Rethinking how capital programmes are delivered – Event Report

On 21st February 2018 over 60 high level representatives of ECI were joined by colleagues at CII at the offices of Fluor in Amsterdam to debate Existential Crisis – Rethinking how capital programmes are delivered.

Delegates were welcomed by John Fotherby, Chair of ECI and Arne Siewertsen, DM Project Controls & Estimating, Fluor our hosts for the day.  Paul van Weert, Shell Global EPC Manager and Bernd de Jonge set the context for a sector that needs to change.  Paul spoke of the need to halve the costs of capital projects to enable them to do twice as many projects with the same allocated budget, not through putting more cost pressure on supply chains, but through fundamentally rethinking the delivery model.  From a client perspective they want to see more continuity and learning across projects, greater standardisation and higher levels of collaboration.  Bernd made the case for making capital programmes more affordable, investable and bankable through better utilisation of capital.  He proposed that more R&D, greater use of digital technology and more collaboration were the keys to delivering projects more effectively.

There was significant agreement amongst delegates that the sector is facing an existential crisis, with 87% either agreeing or strongly agreeing.  On the topic of whether we need to rethink capital programme delivery there was overwhelming support in the room with 96% agreeing or strongly agreeing.

Read the full report here

Fitness For Purpose Obligations – How “fit” is your organisation?

Fitness for Purpose obligations are nothing new in Engineering Construction, especially under Lump Sum Turn Key Engineering, Procurement and Construction contracting arrangements. But how well are these obligations and their implications understood?

Contractors take on Fitness For Purpose obligations with the risk of paying performance liquidated damages in the event that the specified performance guarantees are not met and back up their commitments with contractual warranties, financial guarantees and make good obligations for which the cost is uncapped – this in a business environment where margins can be as low as 2% (or less). Thus, if financial loss is to be avoided it is vital to fully understand the risks be given and taken. Do your sales and project execution teams fully understand the Fitness For Purpose obligations they have committed to? Do your teams awarding contracts really understand what risks they are asking contractors to take?

A decision by the Supreme Court in England in August 2017 highlights some important issues regarding Fitness For Purpose obligations that not only have relevance for contracts governed by the Laws of England and Wales but may also have implications in other jurisdictions. The case was written about quite extensively by legal practitioners straight after the judgement was published but a recent article by Jeremy Winter that was first published by the Chartered Institution of Civil Engineering Surveyors in the Civil Engineering Surveyor last year explores the case from technical and legal perspectives. You may access the full article here it is worth reading!

Overview of Jeremy Winter’s paper:
The dispute between Hoejgaard (contractor) and E.ON (owner) arose out of the parties’ different understanding of the fitness for purpose obligations relating to the design, manufacture and installation of wind turbines for the Robin Rigg windfarm in the Solway Firth. At the heart of this case was the international standard – J101 – and the extent to which this limited Hoejgaard’s responsibility, risk and liabilities, particularly in light of flaws in the standard. The case is also interesting for the bodies responsible for drafting the standards as well as those specifying them in contracts they award.

Hoejgaard contended that because it had complied with J101, it could not be in breach of contract. There was an admitted mistake in the applicable version of J101which led Hoejgaard to overestimate the friction between the steel and the grout, but that was not their fault.

E.ON contended that the fitness for purpose obligation and the requirements to provide wind turbines with a service life of twenty years prevailed over the obligation to comply with J101. Therefore Hoejgaard was in breach of contract, because the wind turbines, with their sliding transition pieces, were not fit for purpose and did not have the required service life.

Hoejgaard commenced the litigation in May 2012 in the Technology and Construction Court and the Supreme Court issued its decision in August 2017 following an appeal by E.ON in the Court of Appeal of the CTT’s judgement. Clearly, both Parties expended a great deal of time, money and resources in the process.

The main points of the Supreme Court decision were;

  • Clause 3.1 of the Conditions of Contract stressed that it was setting minimum requirements and that it was Hoejgaard’s responsibility to identify areas where works needed to be designed to more rigorous standards, so where there were two inconsistent standards in Section 3 of the Technical Requirements, the more rigorous standard would apply.
  • The figure [relating to the height of irregularities on the steel] in the formula [in J101] was wrong, but this (by virtue of clause 3.1) was a minimum requirement, and it was Hoejgaard’s responsibility to identify that there was a more rigorous requirement.
  • The Supreme Court rejected Hoejgaaed’s arguments that the onerous obligation of a 20 year service life was not likely to be “tucked away” in the technical documents, and not addressed in the important clause 8.1 of the Conditions of Contract. The Technical Requirements were plainly contractual documents and to interpret them as Hoejgaard suggested would give them no meaning or make them redundant. In any event, section 1.6 of the Technical Requirements, which contained the Key Functional Requirements, included a requirement “for a minimum site specific “design life” of 20 years without major retrofits or refurbishments.
  • With reference to a 1986 Privy Council case, the Supreme Court said “the poorer the quality of the drafting, the less willing any court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention”.

The outcome [Supreme Court decision] may be thought to be a tough one. However, English Law does not simply seek out what a court might consider to be a fair conclusion. First and foremost, it applies the wording of the contract, and respects the allocation of risk in a contract, even where that might not seem to be fair.

Just because it is impossible to absolutely ensure a life of 20 years does not mean that the designer cannot allow for all realistically foreseeable risks.

The main difference between Jeremy Winter’s paper and the earlier legal commentaries on the case is that Jeremy has considered the issues that were the subject of dispute from the legal, contractual and engineering / technical perspectives. I suggest that this approach provides useful learning for ECI members – always consider issues that may at first appear to be legal / contractual matters ALSO from the technical perspective and vice versa in order to have a full understanding and appreciation of risks and liabilities BEFORE making contractual commitments.

Existential Crisis – Rethinking Capital Programme Delivery

It is essential to avoid a repeat of the Carillion story in Engineering Construction. We can change for the better the fortunes and destiny of organisations engaged in Engineering Construction by taking action as an industry – NOW.

All ECI members will have by now received their invitations to Existential Crisis – Rethinking Capital Programme Delivery event that is being co-sponsored by ECI & CII and hosted by Fluor in their office in Amsterdam on 21 February 2018. Invitations have also been extended to CII members and guests of ECI and CII. If you have received your invitation then please do register to attend. If you have not received an invitation then please register to attend here. If you have a client or supply chain partner who you believe should attend then please extend an invitation to them.

So far we have received great enthusiasm and support for this event “…What a great subject for this seminar! Such a relevant topic for the industry right now, and pleased to see ECI taking a role in facilitating this discussion…” (Paul van Weert, Shell).

So far 48 people have already registered. If you and your guests would like to attend then I recommend early registration. I hope to welcome very many members and your guests to this event in Amsterdam on 21 February 2018.

View from Chair – Is This A Sign Of The Times?

This week saw the collapse of Carillion – one of the UK’s largest contractors. It is said that Carillion’s financial problems were due to delays and significant losses on major Government contracts. Whatever the truth of the matter, the mantra for some time in the UK industry press has been that margins of around 2% are not sustainable.

Setting aside Carillion’s profit / loss issues, it is evident that Carillion’s biggest problem in the run-up to its demise was an acute shortage of cash.

While operating in a different market to Engineering Construction, the Carillion case provides salutary lessons for organisations engaged in this industry – owners, contractors and the supply network – current margins are far too low relative to the risks being taken, cash is king – it’s lifeblood, nobody is too big to fail and fall out from a major contractor failing is catastrophic for industry with the brunt of the impact being taken by subcontractors, vendors, service providers and distress for all the people involved and not forgetting that owners are left with incomplete projects and further significant investment to bring their projects to completion. It is in nobody’s interest for contractors to suffer the same fate as Carillion.

Let us all learn from the Carillion demise.

Engineering Today: the Supply and Demand for Engineers in the UK

The latest labour market intelligence report has been published by the Engineering Construction Industry Training Board. Titled Engineering Today: the Supply and Demand for Engineers in the UK, it analyses secondary data collected from a range of sources to study the characteristics, demographics and education levels of the engineering workforce, from engineers, to technicians and the skilled trades. In addition, the report looks at the future demand and the extent to which the UK has a shortage of engineers. Unlike previous ECITB reports, this study considers the wider labour market for engineers, not just engineers employed in the engineering construction industry.

There are some interesting findings in the report, including:

  • Engineers in the workforce: In 2016, there were just under 465,000 engineers employed in the UK, a 9% increase since 2009.
  • Women in engineering: Almost 9% of engineers in the UK are women (2016), an increase from 5% in 2009.
  • Diversity in Engineering: The industry is over 90% white. There is also evidence that BAME graduates receive lower salaries on average and have fewer employment opportunities.
  • Earnings of engineers: In 2016, the average engineer’s income exceeded £42,000, 49% higher than the average earnings in the UK. Engineering graduates, from apprenticeships and higher education, earned £5,000 more than the average salary for graduates.
  • Engineers in Higher Education: In 2015/16, 38.5% engineering graduates went into engineering professions, the lowest figure since 2012.
  • Apprenticeships in Engineering: In 2013/14 over 90% of engineering apprentices sustained employment compared to an average of 75% for all apprentices.
  • Engineering retirements: By 2026, more than 91,000 engineers, or nearly 20% of the workforce, will have retired or be close to retiring.

This report follows a report the ECITB published in November on the Economic Footprint of the Engineering Construction Industry. Both reports are published as a part of our new Labour Market Intelligence and Research Programme. In 2018, the Year of Engineering, the ECITB will continue to study and analyse the UK Engineering Construction Workforce. Later this year we will publish reports on the future skills requirements of the ECI workforce and how the 4th industrial revolution is impacting skills needs in our industry.

If you have any questions about this report please contact Reuben Overmark, Policy Analyst at the ECITB,

New ECITB report reveals importance of engineering construction to UK Plc

A report into the engineering construction industry has revealed the importance of the sector to the UK economy both today and in the future.

The new research into the engineering construction industry (ECI) – a specialised industry responsible for designing, building and maintaining our critical national infrastructure – reveals an economic footprint that employs nearly 190,000 workers and contributes as much as £325 billion in turnover to the UK economy.

The research into the size and value of the ECI to UK Plc has been carried out by the Centre for Economics and Business Research (CEBR) on behalf of the Engineering Construction Industry Training Board (ECITB). Other key findings in the report show that it pays to work in engineering construction – where the average weekly wage is £631 compared to £439 across all sectors – and that despite a slowdown in the oil and gas sector in recent years, the industry as a whole has been growing – with employment figures rising by 26% between 2010 and 2016 compared to a rise of 15% in overall private sector employment. The study also predicts that this growth will continue, with the ECI set to buck national trends and expand by 17.7% in the next decade, despite broader economic slowdown.

Find out more and download the report here

Nuclear sector theme group

The nuclear newbuild sector faces some major challenges if its renaissance in the UK is to be successful. Therefore this year ECI and Constructing Excellence came together to progress jointly the latter’s theme group in this sector to ensure a cross-sector, construction/engineering response to these challenges. The group’s autumn meeting was hosted by EDF in Somerset last month and featured a site tour of the Hinckley Point C newbuild site. Key owners/clients in the UK, French and Swedish civil nuclear sector are participating, including EDF, Horizon, Sellafield and Vattenfall, as are the Nuclear Industry Association and the World Nuclear Association.

The theme group is led by Adrian Worker of CH2M, formerly of Amec and EDF, and is addressing the productivity challenge in this sector. It will be of no surprise to ECI members that the issues and opportunities being identified are not limited to nuclear. Indeed, when John Fotherby was consulted last week on the group’s draft first output, entitled ‘Factory Thinking’, he commented,

“While nuclear engineering / construction has its own peculiarities, the basic problems apply to all forms of major industrial / infrastructure projects – it’s a question of emphasis and focus. Further, while nuclear projects are major challenges, there are not that many of them constructed around the world – so if the problems are similar in other projects why not broaden the coverage to other areas…?”

We will be inviting some of the key players involved in the nuclear sector and specifically in this work to our event on February 21st in Amsterdam, so that joint exploration of the issues affecting industry at large and the possible solutions might be of benefit to all. Meanwhile, ‘Factory Thinking’ should be released in December, and to be added to the distribution list for the ECI/CE nuclear theme group, please click here. Don Ward

Sir Michael Latham

I and many ECI members were so sad to hear that Sir Michael Latham had died last week. He was the ECI’s first president, from 2001 to 2008. Sir Michael had been a Conservative MP in the UK Houses of Parliament. Widely respected across the floor of the House, he became a household name in the UK construction sector when in 1993 the government of the day asked him to conduct a review of the industry and its troubles. With typical assiduousness he met with hundreds of delegations from all parts of the industry, produced an interim report called ‘Trust and Money’, and then in summer 1994 his final report ‘Constructing the Team’ was published. It was extraordinarily well balanced – he didn’t use the term “win-win” but wrote that he preferred the dodo’s quote in Alice in Wonderland that “all have won and all must have prizes”. For me personally, this was literally career-defining. Soon afterwards I was seconded from BRE to join the implementation team for his review, and a year later I successfully applied to be the Chief Executive of the new Construction Industry Board under his chairmanship, charged with implementing the recommendations. Along with Sir Ian Dixon, Michael provided me with the inspiration to understand, evidence and promote partnering (later collaborative working), client focus and outcomes, collaborative contracts, fair payment, adjudication and so much more into our sector as the components of successful change. He went on to chair so many industry bodies, as well as Willmott Dixon, received many honorary degrees and titles, and was rightly held in hugely high esteem by everyone I ever met. He is survived by two sons, and we send them our very best wishes at this sad time. Don Ward

View from Chair – Nov 2017

What does 2018 hold for Engineering Construction. Is shareholder value likely to improve and will we be making more efficient use of capital? Probably not in 2018 but can 2018 be the year when we embark upon a revolution to fundamentally change the way we do business in Engineering Construction?

We are all investors in the industry – owners, contractors, supply network and service providers – but do we expect to enjoy the returns on our investments we believe to be commensurate with the resources, expertise and endeavours deployed and the risk taken?

For owners how certain are you that your new plant investments will be completed by the date, for the price and to the standard that justified the business case for the investment? Contractors how certain are you that you will complete your projects without incurring unbudgeted costs, be exposed to delay or performance liquidated damages or having dissatisfied clients? Vendors, suppliers, subcontractors will you be expected to deliver exceptional performance under difficult conditions for “break-even” prices?

The questions we must all address are:

Is this an industry in which we can thrive and prosper?

To do so what can and must we do differently as an industry?

What is to be learned from other industries that have undergone significant change eg, shipbuilding, aerospace, automotive etc ?

While research into and development of improved work practises have been taking place for some time, the focus has been on improving the accepted project delivery processes and practices model without considering whether that model is fit for purpose.

If we are to significantly improve shareholder value and capital utilisation so that the plants that the world requires are affordable for all stakeholders then we need a different project delivery model.

The Construction Industry Institute (CII) has embarked upon research into and development of a radically different delivery model – Operating System 2.0 (OS2). ECI/CE has the opportunity to work with CII on this venture.

As a first step ECI / CE and CII are holding a joint event in Amsterdam on 21 February 2018 that is being hosted by Fluor. While the programme detail is currently being developed the objective of the event is to bring together European Engineering Construction stakeholders – owners, contractors, supply network members and service providers – to consider the challenges confronting industry, explore the merits of OS2 and decide how to move forward.

Let’s not miss an opportunity in Europe to be part of an initiative that already has a great deal of support in the USA and growing interest around the world. So save the date, come and join the discussion – and invite your industry colleagues. The event is open to ECI members and their guests and is free of charge. We will be publishing programme details in the New Year.

When will the madness end?

The aftermath of the perfect storm created by the legacy of failing projects (Merrow 2014 et al) and the collapse of the oil price in 2014/2015 has left Engineering Construction in crisis across all industry sectors – survival, not growth and prosperity is currently the name of the game.

Uncertainty is driving reduced levels of investment meaning there is less capital available for projects.  Therefore, what is available must be used efficiently but Engineering Construction is notoriously poor at efficient capital utilisation.

Shareholder value relative to the risks taken is not being realised across the entire project supply network.  This is not sustainable.  Typically, expertise and experience is not being utilised effectively.  Save for some exceptional instances there is an absence of project leadership and management practices are far too often ineffective.

Engineering Construction is not well-equipped to deal with the crisis confronting it.

Other industries (automotive, aerospace, ship building, software etc.) have faced not dissimilar crises but they have survived and prospered after implementing radical change.  So why not Engineering Construction?  What can Engineering Construction learn from these industries?  Is Engineering Construction willing and ready to learn and make the necessary changes?

The way Engineering Construction projects are contracted is fatally flawed.  This requires a complete re-think. The target must be far more efficient and economic investments, vastly improved capital utilisation efficiency, applying experience and expertise far more effectively and economically and greatly improved shareholder value.

However, it is not all doom and gloom.  Industry institutions have recognised the crisis, improvement actions are being debated and implemented BUT so far Engineering Construction is not fully behind the initiatives being generated.  Nothing will change unless Engineering Construction makes the changes. This agenda is pivotal to the work of ECI with ECITB , CII and others.

Projects continue to be contracted on the same basis – typically lump sum EPC awarded to the lowest bidder which is often well below the next lowest bidder. This broken system is propped up by ever-more onerous conditions being imposed on contractors that increase risk when margins simply do not reflect the level of risk being taken – risk and reward is completely out of balance.  For example, recent “clever” lawyering interventions designed to preclude contractors’ entitlement to extensions of time where there are concurrent delays (owner / contractor delays running in parallel) simply mean contractors are unavoidably exposed to delay liquidated damages because it is virtually impossible to avoid concurrent delays on industrial plant projects.  This means serious losses for contractors and their suppliers. Contracting on this basis is pure madness and helps nobody in the long run.

So when will this madness end?  When will Engineering Construction get behind, adopt and implement the radical changes that need to be made so that capital is used efficiently and shareholder value throughout the supply network reflects the risks being taken and the value generated by investment in industrial plants that world economies need?