always, choosing the delivery model will depend on the project and the in-house capability of the project owner. If the owner has a well defined scope of work and significant in-house capability to manage contracts, then it may be appropriate for to let and manage a series of contracts towards the traditional end of the spectrum.
Conversely, if the owner needs assistance with defining the scope and the design and managing the construction work, then they may lean towards an EPCM model.
In many cases a project may fall somewhere in between. For example, the owner may have a well defined scope of work, but needs to bolster its management capability, in which case a project manager may be engaged to let and manage a series of various types of contracts.
There may also be instances where the project interests will be best served by using a combination of project delivery models. For example an EPCM contractor or project manager may be appointed in relation to the overall mine development or expansion, with the underlying contracts including construct only and design and construct, perhaps being preceded by an ECI process.
It is always important that in the very early stages of a project the project owner considers the full range of delivery models that are available and adopts a strategy that is compatible with the owner's objectives and market conditions.
This article is from our February 2012 edition of On Site.