As I will be participating in a panel discussion on Contracting for Success on Complex Projects at next week’s IACCM Australian conference , I thought it would be useful to reflect on my own recent complex project experiences in Queensland.
Alliance Contracts
When I arrived in Brisbane in 2007 the resources boom was in full swing and the government was eagerly splashing royalty cash on big ticket infrastructure projects (oh how times have changed!). The State was also in the grip of a once in a century drought with dam levels at record lows. Urgent solutions were required to avoid major population centres running out of water.
A desalination plant was commissioned along with a new bulk water pipe network to link supply sources with areas in need. With time being imperative, the government turned to the relatively new concept of Alliance contracts as the preferred procurement model.
Under an Alliance contract, the government works collaboratively with the private sector to deliver the project. Typically, following a short preliminary non-cost selection process, an Alliance will be formed that includes a main contractor, designer and the project owner working as a fully integrated team. The Alliance will develop a Target Cost Estimate for the works which is then verified by a third party and if accepted by the project owner the Alliance proceeds to deliver the work on an incentivised cost reimbursable basis. Project delivery risks are managed on a best for project basis and the team operates under a strict no blame culture.
The vast majority of these projects were completed on time and for less that the Target Cost Estimate with the participants sharing the savings. The general public smelt a rat and with a down turn in the economy, Alliances rapidly fell out of favour as a delivery model for the reduced number of major capital projects now being undertaken as they were perceived to not deliver value for money.
Coal Seam Gas Projects
The next wave of major projects came with the development of the coal seam gas industry in Central Queensland. In an enormous example of corporate hubris, that many of the gas majors must now be regretting, there was a mad rush to be the first to ship LNG out of Gladstone. The three main players (GLNG, APLNG & QGC) all adopted differing procurement strategies, particularly in respect of upstream development. GLNG let the work on an Engineer, Procure and Contract Manage (EPCM) basis to Fluor Corporation whereas APLNG and QGC took a more hands on approach of letting design and construction packages directly.
In all cases the projects finished significantly over time and over budget. Interestingly, GLNG has now commenced court proceedings against Fluor for recovery of $1.5B in costs which it claims were not entitled to have been paid under the EPCM agreement
Is there anything that can be learnt from these CSG projects beyond an affirmation of the tortoise and the hare fable (The tortoise being Arrow energy)?
Frank Observations
In a recent interview for Energy Voice Magazine, Martin Houston who was the COO of British Gas (50% partner in QGC) at the time of the development made some very frank observations:
Mr Houston criticized the over-engineering trend seen in the industry.
“So you would take a 25-year-old engineer and say you are in charge of the standard of door handles,” he said.
“My God he will make sure you have the best door handles. And if you want to build something with different door handles, no dice. Because he owns that standard. Aluminium? Forget it, only gold. Pure gold. 24K by the way. Not the cheap stuff.
“There was this notion of ‘I think I can do it better’.
“In Queensland we added $800million of self-imposed standards that did not change the price of the finished product. The other thing we did was we recruited an army of people.”
That level of recruitment created a culture of “man-to-man” marking, according to Mr Houston.
“If you’re a young engineer and you’re man for man marking on the project team what are you going to do?” he said.
“You’re going to find something to do. They’ll start saying things like ‘I’m not sure about the fire quality of that door. I think we’re going to need a slightly thicker door. I know that’s the standard design frame and off the shelf, but we’re going to need that an inch wider’.
“The whole thing becomes self-serving. Often it’s hidden and cloaked in safety as if you don’t adhere to this you’re somehow in breach of the safety mantra and ethos.”
What’s the Solution?
So, given the recent examples above, what is the secret to contracting for success on complex projects?
Join me in Melbourne next week to find out!