This article from the Division 1 of the ABA Forum on the Construction Industry Newsletter<\/strong> \u201cThe Dispute Resolver\u201d<\/strong> represents George T.<\/strong> McLaughlin\u2019s<\/strong> <\/a>\u201cView from the Field\u201d formed throughout the course of his 30+ year career in the industrial marketplace.[1]<\/a>\u00a0\u00a0 His article is broken into four parts.\u00a0 Part 1, below, describes the evolution of the delivery systems in large and complex industrial projects[2]<\/a>. The remaining sections, which we will publish in our next three newsletters, will discuss the legal implications (Part 2), impact on claims, disputes, and resolutions (Part 3), and prevention and corrective processes (Part 4).<\/p>\n Part 1 of 4 \u2013 Framing the Issue<\/span>\u00a0<\/span><\/strong><\/p>\n When the earth\u2019s tectonic plates shift, unless there is a resulting earthquake, it goes unnoticed.\u00a0 The movement is not perceptible.\u00a0 Nevertheless, major changes are occurring.\u00a0 In large and complex projects, with three to five (or longer) year schedules, industry shifts may not be perceptible.\u00a0 Nevertheless, major changes and related impacts may be in progress.\u00a0 Trends and changes in project execution and contracting strategies are similar.\u00a0 These trends, however gradual and unnoticed on a daily or monthly basis, cause major impacts on existing and future projects.\u00a0 While industry experts cite or drive these changes, the impact on the field may be delayed or go unrecognized by many, if not all stakeholders. \u00a0The business motivations driving the trends discussed below are varied and complex.\u00a0 Perhaps, the central theme is risk tolerance or management.\u00a0 The large worldwide prime\u00a0contractors (typically Engineer Procure Construct) migrated toward limiting major risks by limiting scope of work, insisting on reimbursable cost (as opposed to fixed price) commercial\u00a0\u00a0terms, or both. \u00a0Owners chose to limit or compartmentalize risks by breaking scope of work into smaller packages and seeking fixed price on these smaller packages.\u00a0 Construction Contractors retained a willingness to work on fixed price commercial terms; but, increased their tendency toward claims and disputes processes in order to manage their risks.\u00a0 Collectively, we see a myriad of fixed price scope of work packages being pieced together to form a complete project.\u00a0 Formerly, this mosaic of work scopes was under one Prime Contract.<\/p>\n Background<\/span><\/b><\/p>\n \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Definitions<\/i><\/b><\/p>\n The following simplified definitions will be used throughout this article:<\/p>\n Evolution in Delivery Systems<\/i><\/b><\/p>\n In mid-1900s, many Owners used a Contracting Strategy of awarding major prime contracts (Engineer, Procure, Construct or Turnkey) on a fixed price\/lump sum or reimbursable cost basis.\u00a0 This sort of contract limited the interfaces and liabilities to the Owner.\u00a0 Further, it provided an integrated project delivery approach wherein economies of time (shorter duration of the project) could be achieved.\u00a0 In late 1900s and early 2000s, many of the larger contractors (potential Prime Contractors) sought delivery methods that would reduce their liabilities and risk.\u00a0 Consequently, reimbursable cost prime contracts became more prevalent.\u00a0 While this tendency swings with economic conditions and the contractor workload; the overall trend for prime contracts is limited liability, reduced scope of work, and reimbursable cost commercial structures.<\/p>\n Similarly, there has been an evolution regarding the labor component of the construction work.\u00a0 In the mid-1900\u2019s, Prime Contractors were willing to direct hire some or all of the field labor.\u00a0 In the context of a reimbursable cost contract, the risk of the labor component is borne partially by the Owner.<\/p>\n Another evolution is that of a Prime Contractor\u2019s willingness to accept fixed price Engineer, Procure and Construct (EPC) contract.\u00a0 While such arrangements may still be available in weak (limited capital project work) economies, many Prime Contractors are unwilling to perform EPC work under fixed price arrangements.\u00a0 Reduced scope arrangements, such as Engineering and Procurement (EP) contracts, are still available in a fixed price format.<\/p>\n The overall philosophy concerning the formation of the contracting packages has evolved.\u00a0 The US system evolved based on performance, scope of work, plan and schedule origins.\u00a0 See Keith Pickavance, Guide to Good Practice in the Management of Time in Complex Projects (2011 Chichester: John Wiley & Sons,\u00a0 Ltd.).\u00a0 The UK system evolved based on quantities (Bill of Quantities or BOQ).\u00a0 Today, the two concepts have partially merged.\u00a0 Consequently, Execution Strategies and Contracting Strategies have hybrid philosophies.<\/p>\n Scholarly Influences and Trends <\/i><\/b><\/p>\n There have been many Influences on the current philosophies used for Execution Strategy and Contracting Strategies on large and complex projects.\u00a0 These influential organizations or persons include: Independent Project Analysis (IPA)<\/a>; Construction Industry Institute (CII)<\/a>; Project Management Institute (PMI<\/a>); Association for Advancement of Cost Engineers (AACE) International<\/a>; Harold Kerzner, PhD (Kerzner)<\/a>; Keith Pickavance<\/a>; and James O\u2019Brien (O’Brien and Plotnick)<\/a>.\u00a0 The IPA, founded by Edward Merrow, is \u201ca global research and consulting company devoted exclusively to the understanding of capital projects and capital project delivery organizations in the petroleum, chemicals, minerals, pharmaceutical, and power industries.\u201d Edward Merrow, Industrial Megaprojects<\/span><\/i><\/a>, (2011 Hoboken:\u00a0 John Wiley & Sons, Inc.)\u00a0 This book contains important and influential insight about industry trends and practices as well as emerging strategies.\u00a0 In sum, Mr. Morrow\u2019s fine work and the influence of IPA are key factors that currently drive Execution Strategy and Contracting Strategy.<\/p>\n Owners and Contractors Cultural Changes <\/i><\/b><\/p>\n While Owners and Contractors work closely over a prolonged basis, they are fundamentally different.\u00a0 One such difference is risk tolerance.\u00a0 Owners expect Contractors to take risks that could be catastrophic, given the balance sheet of a typical major contractor.\u00a0 Another difference is the mindset of the employees. Owner employees think in terms of an operational asset.\u00a0 Contractor personnel think in terms of plan, schedule, and cost performance of the overall work and contract.\u00a0 Contractor personnel do not make the transition to Owner organizations with ease.\u00a0 Likewise, to a lesser extent, Owner personnel do not make the transition to Contractor organizations.\u00a0 This observation is quickly evident when an Owner takes on the role of Construction Manager.<\/p>\n Generally, the following perspectives are relevant to each major organization discussed in this paper.<\/p>\n Evolution of disputes and their resolution <\/i><\/b><\/p>\n In the early days (1950s through 1970s) claims and litigation were rare and self-destructive for the Contractors.\u00a0 Owners that were in the market-place on an ongoing basis had a heavy advantage because there was a sincere concern that the business relationship with an Owner would end if a dispute occurred.\u00a0 Since then, loyalties have been replaced by a willingness to confront and an appetite for engaging in disputes.\u00a0 Management has shifted toward a more \u201clegal focused\u201d perspective.<\/p>\n Marketplace \/ Field Dynamics<\/span><\/b><\/p>\n \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Baseline<\/i><\/b><\/p>\n In project management, it is a fundamental practice that performance is measured against a baseline plan.\u00a0 Variances are recognized and managed pursuant to previously planned options or revisions to the plan.\u00a0 For the purpose of this discussion, the baseline is Lump Sum Engineering, Procurement and Construction (LS EPC) or Reimbursable Cost Engineering, Procurement and Construction (RC EPC).\u00a0 Figure 1<\/strong> Baseline<\/strong><\/a>\u00a0link provides a graphical picture or presentation of these strategies.<\/p>\n Figure-1-Baseline-EPC-LSTK<\/a><\/p>\n \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 This baseline strategy involves two parties, the Owner and the Prime Contractor. Liability is simple with the Owner exchanging compensation for work performed by the Prime Contractor to convert a business concept into an operational facility.\u00a0 The work is planned and managed by the Prime Contractor.\u00a0 Interfaces are almost exclusively internal to the Prime Contractor\u2019s organization or umbrella of responsibility.\u00a0 From engineering to construction, information and deliverables flow within the Prime Contractor\u2019s organization. The Owner involvement is limited.\u00a0 In essence, the Owner is paying the Prime Contractor to take major risks as specified or implied by the contract, applicable law, industry practices and other means.<\/p>\n Evidence of this strategy and can be seen in the marketplace.\u00a0 A few example promotions or projects include the BakerBotts services promotion<\/a>, Technip and Yamal LNG Project<\/a>, Technip contract in Saudi Arabia<\/a>, and the Siemens\u2019 Panda Temple II Power Project<\/a>.<\/p>\n \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Execution Strategy Variances<\/i><\/b><\/p>\n As discussed in the background above, marketplace and scholarly forces have impacted this traditional baseline strategy.\u00a0 These influences have been evolving over the past several decades (not a long time when one considers that megaprojects can have durations of 5-10 years).\u00a0 This influence has changed business processes, project delivery processes, work flow processes, strategies and many other aspects of capital project work.\u00a0 In his book, Industrial Megaprojects<\/span><\/i><\/strong><\/a>, Mr. Merrow makes it clear that so-called \u201cMixed Strategy\u201d for execution and contracting is now favored.\u00a0 This generally means:<\/p>\n This mixed strategy is a material departure from the longtime contracting strategy using reimbursable cost or lump sum Engineer Procure and Construct contracts.\u00a0 This change leads to more interfaces (relative to Owner) and a greater risk profile to the Owner. In reality, Mr. Merrow\u2019s \u201cmixed strategies\u201d are a series of possible arrangements.\u00a0 A general graphical or pictorial depiction of Mr. Merrow\u2019s \u201cmixed strategies\u201d is presented in Figure 2<\/a><\/strong>, Strategy Variations.<\/p>\n Figure-2-Strategy-Variations-PMT<\/a><\/p>\n Under this mixed strategy, work has been separated into smaller, more limited scopes.\u00a0 The roles and responsibilities have become similarly limited.\u00a0 Liabilities, once simple, are more fractured and heavily focused on the Owner organization.\u00a0 The role of the Owner is greatly expanded.\u00a0 The EP Contractor\u2019s role (Prime Contractor) and liability profile is limited.\u00a0 The role of the Construction Contractors (potentially numbering 25+ on a large and complex project) may remain unchanged.\u00a0 The contractual arrangement, management and liability are now focused on the Owner in its capacity as the Construction Manager.<\/p>\n While interface deliverables and activities may not have changed materially, these deliverables are now supplied by the Prime EP Contractor.\u00a0 Likely, the Construction Contractors\/Subcontractors have no contractual relationship with the Prime Contractor and, in turn, this Prime Contractor may have no motivation or benefit from working efficiently and effectively with the Construction Contractors\/Subcontractors.<\/p>\n Under this mixed model, the Owner has become the focus of liabilities and responsibilities.\u00a0 Further, the risk structure is quite different.\u00a0 This may be a new role for Owners, who typically are not prepared or adequately resourced to deal with this new challenge.\u00a0 Owners sometimes react by hiring a Construction Management firm or they decide to add staff and resources within their own Project Management Team.\u00a0 Both strategies have merits, detractions and risks.<\/p>\n The following projects are representative of this \u201cmixed contracting strategy\u201d:\u00a0 Foster Wheeler and Reliance Industries<\/a>; Aker Solutions<\/a>; Alstom contract on Yanbu 3 Project<\/a>; and KBR contract on Yanbu Export Refinery Project<\/a>.<\/p>\n As the industry departs from EPC contracts, there are intended and unintended consequences including the increase of the Owner\u2019s risk profile, the increased complexity and numerous interfaces, decrease in the Prime contractor\u2019s risk profile (except Lump Sum Contracts), and significant expansion of the Construction Contractor\u2019s risk profile.\u00a0 These consequences create new roles for the Owners, Prime Contractors, and Construction Contractors.<\/p>\n Owners<\/i><\/b>. Owners are much more involved in the project which is directly correlated to an increase in liability.\u00a0 Owners need to adapt to their new role by devoting resources to the following:<\/p>\n EP Prime Contractors <\/b>(previously EPC). Prime Contractors have largely adopted their new role of reduced scope and risk. Under reimbursable cost contracts, the incentive is to bill for services, not necessarily performance-based or motivated to optimize construction.\u00a0 Under lump sum contracting, the incentive is to minimize own costs, scope and risk, and optimize the engineering and procurement. Claims are less challenging and more easily defended by the Prime Contractor.<\/p>\n Construction Mangers<\/b> (previously EPC).\u00a0 Construction Managers (CM) are often independent contractors.\u00a0 They are paid a fee for their services.\u00a0 Risk is shared between the CM and Owner through the Construction Management agreement.<\/p>\n Construction Management by Owner Project Management Team (PMT)<\/b> (previously EPC).\u00a0 This organizational relationship results in major increases of responsibilities and liability to the Owner acting as a PMT.\u00a0 The staff requirements (number and skill-sets) are greatly increased (over and above the Owner requirements discussed previously).<\/p>\n Construction Contractors<\/b>. The Construction Contractors must work through multiple risks and interfaces under the mixed strategy approach.<\/p>\n <\/p>\n New Interface Challenges<\/i><\/b><\/p>\n As can be seen fromFigure-2-Strategy-Variations-PMT<\/a>, the number of interfaces that are external to individual Stakeholders has increased dramatically.<\/p>\n The interfaces between EP Prime Contractor and the Owner (and Owner Project Management Team) typically include: liabilities for performance; approvals of major documents and decisions; deliverables (in essence, all EP deliverables); Requests for Information (RFIs); as well as schedule dates, milestones, and updates.<\/p>\n The interfaces between EP Prime Contractor the Construction Contractors are extensive and potentially problematic.\u00a0 Under the baseline, these interfaces were internal to the Prime Contractor.\u00a0 Now, they are all external and come with an extensive amount of attendant management requirements and risks.\u00a0 The deliverables from the EP Prime Contractor to the Construction Contractors number in the thousands and include: bulk materials (e.g. pipe, fittings, cable, instruments, steel); equipment (e.g. mechanical, electrical); engineering deliverables (e.g. drawings, specifications, lists); Requests for Information (RFIs); delivery schedules; design completion (e.g. finalize and punch lists) and others.<\/p>\n The interfaces between CM and the Owner may require upgraded definition.\u00a0 They include the CM agreement, invoicing, reviews, and approvals.<\/p>\n The interfaces between Construction Contractor and the PMT \/ CM typically include contract documentation, insurance, detailed planning\/scheduling, project meetings and reporting regarding status of deliverables (supply, delivery, compliance, and storage of equipment, bulk materials), and RFIs.<\/p>\n The interfaces between Construction Contractor to Construction Support Contractors (through the Owner or Construction Manager) typically include scaffolding, temporary utilities, heavy lifts or picks, and local transportation.<\/p>\n Hence, the number and complexity of external interfaces have increased dramatically.\u00a0 Further, the roles of the parties have changed such that new roles are unfamiliar and potentially not adequately resourced.\u00a0 Issues and complications are both obvious and subtle.<\/p>\n Issues and Implications<\/i><\/b><\/p>\n Good or bad, these complicated strategies (Execution and Contracting) have emerged in the planning and execution of large and complex projects.\u00a0 The implications of the mixed approach strategies go beyond the greater number of interfaces and increased Owner liabilities discussed above.\u00a0 Other issues include:<\/p>\n Asset Performance.<\/b> \u00a0An Owner ultimately cares about the proper performance of plant, facility and associated work.\u00a0 Under Engineer, Procure Construct and Turnkey strategies, performance guarantees could be obtained from the Prime Contractors.\u00a0 These parties were in a position to assume and manage this risk.\u00a0 Under the multi-interface strategies, such performance guarantees are difficult (if not impossible) to obtain and enforce.\u00a0 Further, liability becomes so diffused that resolutions may be convoluted and protracted.<\/p>\n Scope of Work.<\/b>\u00a0 From a management perspective, timing of design deliverables (relative to contracting decisions), design changes or variations (errors and omissions, scope growth, field changes) and many other issues become problematic.\u00a0 Every interface has a risk associated with scope of work definition.\u00a0 The challenge of completeness now resides with the Owner.<\/p>\n Time Management<\/b> (or schedule perspective). The parties\/stakeholders take on new roles, responsibilities and risks.\u00a0 Some complexities include:<\/p>\n Cost and Progress Management<\/b>.\u00a0 With multiple parties, stakeholders, contractors and more, the collection, status, control and management of costs and progress are highly complex.\u00a0 Again, the risk resides with the Owner.<\/p>\n Completion Management<\/b>.\u00a0 With multiple parties, the sequence and timing of commissioning and startup is challenging.\u00a0 Further, the responsibility must be assigned to one of the parties or yet another specialty contractor.\u00a0 Competence in this process is a constant and pervasive problem throughout the industries.<\/p>\n Conclusions<\/span><\/b><\/p>\n Having presented and discussed all the foregoing, a logical question is \u201cSo what?\u201d\u00a0 As a construction attorney or other professional having an interest in construction issues, \u201cWhy should I care?\u201d\u00a0 Or, perhaps you are asking, why not just go to a more commercial \/ architectural project delivery process?<\/p>\n Relative to the issue of commercial \/ architectural delivery process, the industries discussed herein are quite different in managerial process, ways of working, work flow and project delivery.\u00a0 The evolved strategies result from the absolute need to shorten project time durations and maximize the return on investment by getting the projects operational.<\/p>\n These market-place dynamics have a potential for heavily impact on Owners and Construction Contractors.\u00a0 These impacts include, ways of working, resource requirements, risks and liabilities.\u00a0 Liabilities abound \u2013 each interface has at least two stakeholders or parties and several-to-many interactions.\u00a0 Parties must learn new role and skill-sets.\u00a0 With many interfaces, the dispute potential is increased.\u00a0 It is a numbers game as well as a managerial challenge.<\/p>\n Owners, Construction Contractors and other parties require major assistance with these challenges.\u00a0 Construction attorneys may wish to view these challenges as services extensions that should be offered to their engineering and construction clients.\u00a0 In-house counsel may consider these potential issues in connection with the modification of the contract documents, ways of working, willingness to assume risks, and other considerations.<\/p>\n In Part 2, we will attempt to characterize and outline some of these challenges and related complications.\u00a0 Recognizing that the perspective will be that of a non-attorney practitioner, we will present the emerging issues and dilemmas from the eyes of the project participant; but, focused on issues that may have implications for transaction or litigation attorneys.<\/p>\n <\/p>\n [1] \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 George T. McLaughlin approached us about writing a series of articles about his observations and experiences concerning the evolution of project delivery systems on large industrial projects and the impact those changes have had on the number of disputes and resolution of the same. We gladly accepted his offer.<\/p>\n Since the early 1980\u2019s, Mr. McLaughlin has worked worldwide in this industrial marketplace.\u00a0 He serves Owners, Prime Contractors, and Subcontractors.\u00a0 Mr. McLaughlin was president and COO of a $35 million engineering and construction (mechanical, controls and electrical) contractor for five years.\u00a0 For the most part, Mr. McLaughlin\u2019s work is performed on-location where the relevant work is being performed hence the title \u201cview from the field.\u201d Mr. McLaughlin is a principal of McLaughlin & McLaughlin out of Austin, Texas.\u00a0 In this role, he provides program and project management services as well as litigation support services.\u00a0 His contact information can be accessed at his website (www.mclaughlinandmclaughlin.com<\/a>) and blog (http:\/\/projectprofessionals.org\/<\/a>)<\/p>\n [1] \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Oil and gas, process, power, chemical, pharmaceutical<\/p>\n <\/p>\n Kerzner, Harold. Project Management: A Systems Approach to Planning, Scheduling, and Controlling<\/i>. Wiley, 2009.<\/p>\n Leslie O’Neal-Coble, et. al. CONSTRUCTION DAMAGES AND REMEDIES<\/i>. United States of America: American Bar Association, 2013.<\/p>\n Merrow, Edward w. Industrial Megaprojects<\/i>. Hoboken: John Wiley & Sons, Inc., 2011.<\/p>\n O’Brien, James and Fredric L. Plotnick. CPM in Construction Management, Seventh Edition<\/i>. McGraw-Hill Professional, 2009.<\/p>\n Pickavance, Keith. Delay and Distruption in Construction Contracts<\/i>. Sweet & Maxwell, 2009.<\/p>\n Pickavance, Keith. Guide to Good Pracitice in the Management of Time in Complex Projects<\/i>. Chichester: John Wiley & Sons, Ltd., 2011.<\/p>\n <\/p>\n <\/p>\n Please note thatMcLaughlin and McLaughlin [M&M]<\/b><\/a> is not a law firm and is not intending to provide legal advice.\u00a0 M&M<\/b>is a consulting firm providing (among other services) non-legal expertise in dispute resolution and litigation support.\u00a0 The Resource Center is for the convenience of blog visitors and M&M<\/b> does not offer this for commercial purposes.\u00a0 For further information on M&M<\/b> services, please see<\/i> <\/i>www.McLaughlinandMcLaughlin.com<\/b><\/a>.<\/i><\/p>\n <\/p>\n <\/p>\n <\/p>\n <\/p>\n \u00a0<\/a><\/p>\n<\/div>\n<\/div>\n This article from the Division 1 of the ABA Forum on the Construction Industry Newsletter \u201cThe Dispute Resolver\u201d represents George T. McLaughlin\u2019s \u201cView from the Field\u201d formed throughout the course of his 30+ year career in the industrial marketplace.[1]\u00a0\u00a0 His article is broken into four parts.\u00a0 Part 1, below, describes the evolution of the delivery […]<\/p>\n","protected":false},"author":2,"featured_media":1445,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_s2mail":"yes"},"categories":[9,49,16,3,57,8,1],"tags":[19,52,80,234,39,127,235,60,126,233,105,81,79],"jetpack_featured_media_url":"http:\/\/projectprofessionals.org\/wp-content\/uploads\/2013\/05\/strategy.jpg","_links":{"self":[{"href":"http:\/\/projectprofessionals.org\/wp-json\/wp\/v2\/posts\/1433"}],"collection":[{"href":"http:\/\/projectprofessionals.org\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/projectprofessionals.org\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/projectprofessionals.org\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"http:\/\/projectprofessionals.org\/wp-json\/wp\/v2\/comments?post=1433"}],"version-history":[{"count":24,"href":"http:\/\/projectprofessionals.org\/wp-json\/wp\/v2\/posts\/1433\/revisions"}],"predecessor-version":[{"id":1458,"href":"http:\/\/projectprofessionals.org\/wp-json\/wp\/v2\/posts\/1433\/revisions\/1458"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/projectprofessionals.org\/wp-json\/wp\/v2\/media\/1445"}],"wp:attachment":[{"href":"http:\/\/projectprofessionals.org\/wp-json\/wp\/v2\/media?parent=1433"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/projectprofessionals.org\/wp-json\/wp\/v2\/categories?post=1433"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/projectprofessionals.org\/wp-json\/wp\/v2\/tags?post=1433"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n
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