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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?

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