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View from the Chair: June 2018

The oil price is now hovering between USD 70 to USD 75 per barrel. Increases in the market price of other industrial commodities have also occurred. There seems to be a gradual upward trend in the award of new projects across several industry sectors including considerable interest in renewable energy, especially photovoltaic plants. So is this the time for rejoicing? I think not.

Firstly, there does not seem to be any significant increase in margins – if anything they are becoming tighter. EPC businesses are not sustainable on profit margins of 1% to 2%. At the same time project schedules are typically becoming shorter, contract conditions are often more onerous for contractors and they are being obliged to take on greater levels of risk if they want to win new orders.

Secondly, for owners and despite the “squeeze” on contract prices, in order to meet their investment needs the cost of plants remains too high, delivery times are unacceptably long and there is often uncertainty regarding plant start-up and performance – all of which can compromise the business case for the investment. Owner target reductions of 50% in investment costs and 40% in delivery times are not uncommon objectives. Research reveals that 40% of investment costs are in transactional costs. This is where attention needs to be focused to bring down the cost of plants, not the prices paid to contractors. Research also shows that delivery tiems can be reduced. However, there will be no improvement without radically changing the way capital projects are delivered.

In Engineering Construction there has been no real improvement in trading conditions since 2014…and they were not great before 2014!. Continuation of current trends will inevitably build up serious challenges in the future for owners, contractors and the supply network – the trading conditions are simply not sustainable. Many in Engineering Construction are well aware. More importantly, the current trading condition trends will not enable owners to achieve their price and schedule reduction objectives. For Engineering Construction to become healthy and sustainable in the medium to long term it is essential to fundamentally change how capital projects are delivered – ACTION TO BRING ABOUT THAT CHANGE NEEDS TO BE TAKEN NOW! The ECI event ‘Rethinking how capital programmes are delivered‘ in Amsterdam on 21 February 2018 confirmed this.

In the USA there is significant growing interest in and support from owners, contractors and supply network for CII’s Prairie Dog initiative led by CII’s Stephen Mulva. It is also gaining interest around the world. This initiative is designed to achieve three prime objectives: (1) significantly reduce investment costs, (2) substantially shorten delivery times to plant operational start-up and (3) create meaningful improvement in shareholder value for all stakeholders. The underlying philosophy is to deliver the plants the world actually needs at times when they are required by utilising more effectively the available resources to produce results that sustain and develop industry capability and performance. This effectively means delivering more plants with the present levels of resources.

In order to ensure the membership has access to and may take benefit from the research outputs from Prairie Dog the ECI has fully endorsed it and will take a small share in the special purposes company set up to develop the operating platform that will ultimately deliver the new approach to capital project delivery. Indeed, the CII is looking to ECI to take the lead in Europe to support and promote Prairie Dog in the research, development and operational phases. This is an opportunity not to be missed if Engineering Construction in Europe is to prosper and develop.

The findings from the ECI Amsterdam event on 21 February 2018 were followed-up in a subsequent event in London on 3 May 2018 which resulted in the formation of three groups to decide upon the research questions on the following topics;

  • Investors
  • Digitalisation
  • Sustainability

Presentation of these questions is expected by the end of June 2018 and research is expected to commence in September 2018. We need to form research groups comprising academics and industry professionals. This is where YOU and your ORGANISATION can actively contribute to and support the change that needs to take place to the way in which capital projects are delivered. CII and ECI can provide the forum but it is only industry that can make and implement the change. Please email eci@bre.co.uk to register your interest in participating in a research group and to obtain more details about the research programme and how you can contribute.

The ECI Annual conference will take place on 3 October 2018 and will be hosted by Fluor at their offices close to Schiphol Airport, Netherlands. The Conference topic will be Changing In The Way Capital Projects Are Delivered – Taking Action. It will be preceded on 2 October 2018 by a Client Round Table to be held close to the Conference venue. More details to follow in the next ECI Newsletter.

Recalling JF Kennedy’s sentiments – ask not what your industry can do for you but what can you do for your industry. Let’s work together to make the change that we agree is necessary for a prosperous and sustainable Engineering Construction industry. Your support and contributions are highly valuable and valued.

ECI is reliant upon the continuing support of the current membership and the growth in new members if it is to continue to provide opportunities for Engineering Construction to discuss, determine and implement significant improvement in performance and reward across the industry. It is not only membership fees that are crucial but also active participation in and support of ECI events and initiatives – join-in and help make the difference!

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