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?

View from Chair – John Fotherby

It is now two months since ECI joined BRE. I am happy to report  that the transition is working well and the ECI, BRE and CE organisations are becoming well acquainted. While this has been happening we have not stood still and events planned for this year have been arranged. Please note that due to low numbers the Community of Practice Forum on 9 November 2017 has been postponed till the same day as the event on the use of technology in Engineering Construction on 7 December 2017 in central London. This event will be free of charge, but spaces are limited and therefore early registration is advisable to be sure of a place, find out more and register here. We are continuing to build our relationship with CII and we expect to be hosting jointly an event early next year in Europe  – more on this in the next Newsletter.

We have already canvassed ideas for next year – recent suggestions include further client/epc contractor round tables and developing a construction management training programme. Are these subjects that interest your organisation? What else would you like us to do? Please let us have your thoughts – remember, the ECI is there for you the members but we need your input as to what you want us to do.

Winning and executing projects that enhance shareholder value and utilise capital effectively and efficiently continues to be a major challenge  in the current market climate – at the date of writing the oil price remains below USD 60 per barrel. It is clear that there needs to be radical change to the way Engineering Construction conducts its business globally so that all stakeholders benefit from participation in projects that the world needs. The ECI, in collaboration with partner organisations can be the collective voice of industry that initiates and promotes the necessary change. But, it is you the ECI members, that are, in Europe, the industry – owners, contractors, vendors, suppliers, consultants – what change do you want to see …and what are you prepared to do to see the change implemented that you require? The next edition of the ECI Newsletter will include a regular item regarding changes that members want to see in the Engineering  Construction industry – are you and your organisation willing to contribute? Why not let us have your ideas to share with fellow members?

While it is early days, I am more than convinced that joining BRE was the right thing to do for ECI and BRE because this represents a significant opportunity for the ECI membership. However, it is for the membership to identify those opportunities and to contribute to realising them. The ECI is the catalyst and the membership is the active agent – neither can flourish without the other. I know everybody is very busy with day jobs that must take priority but, please, do take time to contribute, no matter how small, to help the ECI flourish for the benefit of you and fellow members.

Call to Arms

As the ECI transitions into BRE/CE it is important that the ECI establishes the necessary governance. This is at three levels – the CE/ECI Board of Management, the ECI Membership Steering Group and the Executive Working Group. The ECI Steering Group is open to all members, the CE/ECI Board Of Management and the Executive Working Group is limited only to those members who want to contribute to the development and implementation of ECI activity. Details of each of these governance levels have been circulated previously – if you require further copies please email eci@bre.co.uk.

Our strength as ECI is our diversity in membership across the entire supply network. We want to represent this in the above governance levels. Therefore please email eci@bre.co.uk who your organisation’s TWO nominations for the ECI Steering Group are and those interested/willing to be appointed to the CE/ECI Board of Management and the ECI Executive Working Group. To make the ECI the success the membership needs and deserves we need your experience and expertise in these areas.

Calls for Innovation!

The National Composite Centre in Bristol was host to the Materials and Manufacturing Roadshow on 17 October.  This was the first in a series of roadshows inviting companies from various sectors to get involved in addressing the challenges facing the UKCS oil and gas industry.  Dr Carlo Proccacini, head of technology for the O&G Authority, put out a call for innovation and collaboration.  There have been 44bn boe extracted from the North Sea so far and current estimates are that there are still between 10 and 20bn boe remaining.  Those remaining reserves are getting harder and harder to extract.  However there have been improvements in production efficiency and unit costs of development, mainly driven by the oil price crash in 2014 – so efficiency has increased since then from 65% to 73%, and unit costs have reduced from $30/bbl to $16/bbl. But the UKCS is still one of the most expensive places in the world to develop based on these costs.  His challenge to the gathered delegates – and us in the industry – is how to improve asset integrity, undeveloped discoveries, well delivery and decommissioning using the diverse expertise and experience available across many industries.  And the good news is that there is potential funding from various sources to help stimulate and support this innovation and research.  Presenting at the Roadshow were the ITF, OGTC, OGIC and Innovate UK – a lot of acronyms!  All have funding via industry or the government which is available to be used in this context.  One of the main purposes of the Roadshow was to get the message across to the delegates that the government is encouraging and supporting innovation in this area so if you get the opportunity, you may want to get yourself along to one of the other Roadshows being held in Glasgow on 28 November and Rotherham on 30 November.  For more information please click here.

Article by Karen Cherrill, Director, Kingsfield Consulting

European Construction Institute joins Project 13

Project 13 will be a step change for the future of the industry – based on an enterprise relationship that maximises performance rather than a transactional one which transfers risk.  The ICE report, commissioned by the Infrastructure Client Group; Transaction to Enterprises provides the insight into Project 13. Transactions to Enterprises ICG March 2017

Currently in development, Project 13 will move to the implementation phase in March 2018, supporting clients and suppliers to adopt this new delivery model. This will include advisory support, tools, guidance and peer review.

The ECI are sitting within one of the working groups, developing the notion of the Capable Owner, establishing the capabilities required by an effective owner organisation and a common approach for the recruitment, development & training of leaders.  This group is led by Programme Director for the Heathrow Expansion, Phil Wilbraham.  Phil participated in the ECI/ECITB Project Leadership workshop in January 2017 and sees clear synergies for what Project 13 is trying to achieve with issues and potential solutions for the process sectors.  Maximising performance in a globally competitive market is a clear mission for the ECI and something all members are seeking to achieve.  So far the Capable Owner group have been looking at leadership requirements to create an enterprise environment, the use of maturity grids to help define what good looks like in key areas of Capable Ownership.

The ECI would like to raise awareness of Project 13 and the opportunities it presents to our industry.  We also need members to come forward and support the team on taking some of these principles forward but also to add to the debate and work of the Project 13 team.

You can find out more and join the Project 13 community to keep informed through the website: https://www.ice.org.uk/news-and-insight/project-13

Additionally if you want to support the ECI in taking this forward please contact Andy Brown directly at: andy.brown@ecitb.org.uk or call 07973416149

ICE Director General Nick Baveystock says: “Our industry is often criticised for low productivity and concentrating too much on margins. Project 13 is the industry’s attempt to address these issues. The initial thinking has been done, derived by practitioners and clients, and now is the time to take this forward.

We can only make the bold move towards higher productivity, sustainable skills and long term, value driven enterprises with the active and continued support of the profession.”