In different subsea oil and gas projects developments, the award of large contracts for a variety of works is undertaken. Nevertheless, the overall strategy for distributing these contracts to different contractors is the main issue regarding to contracting strategy.
The recent researches on the field of contract strategies establish that the world is growing very fast technologically thus provoke the need for further exploration for sources of energy especially in subsea oil and gas industry. Furthermore, a profound increase in the projects complexity, increase in projects sizes as well as the intensified international engagements in related issues characterize oil and gas projects in the present world (Loots & Charrett, 2009, p.
56). Although these projects are based in the sea, it is argued by different scholars that construction processes have numerous groups of individuals and companies who get involved either as suppliers, buyers or as the real builders. To maintain and ensure ethical relationships among the various stakeholders contracts are formed.
A contract is a legal term that is either written or spoken as an agreement between two or more parties for the purpose of the delivery of particular services in return for money or any other valuable asset (Blum, 2007, p. 88). In projects related to subsea oil and gas engineering, the process and the character of contracting and presentation of projects contracts is of great significance for the future course of the project and as well for the general success of the project. As far as subsea oil and gas industry is concerned, contracts are the critical tolls for the allocation of tasks, risks and responsibilities( Rossman, & Moskin, 2013, p.78) .
Most importantly, contracting strategies in the above discussed industry takes into account the division of responsibilities within the project cycle, the desired allocation of risks, splitting of engaged parties and services among the involved groups as well as taking into account the interface and the market situation. Realistic selection of contracting strategies is the foundation of realization of goals and objectives of such projects. According to Blum (2007), it is of importance for involved stakeholders in such projects to have the awareness and knowledge about the particular characteristics of probable contracting strategies. Contracting strategies refer to the strategies in all stages of a project that establish a level of integration in design, the actual construction and ongoing maintenance in a project and gives support to the project in form of risk delivery, risk allocation and incentivisation.
The Rationale of the Research
Considering the increased exploration and initialization of subsea oil and gas exploration and extraction projects, it is of importance to acknowledge the significance of instigating effective and realistic contracting strategies, as they are key to the success of each and every projects. For this reason, it is important to bring into light different contract strategies applied in the context of subsea oil and gas industry as well as comparing the major two contracting strategies; that is cost reimbursable contract strategy and lump sum contract strategy by discussing, exploring and analyzing their impacts in subsea oil and gas engineering. It is in this respect that the research that will follow will go even deep to thrash out their advantages as well as the shortcomings of the two contracting strategies with respect to various literatures in the specific field.
As many comprehend, there has been very little in terms of research concerning the two contracting strategies especially in the subsea oil and gas sector. Although few study this issue, many companies are investing in the industry probably ending up adopting one or several contracting strategies. It is therefore a major issue when the necessary research that can guide these companies in selecting the best approaches is unavailable. The research will look into different contract strategies but will major in exploring cost reimbursable contract strategy and lump sum contract strategy in all aspects available.
The aim of this research will be to study contract strategies used in oil and gas industry and conclude in comparing and evaluating the impact on a project by applying cost reimbursable contract strategy and lump sum contract strategy. This will include the way they are used in the subsea oil and Gas Industries as well as establishing the consideration made before choosing them for a particular project. In addition, the research will provide insight in various concept of the two contracting strategies besides going deep to unclothe various aspects of the strategies as used in the subsea oil and gas industries. The research will also explore, discus and determine the role of the two contract strategies in project management by comparing and evaluating their impacts. Furthermore, the research will explore all the dimensions and the paybacks of applying cost reimbursable contract strategy and lump sum contract strategy.
Finally, the research will materialize in identifying the benefits and disadvantages of the two quoted types of contract strategies alongside comparing between both contract strategies to determine the best depending on how complex a project is.
The importance of the study
On the event of the completion of this planned research, it is anticipated that various stakeholders in subsea gas and oil industry will be provided with adequate and vital information about contracting strategies in the field, their impacts on general project performance, their advantage and disadvantages as well being equipped with information on the roles of various contracting strategies more so cost plus strategy and Lump sum strategy.
To these ends, the study calls on the following research questions:
Ø What are the various types of contracting strategies used in the subsea oil and gas industry?
Ø What are the considerations made before choosing a contract strategy?
Ø Do you prefer the adoption of cost reimbursable contract strategy and lump sum contract strategy to other contract strategies? Why? Why not?
Ø Why is the implementation of cost reimbursable contract strategy and lump sum contract strategy in subsea oil and gas projects important?
Ø What are the considerations made before choosing the contracting strategy?
Ø What are the roles of cost reimbursement and lump sum contracting strategies in the subsea oil and gas industry?
Ø What are the advantages and disadvantages of the discussed contracting strategies?
The empirical part of the research examines the theoretical framework of the perspective of the two contracting strategies, their effectiveness, their roles as well as the benefits and shortcomings that accrue as a result of their espousal.
During the initial stages of any project, the main issue that faces the project management stakeholders is to make informed decisions on which contract strategies to adopt that best suits the project for successful achievement of the projects goals and objectives (Inkpen & Moffett, 2011, p. 187).
According to Babusiaux (2007), contract strategy refers to the process or the endeavor to select an organizational or projects contractual policy that is required for the execution of specific projects within the major venture. Most importantly, a proper and effective contract strategy for a project especially the ones related to subsea oil and gas industry involves making of five critical and basic decisions that include; setting of the projects objectives and constraints and making of informed decisions on the selection of proper project delivery method. In addition deciding on selection of proper contract type as well as adopting realistic contract administrative mechanisms serves as a basis for triumphant selection of contracting strategies.
Nevertheless, in the subsea oil and gas engineering projects, a contract type is selected by the managers of the project through the advice of the projects engineers and his or her legal advisor. However, the selection in this case must meet the objectives and the goals of the project and be able to take into account the constraints that relate to the project. The objectives are in terms of the time objectives, functional performance, transfer of technology, use of local materials and resources, allocation and payment of risks as well as cost objectives among others. This lead to a reflective increase in the projects complexity, increase in projects sizes as well as the intensified international engagements.
Essentially, there are different contracting strategies in subsea oil and gas industry. The contracting strategies include; Engineering Procurement and Construction (EPC) contracting strategy, Engineering Procurement and Construction with Long Lead Items (EPC with LLIs), Engineering, Procurement and Construction Management strategy (EPCM), the cost reimbursable contract strategy as well as the lump sum contract strategy. This research will only major in exploring and establishing the all the details behind cost reimbursable contract strategy and lump sum contract strategy (Tordo et al., 2013, p. 133).
As a matter of fact, the selection of a specific contracting strategy in the subsea oil and gas industry depends on the level of risk an owner of a project dares to undertake and in most cases it reflects the desired peril, the goal and the aspirations of the owner. For that reason, the specific features and factors of the particular project have to be handled with an in-depth analysis and compared to the characteristics of the respective strategy in a manner that provides a foundation for deciding and choosing on the most appropriate solution (Babusiaux, 2007, p. 116).
As all this contracting strategies are based on the procurement process, it is basically known that supply chain in the industry of oil and gas has not been taken seriously for quite some time and this has resulted to significant drawbacks . Nevertheless, technological changes lead to the development of core values that aim only at fast exploration with consequent high production of oil and gas products.
According to Piskarev & Shkatov (2012) before selecting a contracting strategy to implement, owners of subsea oil and gas projects should ensure that, they consider basic attributes that determine which effective strategy works best in particular environments. To maximize on this, the key factors to consider in such cases include; the type, the size and the location of the subsea industry (Bower, 2003, p. 16). Additionally, as mentioned in the overview, decisions should consider risk allocations, the projects interface, the time constraints and the market structure among many other factors.
The Cost reimbursement contract strategy
In major projects developments, cost reimbursement strategy is the mostly applied over all the other contract strategies especially in the construction phase (Uher, & Davenport, 2009, p.45). This type of contract is also referred to as cost-plus contract strategy. Most importantly, cost reimbursement strategy is majors in compensating the contractor for all the costs it incurs in addition to some extra charge (Seshadri, 2005, p. 277).
As per the strategy, all the costs incurred in the projects operations in terms of labor, the costs of equipments and materials as well as the overhead charges which are required in the project in the management of all the involved activities are reimbursable. According to Seshadri (2005), the extra charges in the endeavors of the contract strategy together with reimbursable costs are treated with a lot of concern as they are part of the contractors expertise. Under the cost reimbursement strategy, there are three types of contracts which include; the cost plus percentage, the cost plus fixed fee and cost plus fixed fee plus incentive contracts.
In normal cases, the cost reimbursement contracts are typically adopted in the ill-defined rapidly monitored projects where the scope and the specifications of the project are later developed in the course of the project in accordance with the success as well as the loopholes in the projects developments.
According to (Pryke, 2009, p. 113), the strategy is also adopted in the projects where the management as well as the contractor expects rapid changes in its course. It is the type of contract strategy which allows for the effecting of changes as the project progresses by studying the effectiveness of every approach adopted. However, scholars agree that this contracting strategy implies massive operational costs as well as huge scheduling risks. This is because the awarded contractors have no encouragement to be well-organized, competent and economical as they according to the strategy, none of the projects risks lies on their hands and at the same they are entitled with the mandate to charge all reasonable costs (Pryke, 2009, p. 113 ).
Furthermore, the operating company is left with all the responsibility to assume the foreseeable and the unforeseeable risks although they have little or no power to overtly control the outcomes of the project because almost all the operations are undertaken by a third party. In addition, the contract strategy is to a greater extent expensive for the operating company as it has to incur additional costs in the form of purchases for additional projects resources for controlling and monitoring its progress (Twort & Rees, 2004, p.40 ).
Essentially, the cost reimbursement contract strategy compels its own costs and schedule penalties that greatly overshadow the benefits of quick tracking in relation to the aspects of contractual complexity, the coordination of parallel activities as well as the number of interfaces to be managed in the project cycle. Nevertheless, it is almost impossible for the operating company to calculate and compile the contractor’s costs before the work is terminated. Most specifically, in the normal world of contracts, reimbursable contracts are always in accordance to the moral first best situation whereby the principle is mandated to observe the actions of an agent and probably order him or her to change and adopt an effective action. |As stated earlier in the paper, cost reimbursement contract strategy operates in three types as discussed below:
According to Salamon & Elliott (2002), this type of cost reimbursement contract strategy, the projects owner reimburses the service provider or the contractor for all the costs that are attached to the projects scope of operation. The operating company in this case carries all the projects costs risks alone. Most importantly, in this type of contract, performance contracts are the ones applied to entice the contractor finish the work in the set time and according to the projects schedule. The chief driver in the adoption of this type of contract is the time and the projects schedule. Moreover, the cost of contract in this case remains unknown until the project is completed (Salamon & Elliott,2002, p. 295). However, this type of cost reimbursement contract strategy works best with the availability of a large operating company’s team to verify and mange the contract operations.
Cost Plus Fixed Fee(CPFF)
Cost plus fixed fee is the type of contract in which there is no incentive to enable reduction of the fixed costs. In this one the overall costs of the projects operation remains high. In addition, the owner pays the contractor a fixed amount. Consequently, the contractors profit does not vary according to the varying aspects of the actual costs of effecting the work. It is a very lucrative type of contract to the contractors as they are subject to abuse (Salamon & Elliott,2002, p. 310).
Fixed Price Incentive Cost
In this type of cost reimbursement strategy, the contract is characterized by the contractors assuming full responsibility over amounts of charges that overrun or underfund. In most cases, it increases the chances of a contractor to benefit from the contract (Salamon & Elliott,2002, p. 313). Cost reimbursement contracts in the subsea oil and gas industries are used to building and construction on research projects as well as being used in many other endeavors where different types of necessary materials are to be purchased.
As per the general terms of the cost plus contract strategy, its terms state that the contractor has to be compensated for the uncertain actual costs of the project at the time of developing the contract. Typically, it is an effective strategy as it motivates the actual workers with lots of motivation in form of additional funds in order to work harder to bring in more profits. It is one of the most beneficial type of a contract. Furthermore, cost plus strategy offer a lot of flexibility as they provide contractors with incentives to minimize the probable risks as well as offering bonus amounts of funds that assist in increasing the chances of assuming extra risks.
Cost plus contract strategies have numerous realizable benefits to the owners of the projects and the contractors. For instance, the contracts strategies tend to result tend to result to projects of a high quality because the involved contractors do not have to save funds on materials and labor maintenances. In addition, the contractors is able to reduce the chances of the project for overbidding because the contractor does not need to avoid going above the budget estimates (Uhlig, 2012, p. 76). The contract strategy is also beneficial to contractors in that they can be able to take on unfinished design of a project as he or she does not have to fear the risks because of the reduced risks.
However, scholars agree that cost reimbursement contracts strategies have their own shortcomings. For instance, if a project has a strict budget, cost reimbursement contracts are poor as they have much greater uncertainties as far as financial terms are concerned. Furthermore, with the use of the contract strategy, it is impossible to estimate the actual cost of the entire operation.
Cost reimbursement contract strategies are also criticized as a result of their inability to save as the strategy may lead to overspendings in order to win the largest fee possible. To enhance efficiency, reduce overspending as well as reducing wastages in this type of contracts strategy, the management team in the project in subsea oil and gas industries should ensure that it provides clearly and well-established commonly expected expenses for reimbursement. In this case, they include; the payroll taxes, salaries and wages, the subcontractors fees, the maintenance costs of the projects operations as well as the equipment rentals. In addition, the management team can ensure that it does not cover the issues of negligence by the contractors’ team as well as the contractors themselves. This will help enhance the functioning of the cost reimbursement contract strategies in the subsea oil and gas projects (Uhlig, 2012, p. 76).
Lump sum contract strategy
Contrary to the cost reimbursement strategy, Lump sum contract strategy allows the projects owner to know the total price of the project before the completion of the operation.
Under this strategy, the contractor bids with a price that covers all the expenses of the work, the costs of the equipments as well as the services to be provided with the use of the technical specification package and the detailed plans produced by the operating company (Twort & Rees, 2004, p.40 ). In this case, the contractor is paid a fixed amount of funds of which he or she covers the entire risks in the project because the risks are considered in build in the package. Essentially, the contractors during bidding process ensure that they charge extra amounts on top of the total costs to cover up the expenses of managing the risks (Lester, 2014, p. 167).
For instance, the latest information from one of the managers of a gas and oil company proves that contractors charge over 80% of the total costs as the charges for managing the projects risks. Most importantly, the extra amounts are charged because regardless of the problems faced by the contractors in the course of the projects implementation, they have the general responsibility to accomplish the deal.
The major advantage of this contract strategy is that it clearly advocates responsibility to the major contractor because they assume full responsibilities over the risks and have the power to control the projects implementation endeavors, minimizing the interfaces as well as working with more overlaps between engineering and construction phases. With this, the contractor increase efficiency probably increasing the margins. Furthermore, this contracting strategy in the subsea oil and gas industry reduces the expended effort by the operating management team of the project in managing the contract work by allowing for lower owner costs.
However, the contract strategy has its own limitations (Twort & Rees, 2004, p.40 ). For instance, for the actual quotation of real projects cost, technical specification and the scope for the project must be in clear definition prior to the agreement as it will serve a vital role in the general projects operation (Clough, Sears & Sears, 2008, p. 134). Another limitation of the lump sum contracting strategy is that in case the work plan provided by the owner is not comprehensive, there is a possibility of the contractor to claim compensation for work done outside the projects schedule. In oil and gas projects, this in the long-run may lead to potential conflicts of interest as well as dispute over the changes in the monetary perspective.
In the context of this research, research methods are the measures to be taken to present all the activities and procedures to be carried out in the process of establishing the Contract strategies applied in subsea oil and gas industry as well as the techniques to be used in comparing the major two contract strategies; that is cost plus and Lump sum contract strategies. For the planned research the methodology will be adapted from Saunders et all., based on research aim and methodology requirements. This will be a critical endeavor to ensure that the methodology helps in tackling the research questions as well as helping the research in achieving its aim.
Research Design (onion)
In the perspective of exploring contract strategies in the subsea oil and gas industry research onion design will be the best method. Research methodology is a study problem of the research in the context of any study adopted and aims to put into place in the research process with specific objectives in mind aimed at achieving the best results. This is a systematic and a significant investigate which the researcher aims at putting into the identified subject of the study This starts with conception whereby the researcher will clearly explain and vividly describe the steps that they will adopt while working on the real research. Research methodology in this research will be viewed as the description, explanation and justification of various methods of conducting the real research (Mark Saunders, 2006, p. 78). The concept of research onion design (Mark Saunders, 2006, p. 187) will be used to understand the research process used in this study.
The research philosophy to be incorporated is realism whereby mostly determined by the fact that there is a generally argument perceived by almost all management teams in the subsea oil and gas projects selection of contracting strategies is a key success factor. Realism in this case is based on the reality that cannot be changed. According Scholars, research philosophy is based on researcher’s personal values, which are later used in digging deep about human subjects and their perceptions regarding the study subject.
The study will adopt a descriptive and qualitative survey structure. The qualitative research approach here supports positivism whereby although there is no data to be compared as part of quantitative research, the fundamental construct of the research is based on a reality that cannot be changed. Qualitative research will also be adopted since it investigates the social constructivist paradigm and relies on the socially constructed reality nature. It aims to fundamentally record, analyze as well as determine the meaning and significance brand loyalty. The study will utilize survey strategy based on sample population views, which later will be used to make general conclusion. The research choice to be adopted in this study is mono method involving qualitative data collection technique and other data collection and analysis methods
The method for data collection to be incorporated in the research will be the use of secondary sources of data as well as the incorporation personal experience to the issues of related to contract strategies , their impacts, their benefits and limitations in the subsea oil and gas context. In addition, case studies and the use of survey methods such as questionnaires for interrogating project managers and diverse contractors as well as their employees will be employed. This will ensure collection of important information from the available studies and building a strong foundation for making conclusions based on the study topic.
Data analysis refers to an endeavor that allows development of conclusions through evaluation of different results. This involves cleaning and organizing qualitative and quantitative data for evaluation, describing the data through the use of descriptive statistics as well as testing of the theories involved. In addition, in this research, general conclusions will be involved as most of the data will be from secondary sources and personal experience.
In order for this study to be reliable and acceptable, all issues related with research ethics will be addressed. These issues include, but not limited to addressing the privacy and confidentiality as well as the intellectual rights of the diverse scholars whose ideas will be utilized as the basis of developing the study. The participants will be required to fill a consent form prior to the start of the study. All ethical rules that are laid down in the consent are supposed to be followed to the latter.
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Cite this Subsea Oil and Gas Projects Developments
Subsea Oil and Gas Projects Developments. (2016, Apr 22). Retrieved from https://graduateway.com/subsea-oil-and-gas-projects-developments/