TP India Oil & Gas - Report Final

EPC – Market StudyTPIL – Strategic Planning Confidential

STUDY ON THE MARKET OF EPC CONTRACTS IN OIL AND

GAS SECTOR IN INDIA– FIRST PHASE OF STUDY

PROJECT TIME FRAME

April 2010 to December 2010

PROJECT CO ORDINATORS

J Raja

S Ramachandran

PROJECT MEMBERS

RVM Sumanth Rao

Socrates Chinniah

For the award of the

EXECUTIVE POSTGRADUATE DIPLOMA IN BUSINESS MANAGEMENT

LOYOLA INSTITUTE OF BUSINESS ADMINISTRATIONLOYOLA COLLEGE, CHENNAI


BONAFIDE CERTIFICATE

This is to certify that the Summer Project / final Dissertation entitled < title

(use bold print; main title all capitals and subtitle with leading capitals)>

submitted by <Candidate’s Name (use bold print with leading capitals)> to

LIBA, LOYOLA COLLEGE, CHENNAI for the award of the diploma of Post

Graduate Diploma in Business Management is a bonafide record of research

work carried out by him (her) under my (our) supervision. To the best of my

knowledge, the contents of this report in full or in parts have not been

submitted to any other Institute or University for the award of any degree or

diploma.

The project work has been carried out at < name of organization/institution >

Chennai - 600 034

Research Guide(s)

Date:

Research Co-ordinator *

* External Guide at the organization


EXECUTIVE SUMMARY

The project aims to identify the various EPC projects executed in India in the sectors

of Oil and gas, Refinery, Petrochemical and fertilizers during the past 5 years. The

identified data is to be used to identify the major players and the market share of the

EPC Contractors in India and also profile the competitors with respect to TPIL in EPC

arena in India. This study would be a pre requisite for framing strategy for TPIL to

become a leading and preferred engineered contractor in India. The project is carried

out as two phases.

The Project is carried out in two phases; First phase of study includes the collection of

secondary data. The second phase of study involves the collection of primary data

through the mode of questionnaire from the competitors and the clients for extended

data collection that will be used for analysis on the EPC market prevalent in India.

The Observations of the study are posted to management for further planning of the

Strategy of TPIL to become the most preferred contractor in India in the field of Oil &

gas, Petrochemicals, Chemicals and Fertilizers. The introduction to the research

consists about a description about the background of the study. The various objectives

of the study have been outlined.

The works of various theories pertaining to the subject has been discussed in this

section. This review was important to gain knowledge about the various theories,

concepts and the strategies that can help to analyze the issue and the subject of the

study.

The methodology has been utilized to conduct the study. The quantitative and the

explorative methodology is used in the study have been described along with the data

collection measures.


.

The analysis and results and findings of the data collected through the primary and

secondary data sources have been shown. The analysis is followed by a conclusion to

the research. Thus, providing areas of the future study in the subject and explains the

various applications of the research.

Table of Contents


CHAPTER 1...................................................................................................................1

1. INTRODUCTION...............................................................................................1

1.1. Objectives of the Study................................................................................4

1.2. Limitations & Assumptions.........................................................................5

CHAPTER 2...................................................................................................................7

2. LITERATURE REVIEW....................................................................................7

2.1. Introduction..................................................................................................7

2.2. Outsourcing value chain activities.............................................................11

2.3. Construction value chain integration.........................................................11

2.4. Upstream oil and gas..................................................................................13

2.5. Downstream EPC projects.........................................................................19

2.6. Typical Construction sequence in EPC projects........................................21

2.7. Project Organization structure...................................................................21

2.8. Industry Trends and Productivity issues....................................................24

2.9. Common Management issues in EPC Projects..........................................26

2.10. Consultancy Problem definition.............................................................28

2.11. Common issues in concurrent development projects.............................29

2.12. Lean approach to productivity improvement.........................................30

2.13. Analyzing information flow using Design Structure Matrix (DSM).....33

2.14. EPC contracts.........................................................................................34

2.15. Contractor...............................................................................................61

CHAPTER 3.................................................................................................................64

3. METHODOLOGY............................................................................................64

3.1. Preliminary Study......................................................................................64

3.2. Data Collection..........................................................................................65

3.3. Overview of Data Collected.......................................................................65

3.4. Data Analysis.............................................................................................67

CHAPTER 4.................................................................................................................69

4. DATA ANALYSIS..............................................................................................69

4.1. Project – Time and Cost:...............................................................................69

4.2. Geographical Spread.....................................................................................70

4.3. Operating Company / Clients........................................................................72

4.4. Competitors...................................................................................................74


4.5. Sectors...........................................................................................................76

CHAPTER 5.................................................................................................................77

5. CONCLUSIONS...............................................................................................77

5.1. Further Study.............................................................................................78

APPENDIX 1...........................................................................................................80

References & Bibliography..................................................................................80

LIST OF TABLES

Table 5.4.1 List of Variables 7


Table 5.4.2 Summary of Data Collection 8

Table 5.5.3.1 List of Operating Company 13

Table 5.5.4.1 List of Contractors 15

LIST OF GRAPHS / DIAGRAMS


Graph 4.0.1 Methodology 4

Graph 5.5.1.1 Year Vs No Of Projects 9

Graph 5.5.2.1 Projects by Location 10

Graph 5.5.3.1 Companies Vs No of Projects 12

Graph 5.5.5.1 Sector wise classification 14


CHAPTER 1

1. INTRODUCTION

In framing the issues in this paper, it is worth defining value chain, oil and gas market

sectors, and engineering, procurement and construction (EPC). These are further

explored in a review of literature. A value chain is a chain of activities. Products and

services pass through all activities of the chain in order and at each activity the

product gains some value. The chain of activities gives the products more added value

than the sum of added values of all activities. It is important not to mix the concept of

the value chain with the costs occurring throughout the activities. A diamond cutter

can be used as an example of the difference. The cutting activity may have a low cost,

but the activity adds too much of the value of the end product, since a rough diamond

is significantly less valuable than a cut diamond (Porter, 1985).

Within the petroleum industry operations are typically divided into three main

categories: upstream, downstream and midstream. Searching for, recovery and

production of crude oil and natural gas are generally seen as activities relating to the

upstream sector. Processing, storing, marketing and transporting commodities that

include crude oil, natural gas, natural gas liquids (LNG’s, primarily ethane, propane

and butane) and sulphur are actions associated with the midstream industry. The

refining of crude oil, and the sale and distribution of natural gas and derivative

products of crude oil are associated with the downstream oil sector. In defining EPC,

the key differentiator from other types of project management contracts is not that it is

a scope of work, not a form of contract, and requires a single responsibility. Normally

a construction contractor taking on an EPC contract assumes responsibility including

financial responsibility which brings an element of commercial risk which must be

carefully considered (Kentz, 2008).Returning to value chain, it can be argued that a

company’s profits are only as good as its ability to create value for its customers (e.g.

Gibbon, et al, 2008). Porter (1985) defines it as a chain of activities through which a

product passes through and gains some value. He has extended the concept beyond


the individual organization to larger interconnected system consisting of firm’s

supplies (and sub suppliers), it’s distribution channels and the firm’s client/customers.

And under this analysis, two central questions arise under the choice of a competitive

strategy:

1. Attractiveness of industry for long term profitability and the factors that determine it

2. Determinants of relative competitive position within an industry (some industries are more profitable than others).

A firm needs to consider both the above questions. Competitive advantage

Grows fundamentally out of value a firm is able to create for its clients that exceeds

the firm’s cost of creating it.

Three generic strategies are proposed, much covered in the management literature:

1. Cost Leadership –it is perhaps the clearest of the three generic strategies.

Here a firm sets out to become the low cost producer in its industry. During the

analysis of cost, due recognition should be given to linkages between individual

activities;

2. Differentiation –here the firm seeks to be unique in it industry along some

dimensions that are widely valued by customers. The firm is rewarded for this

uniqueness with a premium price;


3. Focus –this strategy is quite different from others as it rests on the choice of a

narrow competitive scope within an industry. Here the focuser selects a segment or

group of segments in the industry and tailors its strategy to serving them to exclusion

of others. The focus strategy has two variants. Cost focus and differentiation focus. In

cost focus a firm seeks a cost advantage in the target segment while in differentiation

focus; a firm seeks differentiation in its target segment.

It is in applying value chain concepts to the EPC sector that there is less published

work to draw on and there are some significant issues to consider. With the very basic

definition of project as a “temporary endeavor”, EPC value chain only exists for the

duration of the project (Cherns and Bryant, 1984). This short duration makes it very

important to have the systems effective and efficient at the first place, as the damage

control is never fast enough to catch up with the project duration. Al Naqvi (2009)

mentions that long periods of prosperity led to complacency as inefficient processes

and lethargic strategies became acceptable ways to conduct EPC business. As the

economy tightened, sectors restructured and competitive pressure mounted, the focus

is now shifting from thriving to surviving. The uncertain times can offer promising

opportunities to redefine the competitive landscape, to establish a long term winning

strategy and to create a sustainable competitive advantage. For this, the process starts

with analyzing and rethinking EPC value chain.

Construction industry clients are increasingly demand documented evidence of the

steps taken to deliver value. Although their understanding of value differs, the

engineering team (designers) requires broad and flexible measures to justify design

decisions in terms of value expectations of the project stakeholders. Saxon (2002)

noted that: “the construction industry knows little of how it adds value to customers or

society”.

Therefore, there is a need to understand what is meant by “value” within each project

and reflect that into design decisions. The objectivist view of value embedded in

traditional approaches such as value management must be complemented by a


subjectivist view that accommodates the judgment of value that occurs within

relationships between facilities (and their embedded design solutions) and people

(Thomson et al,2006). In the EPC sector, the value chain members (if at all there is a

formal group in an organization) are often isolated from the engineering design. This

hinders design solutions that could yield better stakeholder value. Austin et al (2001)

proposed the concept of “design chain”, in which all value chain members are

engaged in collaborative design problem solving.

1.1. Objectives of the Study

The Objective of study are classified into Primary objectives and secondary objectives

Primary

The primary objectives of the study is to

• Determine the size of Market in Onshore for Oil and Gas, Petrochemicals, Fertilizers and Chemicals for the past 5 years.

• Identification of Market share of various EPC contractors in the field.

• To determine the profile of various players in the Business.

• Likely Market projections for the next 3 years

Secondary


The secondary objective of the study is to

• Profiling of Contractors who are in competition in EPC Sector.

1.2. Limitations & Assumptions

The analysis on the data is carried out with assigning equal weightage to the projects

rather than the cost of the project, due to the unavailability of the cost data, the cost

data is available for only less than 14% of the projects and hence the market share

through revenue could not be carried out.

When there are more than one engineering contractor have executed the job for the

operating company / client, the scope of work of the engineering contractors are not

clearly identified and hence the scope is considered as the same for the contractors

data collected for data analysis.

The data that has been collected has been from various magazines, Journals,

Newsletters, Public domain of the companies, various publishing agencies. The

accuracy of the information and the reliability of the information are related with the

date of publication in the Magazines, Journals, Public domain


CHAPTER 2

2. LITERATURE REVIEW

2.1. Introduction

Engineering, Procurement and Construction (EPC) contract means much more than

just putting together three different sources of engineering, procurement and

construction for project execution. Combination of engineering, procurement,

operation, management, administration, on- time delivery, cost control and risk

management is done in project management of EPC contracts, with Planning,


controlling and simultaneous activities acceleration regarding project scope of quality.

EPC contractor commits to execute the parallel sequence of activities according to

project schedule. Several studies were done about the projects key success factors for

different situations and industries.

A project is an organization of people dedicated to a specific purpose or objective.

Projects generally involve large, expensive, unique, or high risk takings which have to

be completed by a certain date, for a certain amount of money, within some expected

level of performance. At a minimum, all projects need to have well defined objective

and sufficient resources to carry out all the required tasks. (Steiner 1969).

Other definition is offered by Cleland and Kerzner( Cleland & Kerzner, 1985): A

project is a combination of human and nonhuman resources pulled together in a

temporary organization to achieve a specified purpose. In EPC method engineering,

procurement and construction are done in one contract, engineering services is under

completion, and meanwhile procurement delivery, site mobilization, construction and

erection are done in parallel. Management has major role for coordination and

successful completion of EPC project. Using applied project management techniques

and organizations with project control and management experiences are pivot al basis

of these contracts. A company is successful who can manage engineering and

procurement to reach standards while reducing costs of procurement, understanding

the difference between tactical and strategic issues by managers is important.

They are both essential for successful project implementation, but differently affect

project toward its completion. Strategic issues are important at the beginning of the

project. Tactical issues become more important towards the end. A successful project

manager must be able to consider both strategic and tactical issues during the project.

Toward the project completion, tactical and strategic factors would have same

importance. It sees during the project, initial strategies and goals forms tactics. Based

on the discussion of strategy and tactics, following items can be regarded:


1. Using a Multiple-Factor Model:

Project management is a complex task in which the manager must attend to many

variables. The more specific one can be with regard to the definition and monitoring

of those variables, the more likely a successful outcome for the project will occur. The

ten critical success factors are shown to contain a degree of sequentiality and these

factors become critical to project success at different points. It is important for t he

project manager to make use of a multiple-factor model, first to understand the variety

of factors impacting on project success, and then to be aware of their relative

importance across stages in the project process.

2. Thinking strategically early in the project life cycle

Strategic factors are important early in the project life cycle, during the

conceptualization and planning stages. These factors are the most significant

predictors of project success. Many managers make the mistake of not involving

members of their project teams in early planning and conceptual meetings. It is very

important that managers and project team members have common understanding

about the schedule and project goals. The more project team members are aware of

these goals, the greater the likelihood of their taking active part in the monitoring and

troubleshooting of the project.

3. Think more tactically as project moves forward in time

By the later work stages of execution and termination, strategy and tactics are of

almost equal importance to project implementation success. Project manager shifts the

emphasis in the project from "what do we want to do?" to "How do we want to do it?'.

Tactical success factors reemphasize the importance of focusing on the “how" instead

of the "what". Factors such as personnel, client consultation, communication,


monitoring etc are more concerned with attempts to better manage the project

implementation process.

4. Use tactics and strategies

Strong strategies or tactics by themselves will not ensure project success. When

strategies are strong and tactics are weak, there is a great potential for creating strong,

well-intended projects that never get off the ground. Cost and schedule overruns are

consequences of such projects. On the other hand, a project which starts off with a

weak strategy and strong subsequent tactical organization has the likelihood of being

successfully implemented, but solves the wrong problem. Strategy and tactics are not

independent of each other. Hence, developed strategy in the earliest stages of project,

should be made known to all project team members.

5. Consciously plan for project team's transition from strategy to tactics

The project team leader needs to actively monitor his or her project through its life

cycle. An important method to manage the transition from strategy to tactics is to

make efforts to continually communicate the challenging status of the project to the

other members of the project team. The project team is kept aware of the specific

stage in which the project resides as well as the degree of strategic versus tactical

activities necessary to successfully sequence the project from its current stage to the

next phase in its life cycle. Finally, communication helps the project manager keep

track of the various activities performed by his or her project team, making it easier to

verify that strategic vision is not lost in the later phases of tactical operation.


2.2. Outsourcing value chain activities

A firm may specialize in one or more value chain activities and outsource the rest. A

thorough value chain analysis can facilitate outsourcing decisions. A firm’s strengths

and weaknesses in each activity in terms of cost and ability to differentiate need to be

analyzed to arrive at outsourcing decisions. The following are some of the aspects to

be considered for outsourcing decisions:

Whether the activity can be done cheaper and better by

suppliers/subcontractors.

Whether activity is one of the firm’s core competencies from which stem a

cost advantage or product differentiation.

The risk of performing the activity in-house, if the activity relies on fast

changing technology or product sold in a rapidly changing market, it may be

advantages to outsource the activity in order to maintain flexibility and avoid

the risk of investing in specialized assets.


Whether the outsourcing of an activity can result in business process

improvements such as reduced lead time, higher flexibility, reduced inventory

etc.

2.3. Construction value chain integration

Though the construction supply chain exhibits some characteristic differences from

other sectors (Koskela, 1997) there remain no compelling reasons for industry’s

continuing inefficiencies. Egan (1998) argued that construction industry needs to

integrate its processes and products to ensure that better value can be delivered to the

client. This approach involves clients, designers, main contractors and sub contractors

working together as a unified team, rather than disparate collection of separate

organizations.

Many construction clients appear to distrust their main contractors who in turn

maintain arm’s length relationship with their subcontractors and suppliers (Geoffrey

&Andrew, 2005).

Despite the difficulties that industry faces, it is essential that it develops its sup-ply

chain practices to deliver value to the client rather than simply seek to generate short-

term savings (Lockamy & Smith, 1997).

Harland et al. (1999) have shown how figures can more readily attain long term cost

reduction by forming closer working relationships with key suppliers, which is highly

relevant for construction supply chain. Compared to other industries, construction

industry has been viewed as a slow learning industry.


Although many engineers, project managers and contractors do not consciously

recognize a value chain, they all interact with it and make value chain management

decisions on a daily basis. Having real time information available at any time can

reduce lead time and increase accountability for tracking purposes. These decisions

can strengthen the value chain if they are the very right ones.

2.4. Upstream oil and gas

The upstream oil sector includes exploration, drilling and production of crude oil.

Therefore, upstream oil sector is also known as the Exploration and Production (E&P)

sector. The upstream sector includes the searching for potential underground or

underwater oil and gas fields, drilling of exploratory wells, and subsequently

operating the wells that recover and bring the crude oil and/or raw natural gas to the

surface.

The midstream includes transportation and trading of crude oil to refineries.

The downstream oil sector is a term commonly used to refer to the refining of cru-de

oil and the selling and distribution of natural gas and products derived from crude oil.

Although the overall production of oil is driven by global demand, the value chain is

producer driven and many companies are vertically integrated and have control over

every level in the chain. The recent trend in the industry is for companies to merge to

expand their upstream levels instead of downstream levels.

Literature shows that there is less emphasis on increasing refinery capacity; and

companies are now focused more on exploration and production segments of the

value chain. According to an energy research firm John S. Herald Inc., worldwide


upstream capital spending had been steadily increasing annually until the end of 2008.

Though the current global recession impacted it adversely, the trend in the last decade

gives enough reasons for EPC companies to focus more on upstream oil sector even

though they may not have good presence in upstream sector now.

The credit crunch and economic downturn of 2008 and 2009 have made a deep

impression across business sectors. Emirates Business (2008) reported that Gulf

down-stream oil projects are expected to be the main victim of the global financial

crisis as strong Asian demand for crude could keep upstream ventures on track,

according to a key Gulf investment bank. This is mainly because of a decline in global

demand, threat of oversupply of products such as, fertilizers, petrochemicals and

refined petroleum products and a decrease in margins due to decline in prices and

fixed feedstock prices.

On 23rd December, 2008, Downstream Today reported that, with global demand for

chemicals falling faster than it has in 20 years, 2009 is going to be a challenging year

for the petrochemical industry. It was a prediction that proved to be accurate.

Calling it "a massive footprint shift," Dow Chemical CEO Andrew Liveries

announced his company is likely to restructure operations worldwide to deal with

steep market declines and the global recession, Downstream Today reported. Liveries

added that the market is "as bad as we have ever seen it in our lifetimes," and has

never see so many regions decline simultaneously in the world. "We could be looking

at a couple years of tough and severe correction."

The downward trends in midstream and downstream sectors demonstrate how

important is for EPC companies to focus on upstream sector and diversify in every

available opportunity. Since the late 1950s till date, the Oil and Gas Industry has

continued to serve as the main stay of the Nigerian economy. The industry has widely

been acknowledged as the nation’s live-wire and literatures abound on its role and


significance to the nation (Agusto, 2002; Atakpu, 2007). Furthermore, it is reported

that an estimated $8 billion is spent annually on servicing operations within the

industry and this figure is projected to hit $15 billion within the next few years

(Business Day, 2008). Regrettably, despite these huge sums of money spent in

servicing the industry, only very little proportion of the accruable profit is available to

indigenous oil servicing firms or spent in developing Nigeria’s industrial base.

Majority of the amounts are paid to foreign firms for services such as Fabrication,

Engineering Procurement Construction (EPC), Front End Engineering Design

(FEED), conceptual designs and seismic studies. This results in capital flight as the

profits from the contracts are repatriated abroad, where most of the equipment are

manufactured; thus providing employment opportunities for citizens of other

countries, and in most cases developed countries.

According to industry experts, the main reason for this situation is attributed to the

problem of low local content (LC), which is a situation where most of the service

contracts are awarded to foreign firms because local indigenous firms ‘allegedly’ lack

the requisite skills, technical expertise, manpower and production capacity and

capability to compete favorably (Aneke, 2002; Ariweriokuma, 2009). Oladele (2001)

suggested that low LC in the Nigeria is due to: Deficient capitalization arising from

the tendency of Nigerian entrepreneurs to operate as ‘one man’ businesses; Capital

and structural deficiencies associated with poor training and low managerial ability;

and Inability to attract funds due to lack of suitable collateral and positive corporate

image. In addition, Olorunfemi (2001) and Ogiemwonyi (2001) in similar papers

articulated the problems of low local content to the inability of commercial banks to

provide tenured loans to indigenous firms to execute projects; and that of Nigerian

firms to foster appropriate alliances and partnerships with foreign firms, stressing that

these collaborations needed to be facilitated by the government and the multinational

oil producing firms, respectively.

Furthermore, Heum et al. (2003) summarized the reasons for low local content to

include low technological capacity; lack of funding from financial institutions;


inadequate and incoherent policies/legislations; inadequate infrastructure; unfavorable

business climate; lack of partnership between indigenous contractors and technically

competent foreign companies.

Historically, Nigerians have had very little share of the country’s oil wealth and there

was an urgent need to reverse this trend in the wake of her return to democracy in

1999. To address this anomaly, the Federal Government of Nigeria in early 2000

introduced the Local Content (LC) policy in the oil and gas industry, christened

‘Nigerian Content’ (NC). It was primarily aimed at enhancing increased participation

of local

indigenous firms and was targeted as a tool for transforming the industry through the

development of in-country capacity and indigenous capabilities in manpower

development, facilities and infrastructure towards ensuring higher participation of

local indigenous companies actively in the industry (Lawal, 2006; MacPepple, 2002

and Nwapa, 2007).

It was also aimed at reforming the industry into becoming the economic hub for

promoting higher SMEs participation, job creation and base for industrial growth; as

well as for checking capital flight from the country (Binniyat et al, 2008; Chukwu,

2005 and Gilbert, 2007). The crucial need for this policy was re-emphasized when the

Speaker of Nigeria’s House of Representatives was quoted in the media: “it is

important to note that while the oil and gas industry clearly dominates the Nigerian

economy, a successful local content policy must be a part of a comprehensive

industrial and economic growth strategy for Nigeria as a whole… It should include

both a plan for domestic capacity building and infrastructure development to broaden

the national industrial base (Business Day, 2008). On its part, the SMEs sector has for

long been recognized as the back-bone, engine-room and catalyst of economic growth

and development in several countries (Ariyo, 1999; Day, 2000; Ihua, 2005). SMEs

constitute a major proportion of all the businesses in most countries and play salient

roles in the area of wealth creation, provision of products and services, job creation,


enhancement of better living standards and contribution to the GDP of both developed

and developing countries. Although while SMEs in developed countries tend to be

negatively affected by internal factors such as poor management capabilities and

ineffective marketing efforts; their counterparts in developing countries such as

Nigeria tend to face more challenges from external factors such as unfavorable

business climate, inadequate infrastructure and lack of social support (Ihua, 2009;

OECD, 2000; Okpara, 2000).

Nonetheless, literature is replete on studies linking entrepreneurship with economic

growth; as well as associating the pace of entrepreneurship development with

government policy. Researchers have focused on what have been termed

“entrepreneurial environments”, referring to certain factors that influence the

willingness in individuals to engage in entrepreneurial activities and business start-

ups. While these factors include the availability of legal and institutional frameworks,

organized markets, skilled manpower, experienced entrepreneurs and the personal

possession of certain skills, traits and motivation; nonetheless, the availability of

favorable government policy has also been identified as a critical factor to

entrepreneurial development (Acs and Armington, 2004; Frese and De Kruif, 2000;

Gnyawali and Fogel, 1994; Wennekers and Thurik, 1999). Similarly, it was expected

that the LC policy would promote higher participation of small to medium-sized firms

within the industry and subsequently enhance value addition to the nation. According

to Heum et al.(2003), there exists several opportunities in the industry, through which

small firms can seek participation and contribute to economic growth, such as:

Fabrication and construction; Well construction and completion; Modification,

maintenance and operations; Transportation; Control systems and ICT; Design and

engineering; and Consultancy.

Despite these opportunities, the last couple of years have witness mixed reports and

speculations among industry stakeholders like the media, multinational firms and

regulators, as to the efficacy of the Local Content policy in meeting its objectives. The

initial target of the government was to achieve forty-five percent by the end of 2007


and seventy percent by 2010. In 2008 the Nigerian National Petroleum Corporation

(NNPC) reported that the policy has succeeded in increasing local content to between

thirty-five and forty percent. However, this claim has been refuted by the media,

stating that evidence shows that only about 15 to 20percent local content may have

been achieved (Business Day, 2008). It is not clear how the policy was measured or

the yardstick applied to generate those results. Nonetheless, we argue that a better

way of appraising the policy would be by assessing its implication on different

stakeholder groups within the industry. For instance how has the policy impacted on:

the nature of contract awards within the industry; the supervisory and monitory

activities regulators; biodiversity and environmental management; the promotion of

indigenous new entrants or already existing firms within the industry?

In the light of the above, our main research question is: What has been the implication

of the LC policy in promoting the higher participation of indigenous Small to

Medium-Sized firms in the oil and gas industry? This paper is part of an extended

study attempting to appraise the efficacy of the LC policy; and how it has been able to

add value to the economy, create jobs, develop local infrastructure, stimulate higher

participation of indigenous companies and enhance the utilization of local human and

material resources. Data was collected for this study using the multiple-case study and

semi-structured interviews techniques. The preceding paper from the authors reported

results from only two cases; while a subsequent paper reports quantitative data from

survey conducted on indigenes of the Niger Delta region, across three states, Bayelsa,

Delta and Rivers states. However, this paper reports finding from qualitative data

collected via three cases and five interviews conducted with key informants/experts

from Nigeria’s oil and gas industry.

2.5. Downstream EPC projects

A Typical LSTK downstream project spans around 2-3 years and involves a multi-

million dollar effort. According to Bertelsen & Nielsen (1997), construction of such

industrialized facilities involves a specialized supply chain where EPC contractor acts


as the channel co -coordinator. The typical players involved in the value chain are

shown in Figure 4. It includes a swarm of players from process technology firms,

equipment manufacturers to construction sub-contractors. There are four key stages

involved in the execution of EPC project. We briefly discuss these four stages in the

Table 1 below.

The general flow of information between the various phases in an EPC project is as

follows (informational flow: figure 5).

This is only a general direction. In reality these functions are highly dependent and

overlapped. The information flows ‘To and fro’ between these functions and are

explained in the following Units. It displays the extent of overlap between different

function in the form of Gantt chart



2.6. Typical Construction sequence in EPC projects

The outcome of the first three phases provides the necessary work front for

construction. The construction involves the majority of time in an EPC project. The

construction in itself has a typical sequence which is shown below (See Figure

below).

2.7. Project Organization structure

The formal functional organization structure that executes engineering and

construction projects is shown in figure 8. This is the most commonly used structure

in the industry. In this section we will discuss about the key roles involved in

execution of those projects. Later in unit-5, let us see how this structure is reorganized

to form a value stream based organization structure.


The project director/ manger (PM) is the top authority who executes the entire cycle

of EPC projects and wholly responsible for the profit from the project. There are

number of other managers from different functions giving support to the project

manager. (See Figure below)

The engineering division consists of several engineering functional disciplines. Each

of these functional disciplines is a team, directed by a senior lead engineer. Project

engineers are those who coordinate between those functional teams and regularly

assist the project manager in resolving the issues that pops up in a project. According

to Ballard & Howell (2003), “project engineers are seasoned engineering leads and

report either directly to the project manager or to engineering managers”.

Procurement manager handles a team, who are specialized in handling all supply

chain related activities like vendor identification, purchasing, coordination with

vendors and material handling etc.


The construction manager is solely responsible for the on-site construction progress

and reports directly to the project manager. It involves managing various skills (from

labors to engineers), which is very different from engineering and procurement

phases. The Projects managers are the most powerful in a project, but when it comes

to reality they will have to cooperate with a matrix of other organization managers in

order to ensure smooth project execution. In addition to these functional departments,

Project control and planning group plays a significant role in executing the projects

smoothly. They are responsible to track the project progress in terms of schedule and

the budget, and report to the management if there are any deviations. Then

accordingly measures are taken to put the project back in track. They develop the

project plans, schedules and prepare the work break down structures for each

engineering functions. Later in section 4.2, planning and creation of

WBS along value streams is discussed in detail. There are also few other departments

involved in the front-end project bidding and project grant phase. Those groups are

estimation, budgeting and contracts management. Other supporting functions include

material management, Project IT, Quality group/ TQM.

Moreover, there is a practice of creating task force in order to accelerate the works in

larger projects. It is a cross functional team that comprises of engineers from different

functions. It is formed on the basis of the task that has to be accelerated. During this

phase, members are literally brought out of their functional discipline and located

separately. This team mainly focuses on the project progress rather than working for

their corresponding functional departments. This is the most preferred method for

project managers in critical situations and is hated by the functional heads as it

disturbs their regular working.


2.8. Industry Trends and Productivity issues

This section gives a brief overview of common management issues and their root

causes from the industry. This will facilitate the process of finding lean literatures on

productivity tools.

2.8.1. Key Industry Trends

For the last few decades, there has been no change in the organization and structure of

EPC projects. But there is a drastic change and trends in the external environment

factors that have made the current organization structure unable to cope with them.

This has led to many common management and productivity issues. The key trends

that led to such issues are discussed in detail as follows:

Increase in Client Power: As the prospects of industry grew, there was a huge increase

in low cost contractors. This has led the clients to choose from many, based on their

expediency. This in turn has affected the EPC contractors, by increase in client

pressure to reduce the project cycle time and compress on their profit margins; in spite

of increase in project complexity. According to Repenning and Sterman (2001), the

major factor behind this trend is the lack of significant process or technology

innovation in the industry over the last few decades. Thus this imbalance between the

client and the contractors has led to less motivation for the contractors to invest in

productivity improvements. Increase in Global Execution: The distributed pattern of

petrochemical investment has led to execution of projects globally across the world.

Also, the increase in pressure of reducing cost has moved the contractors for

outsourcing in low cost countries. Result is the fragmentation of projects, where most

of the engineering and procurement activities are spread out to reduce the cost

(Backhouse and Brookes, 1996). This has led to various complex coordination issues

adding up to their regular work.


Increase in project complexity: The intensification of petrochemical plants in both

scope (Client handover requirements and Safety) and scale have led to new challenges

in coordination (Ballard, 2008), which the current structures might not deal

effectively. Increasing IT complexity: Information flow is critical in such complex

projects. The range of IT tools from auto-simulators to 3D designs has fundamentally

changed the work process in this business by declining project performance rather

than increasing their efficiency. The reasons claimed for this are:

Reduction in computational cost of change has an impact on 'behavioral

change' where both engineers and clients can make frequent design

modifications.

IT has changed the meaning of 'Project deliverable', while project procedures

remain the same (George Reichard et al; 2007). For instance, the process

departments delivers P&ID as physical document, for which input information

are obtained from multiple engineering groups. IT has changed this into mere

report with no critical value added. Progress monitoring and control have also

become complicated due to this IT impact.

The software tools for these IT applications undergo a frequent change, which

means that a project with 2-3 years duration has to adjust to this IT changes

every 1-2 projects. These tools have still not yet grown to deliver full

productivity promises (Ballard, 2008).

2.9. Common Management issues in EPC Projects

Concurrent engineering: As discussed in the previous section, the increase in pressure

to reduce the cost, project cycle time in spite of increase in scale and scope of the

project has led the EPC contractors to parallelize the tasks heavily. To compress the


project cycle time, the activities are overlapped in spite of being sequential (Ballard,

2001). This setup is called concurrent engineering.

Insufficient Traditional coordination mechanisms: Given rise to serious coordination

issues as discussed above, the traditional way of doing it is no longer sufficient

(Ballard & Howell, 2003). Earlier the execution was mostly sequential and it worked

well with the teams that located closely. However this cannot help in the current

situation, where concurrent engineering, globally distributed sites and outsourcing has

become very common. This again adds up to serious coordination issues, that only

pops up in the last minute and give rise to costly rework cycles.

Wrong incentives encouraged in the industry: As said earlier in Table 1, around 80%

of the project cost is represented by procurement and construction and while

engineering represents only 20%. But the engineering cost has direct influence over

the procurement and construction cost. The importance of this is not preached in

reality during project contract negotiations. During this process, both the contractor

and client are ready to compensate for the engineering cost incurred. This way of

emphasizing on controlling the project cost at expense of engineering costs, place the

project at risk. It also put the engineering leads in pressure to minimize the cost

incurred and will lead to issue like sub-optimizations that will have serious impacts on

the construction phase.

Unworkable budgets: Due to decline in pricing power as a result of poor performance

and industry changes, most of the EPC contractors tend to start a project with

schedule and cost budgets that are not attainable (Patty& Denton, 2010). This sort of

environment causes serious behavioral patterns into the teams; make them lethargic

about the targets as they know that it is not possible to achieve the targets. The

managers knowing this can even set tighter targets to the team and thus create a

negative spiral.


Functional focus amplifies problems created by man-hour focus: The problem of

excessive focus on man hours is further amplified by with functional focus. Since this

business is characterized by low profit margin and evaluated based on the manpower

utilization(Costa,2009), the functional departmental heads are in a continuous

pressure to make their staffs fully engaged and get the job done in the minimum

period. This in turn doesn’t provide enough time for the different functional engineers

in the review cycles, which can lead to finding of an issue at later stage. This can lead

to rework and can have serious impacts in the downstream activities. Thus this hides

the problem and creates a wrong sense of progress.

2.10. Consultancy Problem definition

Many of the issues discussed above have been encountered with Dodsal and develops

into two major problems: Project Overruns in terms of schedule and budget, ending

up in depletion of profit margins (Refer figure 9 above). The scope of this internship

program was to find ways to improve their operational efficiency and avoid overruns

in the project using lean principles. This report finds ways to address those issues by

using the following approach as shown (Refer figure 10)


2.11. Common issues in concurrent development projects

Many problems that are associated with EPC project management in a concurrent

engineering setup has been explored deeply. According to Backhouse and Brookes

(1996), the execution of concurrent engineering setup doesn’t succeed most of the

time because of misalignment with resources, metric, process, tools and also the focus

of the organization in the need of efficiency. He also adds that inappropriate

organizational structures, policies and decisions take place due to the mismatch

between the technical organization, dynamic complexity of the projects and also

mental models used by the managers.

DSM is a powerful technique that can be used by the managers to look at those

complexities in new perspective and can help them manage the projects efficiently.

Sterman (2000) describes about how to overcome the behavioral patterns that is been

developed from the sequential working, by analyzing an EPC paper mill project using

DSM. Ford and Sterman (2003) discuss the short sighted management policies as the


reason for project failure. The project appears to be on schedule until 90% progress

and freezes. It is then completed after consuming about the two times the duration of

planned schedule. Repenning et al (2001) explains about the models that help

understand how fire fighting, recognition of unplanned allocation of resources are

discovered last in the project cycle and these are very familiar in concurrent

development projects. They explain about how the manager’s attempt to push the

resources to do a bit more in a short time , forms the basis for their decrease in

concentration to the upfront task and finally ending up with issues in downstream

activities.

Though the literature gives enough insights that can identify and resolve the problems

that occur in the engineering and construction projects, it is not easy for the

organization to utilize these recommendations to put them in action. Repenning and

Sterman (2001) calls this space between the accessibility to proven solutions and the

lack of ability to implement them as "improvement paradox". They propose that this

inability is not because of the specific improvement tool, but because of the influence

by th e physical and psychological factors and situations, in which the new

development programs are introduced.

2.12. Lean approach to productivity improvement

According to Womack and Jones (2003),” Lean Principles concentrates on five core

principles” as shown below. It was derived from the highly successful practices of

Toyota production system. Being motivated by its achievement in the manufacturing

domain, this concept is being extended into the EPC projects (Lean engineering) and

an organization providing the environment for Lean engineering is developed (Lean

enterprise). This involves a huge impact on the organization and the implementation

can be achieved through a fundament shift in management attitude.


Lean requires system wide thinking and decentralized action. Hence renovating the

current traditional approach with lean is very difficult and demands for process

preparations called stability conditions.

Marchini (2004) explains the importance of expanding lean thinking into the

associations between the different firms involved in the entire construction value

chain. Also there are several initiatives to adopt lean philosophy in engineering &

construction industry, from industry key players. Lean Construction Institute (LCI)

plays a significant role in defining new lean tools and techniques for the industry.

Most of them has been adopted and in practice across the globe.

Most of the Lean experts and practitioner’s insist to look at a system as a whole,

before getting down to optimize any individual process or process group in it. It can

be accomplished by the use of value stream mapping. It creates an end to end process


map of material and information flow in a system. Thus by creating a high level

conceptual view of a system, it promotes to identify areas where improvements can be

made to increase the efficiency. Without doing this, any improvement done in the sub

process doesn’t work efficiently to bring end value for customers.

As a result, most of the lean practitioner’s and experts use value streams as the

opening step in implementing lean. According to Rother and Shook, (1999), Value

stream is defined as the set of activity involved in producing a finished good from raw

materials or bringing concepts to reality. The value stream analysis involves

elimination of non value added activities in the system process flow and makes the

system capable of reacting rapidly to the end customer. The first step in conducting a

value stream mapping is to create the current state of process map that capture the

flow of material and information in the system. It also captures other key information

that creates value and non value in the process. This information serves as the basis

for applying lean principles and enables creating a future state map with the proposed

process improvements. The most important thing in creating the future map is to

classify the activities into value added and non value added activities. The non value

added activities can give rise to waste and supporting activities. These concepts are

very predominant in manufacturing sector and several initiatives are being taken to

extend these concepts into other areas. Morgan (2004) and McManus (2002) argue

about the implementation of value streams in product development in automotive and

aerospace industries.

2.13. Analyzing information flow using Design Structure Matrix (DSM)

DSM- Design Structure Matrix is a compact and also powerful method for analyzing

the information flow and dependencies between the components in a system. DSM is

otherwise called as Dependency system matrix. It normally represents the components


in a system as rows and columns in an n-square matrix. Rows and columns represent

information exchange and dependency relationships between these elements and their

corresponding intersection shows the interaction between them. The off-diagonal cells

in the matrix indicate system interactions. It captures interaction between the system

elements in such a way that, it brings out feedback iterations in the system design.

Petrakis and Pultar (2005) illustrate that, DSM also involves mathematical analysis

and many algorithmic tools which are used to improve the system design. Eppinger

(2001) provides an excellent overview of DSM. DSM representation is also used to

analyze various other factors such as project activities, process parameters, system

components or team organization. Many types of DSM can been seen based on the

system elements.

Coupled tasks are the most common feature in a concurrent engineering setup and the

resultant feedback loops that occur between the coupled tasks are called as iterations.

Iterations can be planned or unplanned. Unplanned ones cause delay in the projects.

Traditional planning process ignores such feedback loops which leads to rework and

hence causes delay in the project. Ford and Sterman (2003) uses systems dynamics

models in concurrent engineering setup to identify that, delay in discovery of rework

leads to unplanned Iterations.

The most important value of DSM is to see a complex system as a whole and

understand it. Traditionally, managers were not able to figure o ut complex systems,

but now using DSM, they can capture a complex system in a single view. By DSM

analysis of a single value stream, the root cause for rework in Engineering &

Construction projects has been identified for Dodsal management (Refer Unit 4).

Eppinger (2001) explains that DSM allows not only identifying the issues but also

helps mangers to fix them. McManus and Millard (2002) suggest, DSM is a useful

tool for mapping and analyzing value streams in product development and project

management where information flow is large compared to material.


2.14. EPC contracts

2.14.1.Definition of contracts

Various definitions have been proffered by different authorities for the term

‘contract’.

Sir William Anson, the learned English authority on the Law of Contract has defined

a contract as:

“A legally binding agreement between two or more parties, by which rights are

acquired by one or more to acts or forbearances on the part of the other or others”

An engineering contract dictionary defines a contract as:

“A binding agreement between two or more persons which creates mutual rights and

duties and which is enforceable at law(Ir Harbans Singh KS 1, 2007)”

2.14.2.Contract Elements

The legally essential elements of a construction contract include an offer, an

acceptance, and a consideration (payment for services to be provided). The offer is

normally a bid or proposal submitted by a contractor to build a certain facility

according to the plans, specification, and conditions set forth by the owner.


Acceptance takes the form of a notice of award, as stated earlier. Consideration

usually takes the form of cash payment, but it may legally be anything of value (S. W.

Nunnally, 2007).

There are certain elements that must be present for a legally binding contract to be in

place.

According to Frederick E. Gould & Nancy E. Joyce, 2003 said that the first two are

the most obvious:

An offer: an expression of willingness to contract on a specific set of terms,

made by the offer or with the intention that, if the offer is accepted, he or she

will be bound by a contract.

Acceptance: an expression of absolute and unconditional agreement to all the

terms set out in the offer. It can be oral or in writing. The acceptance must

exactly mirror the original offer made.

A counter-offer is not the same as an acceptance. A counter-offer extinguishes

the original offer: you can’t make a counter-offer and then decide to accept the

original offer.

A request for information is not a counter-offer. If you ask the offer or for

information or clarification about the offer, that doesn’t extinguish the offer;

you’re still free to accept it if you want


2.14.3.The Essence of a Contract

According to Frederick E. Gould & Nancy E. Joyce, 2003 said that the essence of a

contract has been judicially expounded to the following effect:

To constitute a valid contract, there must be separate and definite thereto; to parties

must be in agreement, that there is consensus ad idem; those parties must intend to

create legal relations in the sense that the promises of each side are to be enforceable

simply because they are contractual promises and the promises of each party must be

supported by consideration.

All contracts are built upon the basic premise of the meeting of minds, the idea of

assent and agreement as to the same thing. Agreement is to be established based on

objective considerations such as conduct and not inferred from the mere mental

element of intent. The other ingredients, e.g. consideration, legality, etc are then

added on to reinforce and supplement the basic premise to ensure that the essence of a

valid contract is tenable at law.

2.14.4.Basic Elements of a Contract

According to Frederick E. Gould & Nancy E. Joyce, 2003 said that the basic elements

which are necessary for the creation of a legally binding and enforceable contract are

essentially as represented in figure 2.1 and listed here under:

A clear or firm offer or proposal

An unqualified acceptance of the offer/proposal


Intention to create legal relations: both parties must show an intention to enter

into a legally binding agreement

Consideration: each party must contribute something in reciprocation of the

other’s promise

Certainty : the terms of an agreement must be certain or capable of being made

certain

Capacity : the parties must have a legal capacity to contract

Consent : the parties must contract with free consent, i.e. Consent must not be

obtained by coercion, fraud , duress, misrepresentation, undue influence, etc

Legality : the contract must be formed within the boundaries of the law, e.g.

Its object or consideration must not be unlawful

Possibility : the contract must be capable of performance both physically and

legally


2.14.5.Types of contracts

Contracts based on the pricing/payment criteria

Contracts based on the method of contract procurement

Miscellaneous types of contracts

One of the principal methods of classifying contracts is based on the method by which

the contract price is established and subsequently payment is made to the contractor.


Here, although there exists traditional terminology to describe the methodology

adopted in specific applications, recent practices in the industry have led to the

blurring of precise definitions thereby creating considerable confusion on part of the

practitioners (Frederick E. Gould & Nancy E. Joyce, 2003).

According to Frederick E. Gould & Nancy E. Joyce, 2003 said that it is the intent of

this chapter to look at the traditional approach whilst at the time, to address possible

areas of confusion. The starting point is the further sub-classification of contracts

under this category into the following types:

a) Fixed price type of contracts

b) Cost reimbursement types of contracts

c) Miscellaneous type of contracts

Fixed price type of contracts

A fixed price contract is a contract in which the contractor quotes a price for the

whole of the work. In essence, the contractor takes the risk of judging how much

work is involved and its cost. In practice, if the contractor is entitled to a variation in

the contract sum. Then fixed price items may be defined as items paid for on the basic

of a predetermined estimate of the cost of the work, an allowance for the risk involved

and the market situation in relation to the contractor’s workload, the estimated price

being paid by the client irrespective of the cost incurred by the contractor (Frederick

E. Gould & Nancy E. Joyce, 2003).


According to Frederick E. Gould & Nancy E. Joyce, 2003 said that the common

species of fixed prices contracts encountered in the engineering/ construction industry

include the following:

(a) Lump sum contracts

Lump Sum contract where a party undertakes to complete the whole of the work for a

stated and fixed amount of money payable by the other This is so even though it may

contain express stipulations permitting adjustment of the contract sum for

eventualities such as variations, payment for extended preliminaries, etc. what is

important is that at the time of contracting, both parties must have agreed upon a lump

sum price to be payable for a defined scope/quantity of work to be undertaken. It

should be noted that most of the common Standard Forms of Contract used in the

country such as the JKR Forms, IEM Forms, etc are essentially entire contracts for a

lump sum with modifications to ameliorate to rig ours of strict entirety. The two

principal types of lump sum are with bills of quantities and with drawings and

specification.

(b) Measure and value contracts

This type of contract is utilized principally where the exact scope and quality of the

work cannot reasonably be determined accurately at the time of tendering. To enable

the tenderers to establish a price, a basic is provided by the employer in the invitation

to tender documents. Either during the currency of the contract or upon completion of

the works, the works are measured, valued or payment effected to the contractor. Such

contracts are common, rather than an exception in civil engineering and infrastructure

projects especially those involving earthworks, work below ground level, etc.

Measure and value contracts come in the two basic forms based on either a bill of

approximate quantities or a schedule of prices.


(c) ‘Turnkey’ contracts

Going under various labels such as ‘package’ deal type of contracts, ’design and

build/ design and construct’ contracts, EPCC type of contracts, etc the defining

characteristic is the combining of all the fundamental tasks of the project, i.e. design,

production (construction or building) and management in a single package. The

contractor takes full responsibility and carries sole liability for design and

construction. In such typical contract, the employer approaches a contractor with a set

requirements may be mere brief statements or detailed specification, drawings,

schedules, etc depending on the nature and complexity of the project or the extent to

which the employer has the expression of his wants. The contractor responds to the

employer with an offer called the ‘contractor’s proposals’ which will include

production as well as design work, contract price and the manner in which the

contract price has been calculated, e.g. the contract price analysis, etc. bills of

quantities are strictly not applicable in a ‘Turnkey’ contract and if something akin to

these are used, they are merely for the purposes of the contract sum analysis or for

making payment to the contractor.

Though ‘turnkey’ contracts can be on fixed price or cost reimbursement basis, the

accepted practice in this country favors the fixed price approach. The norm is for the

contractor to contractor to contract on the basic of a predetermined estimate of the

cost of the complete work. this is in line with the selling point of such an arrangement,

whereby the contractor bears all risks, inclusive of costs and pricing risks subject to

adjustments occasioned by variations ordered by the employer, extended

preliminaries, etc. another feature sometimes encountered in such contracts is a

guaranteed maximum sum, a sum offering assurance to the employer on his maximum

price exposure.

Cost reimbursement type of contracts


Cost reimbursement is a term used to describe one of the two principal methods of

making payment under contract. Cost reimbursement contracts are not popular in this

country as it burdens the employer with all the risk and with no advance notion of the

eventual financial commitment. It general imposes no incentive on the contractor to

maximize efficiency and keep the costs down since he is already assured of his fee in

advance. Seemingly with this arrangement, the employer bears the brunt of this

disadvantage whilst simultaneously guaranteeing the contractor of his fee with little or

no attendant risks (Frederick E. Gould & Nancy E. Joyce, 2003).

The types of cost reimbursement contracts are:

Cost plus fixed fee contracts

Cost plus percentage fee contracts

Cost plus fluctuating fee contracts

Contracts Based On Method of Procurement

a. Traditional General Contracts (TGC)

Appearing under various labels such as general contract, ‘employer-design’ contracts

and the like, traditional general contracts are basically characterized by the separation

of the design form the manufacture (i.e. construction or installation) elements of the

contract. The employer causes the design to be prepared by his professional designers

and thereby takes full responsibility for the design. Depending on the contractual

arrangement selected, the employer may also cause bills of quantities to be prepared

(IrHarbans Singh KS , 2007).


Under thus methods of contract procurement, the contractor builds or manufactures

what the designers have designed and/or specified. he is only responsible for the

material and workmanship aspects of the contract and for the performance of his sub-

contractors (inclusive of any nominated sub-contractors) not withstanding its ‘time-

tested’ credentials such contracts are slowly losing favor with the onslaught of e.g.

‘package’ deal type, construction management, etc (IrHarbans Singh KS , 2007).

b. Management contracts

A management contract has been described as a form of contractual arrangement

whereby a contractor is paid a fee to manage the building of a project on behalf of a

client It is, in essence, a contract to manage rather than contracts build (Ir Harbans

Singh KS, 2007).

The characteristics of a management contracts are that the employer engages the

contractor design to participate in the project at an early stage contribute construction

expertise to the design and manage the construction process, the latter being

undertaken by a number of works (or ‘trade’) contractors. The management contractor

is paid a fee, which fee may be on a fixed lump sum basic or a pre-agreed percentage.

Depending on the nature of the contracts entered between the employer, the

management contractor and the ‘trade’ contractors, the management contractor may

or may not carry liability for the defaults and/or omissions of the latter, delay

inclusive(IrHarbans Singh KS , 2007)

c. Construction management contracts


According to IrHarbans Singh KS, 2007 said that as aptly named, construction

management contracts are a sub-set of the general corpus of management type of

contracts and such share common characteristics with management contracts

discussed above. There essential differences are namely:

The employer has direct contracts with the ‘works’/’trade’ contractors

The employer pays such ‘works’/’trade’ contractors directly

The construction manager us not liable for he acts and/or defaults of the

works’/’trade’ contractors

The construction manager essentially acts as a mere consultant instead of a

contractor in the general sense

d. ‘Package’ Deal Type of Contracts

According to Ir Harbans Singh KS, 2007 said this method of the procurement where

the contractor is responsible for both design and construction (and in some cases for

even financing, complete fitting out, ‘technology’ transfer, etc). The common

variations include:

Design and Build (D&B) contracts

Design and Construct (D&C) contracts


Engineering, Procurement and Construction (EPC) contracts

Engineering, Procurement, Installations and Construction (EPIC) contracts

Engineering, Procurement, Construction and Commissioning (EPC) contracts

Selection of the contractor is normally based on competitive tendering or

Negotiation and payment effected on either an interim, milestone or lump sum

Basic.

e. Build, Operate and Transfer Contracts

According to Ir Harbans Singh KS, 2007 said that this novel method of contract

procurement surfaced on the local scene directly as a result of the government’s

privatization policy. Under the scheme, the contractor is responsible for:

Financing the project at all stages

Undertaking the relevant design and construction

Operating and maintaining the works over a stipulated period


On the lapse of the agreed period, reassigning it to the employer at no further

charge

f. New Types of Contracts

According to Ir Harbans Singh KS, 2007 said that with the recent building boom, the

local industry experienced some ‘non-traditional’ Forms of Contract procurement

including the so called ‘Fast Tracking Contracts’, Partnering Contracts’ and ‘Fee

Contracting’

Fast Tracking Contracts as their name aptly describes them are nothing more

than contracts undertaken on a fast track basis with overlapping or concurrent

stages instead of the traditional sequential of activities. The ultimate objective

is to complete the project in the shortest time possible.

Partnering Contracts are in essence an extension to the normal serial contracts.

Under this system of the contract procurement, over a pre-determined or an indefinite

period of time’ the contractor automatically receives all new contracts from the

employer with payment to be made by reference to an initially agreed formula.

Fee Contracting were made to introduce this species of the contract locally in

the late nineties, the economic ‘meltdown’ at the material time thwarted such

efforts. Nevertheless it is one type contract that may become significant in the

near future involving large and technically complex projects.

Delivery Methods


The term delivery method refers to the owner’s approach to organizing the project

team that will manage the entire design and construction process. This selection

process in governed to a large extent by risk but also by the owner’s desire to find a

method that will deliver the project on time, budget, and in a form that will meet the

owner’s needs most effectively (Frederick E. Gould & Nancy E. Joyce, 2003).A

number of proven strategies can be used to accomplish these ends. The three most

common are traditional, design/build and construction management. Combinations of

these strategies may be employed well. Each has its distinct advantages and

disadvantages, but the choice is not always clear and simple. The owner must

carefully weigh his or her options to ensure the right choice for the specific project

(Frederick E. Gould & Nancy E. Joyce, 2003).

Conventional/Traditional Contract

In this arrangement, the owner first hires a design professional, who then prepares a

design, including complete contracts documents. The design professional is typically

paid a fee that is either a percentage of the estimated construction cost or a lump sump

amount, or he or she is reimbursed for costs at an agreed-upon billing rate. With a

complete set of documents available, the owner either conducts a competitive bid

opening to obtain the lowest price from contractors to do the work or negotiates with

a specific contractor. The contractor is then responsible for delivering the completed

project in accordance with the dictates of he contract documents. The contractor may

choose to subcontractor much of the work or may have the forces in house to

accomplish the task. That choice usually depends on the contractor remains solely

responsible for execution of the work. This delivery mode become popular near the

turn of the twentieth century in response to the increasing specialization of the various

building profession and until recently it was the predominant mode of delivery

(Frederick E. Gould & Nancy E. Joyce, 2003). During the construction process, the

owner may hire the architect to administer the contract or may choose to have in-

house employees do this task. Administering the contract consists of observing the

work to monitor quality, carrying out the change order process, certifying payment to


the contractor and ensuring that the owner is receiving the product called in the

contract documents. If the owner hires the architect, he or she does so through an

agency relationship that is, the architect is bound by the legal rules of this relationship

and as such is empowered to act in the owner’s name. The contractor, on the other

hand, is hired in a simple commercial contract and as such is charged with carrying

out the terms of the construction contract. There is no contract between the architect

and the contractor. The relationship is once in which the architects acts for the owner

during any dealings with the contractor. Nor are there contract agreements between

the architect/owner and the specialty subcontractors. The relationship exists only with

the contractor, who is solely responsible for the contractor performances (Frederick E.

Gould & Nancy E. Joyce, 2003).

2.14.6.Role of Owner, Contractor and Design Professional under a

Conventional Contract

Normally the outside independent architect or engineer prepares the plan and

specifications for the owner prior to tendering. This means that the architect or

engineer id legally responsible to the owner for design defects according to his

professional services contract. Generally, the design professional has no liability for

defective construction, other than for defects that should have been reasonably

observed from field services & inspections which he has carried out. Most important

of all, the independent architect or engineer has contractual obligations to protect the

owner. One result is that the architect or engineer frequently acts as agent for the

owner during construction phase (Bryan S. Shapiro, 1994).

Under a conventional contract, the owner employs plans and specifications by way of

a competitive bidding format to obtain tender bid and to select the successful

contractor. This means that the owner warrants the sufficiency of the plans (full

disclosure of information), and assumes any liability for defects n the plans and

specifications that he provides to the contractor. Conversely, the contractor is


responsible for defective construction and workmanship, but has no liability for

design defects (Bryan S. Shapiro, 1994).

The typical construction contract approach leaves a big hole between the design

professional and the contractor. These two parties are not linked by contract: they do

not owe any contractual duties each other, although recent jurisprudence suggests that

in certain circumstances, the design professional may indeed owe a legal duty in tort

to a bidding contractor. Also, their bonding and insurance requirements are arranged

independently. Legally, in this typical construction approach, the design professional

and the contractor occupy positions that are on the “opposite side of the table” (Bryan

S. Shapiro, 1994).

Advantages

The traditional method is a known quantity to owners, designers and constructors. For

many years, the mode of delivery was the predominant one for the construction in the

United States. The procedures and contractual rules of conduct have been worked out

and are well understood. Many professionals prefer this well-d4efined relationship,

which reduces their level of risk because it reduces uncertainty. Under the right

circumstance, this means that a project is more likely to proceed smoothly from

beginning to end (Frederick E. Gould & Nancy E. Joyce, 2003).The mood also

contains considerable contractual protection for the owner. The allocation of risk for

construction performance rests almost completely on the contractor and

subcontractors. The owner is insulated from many of the risks of cost overruns, such

as labor inefficiencies, nonperforming subs, inflation and other vagaries of the larger

economic picture. In most instances, the owner knows the final cost at the beginning

of construction, and the risks of cost overruns are borne by the contractor. However,

the risk of cost increases depends to large extent on the accuracy and completeness of

the contract documents. If they are unclear or not well done, the changes that must

ensue can raise the owner’s costs considerably (Frederick E. Gould & Nancy E.

Joyce, 2003).


Additionally, the traditional method provides the owner with all the benefits of open

market competition. The open bidding procedure, in which the lowest bidder is the

“winners”, gives the owner the lowest price available in the marketplace and

presumably the greatest economic efficiency (Frederick E. Gould & Nancy E. Joyce,

2003).

Finally the owner does not have to be heavily involved in the construction process. He

or she must be involved in the design process to make key decisions about whether or

not to accept the design but once construction actually begins, the owner is

represented by professionals empowered to act in his or her name and to make

recommendations. Day to day interaction is no necessary (Frederick E. Gould &

Nancy E. Joyce, 2003).

Disadvantages

Nevertheless, several elements of the traditional method can work against the owner.

First, the construction professional does not enter the process until the design is

complete, meaning that the design is not usually reviewed for constructability before

it is finished. Design features that could have been built more economically or

effectively often result in higher costs. Some design firms overcome this problem by

hiring preconstruction consultants or having construction professionals on their staffs.

Although this benefits the project it is not as effective as having the design reviewed

by the person who will actually have to build it (Frederick E. Gould & Nancy E.

Joyce, 2003).

Second, with the traditional approach it is difficult to reduce the time required to do

both design and construction. As figure 2.2 shows, the process is sequential and

linear; there is no opportunity to overlap tasks and thus reduce overall time. This may


raise interest expenses on construction loans and other costs and can expose the

project to greater risks of inflation. The time element problem is one of the primary

reasons for the recent decline in the use of the traditional method (Frederick E. Gould

& Nancy E. Joyce, 2003).

Finally, all parties work autonomously in this mode. The designer designs the project

based on the owner’s instructions. The general contractor prices and schedules the

project based on the construction documents alone. This approach provides little

opportunity for interaction and team building among the participants and can lead to

major breakdowns relationships (Frederick E. Gould & Nancy E. Joyce, 2003).For

example, when the contract must be interpreted, the parties involved view the

situation from fundamentally different perspectives. A firm fixed-price contract can

considerably exacerbate the problem because the contractor had to competitively bid

for the job and thus interprets details as cost-effectively as possible. The owner and

the designer, on the other hand, want to receive the most for their money. Such

differences in interpretation lead to conflicts that can quickly escalate, creating

adversarial relationship (Frederick E. Gould & Nancy E. Joyce, 2003).Unforeseen

conditions on a job can also be a source of conflict and may lead to changes in the

contract. A through design process and complete set of drawings attempt to minimize

these conditions. Conducting additional soil borings or opening up walls in renovation

work can help to properly identify actual conditions and avoid future conflicts.

Unfortunately, no every condition can be identified and when unforeseen conditions

or events occur the contract may have to be renegotiated. This takes away any


advantage to the owner in terms of know costs when construction begins (Frederick E.


The design-builds concept as originally conceived was based on the concept that a

single firm had the in-house staff and expertise to perform all planning, design, and

construction tasks. Later, increased interest in the concept had engineers, architect and

conventional contractors seeking to compete with he original design0build firms to

meet the growing interest by owners in the project delivery process (Frederick E.


Under the current approach, instead of limiting design-build to firms with in house

capability in both areas, the fields has now been opened up to permit contracts with

engineers who subcontract the construction portion to a contracting firm, with

construction contractors that subcontract design services to an engineer or architect

and with engineers and architect in joint venture with contractors that subcontractor

design services to an engineer or architect and with engineers and architects in joint

venture with contractors firms (Frederick E. Gould & Nancy E. Joyce, 2003).

There are basically three types of design-build firms today, contractor led, and

designer led and single firm. Contractor-led firms tend to dominate due to their

experience in estimating, purchasing. Cost control and construction supervision, not

to mention the contractor’s better financial backing and ability to manage risk

(Frederick E. Gould & Nancy E. Joyce, 2003).

For the owner, the design and build method provides a single point of contact and

responsibility throughout the life of the project. The firm hires by the owner will

perform both design and construction. Entities offering this service may be

design/build firms with in-house employees or joint-ventures firms that come together

contractually to perform a single project. In either case, the design/build entity can

hire subcontractors who perform the actual construction in the field (Frederick E.


Gould & Nancy E. Joyce, 2003).This mode is used extensively in certain industries,

particularly industrial construction. The complexity of the industrial projects such as

oil refineries and power plants makes them a good candidate for design/build. Before

the traditional method become popular, design/build was actually the preferred mode

of delivery for almost all projects, although it was not named as such. An owner hired

a master builder, who designed the project, acquired the materials, and hired and

supervised the craft workers on the site. This mode of delivery became less popular as

professional tasks became more specialized (Frederick E. Gould & Nancy E. Joyce,

2003).

In general, it can be summarized that Design and Build provides single point

responsibility for the whole design and construction. Contractors, who are responsible

for the implementation of the project, have power to control all over the projects. This

nonetheless does not deter the involvement of the client. The client’s need and

requirements are always been taken into consideration, which this consequently

presents uniqueness of the system (Frederick E. Gould & Nancy E. Joyce, 2003).

2.14.7.Role of the Parties under a Design/Build Contract

The first major change that one observes in a design/build contractual arrangement is

that the owner signs a single agreement with the contractor. Under this agreement, the

contractor agrees to provide both design and construction work, usually for lump sum

fee. This means that the design professional is either employed by the contractor, or is

working with the contractor in a joint venture style arrangement (Bryan S. Shapiro,

1994).

Second, the owner initiates the design/build process by laying out its own functional

or performance requirements. The owner’s requirements are usually sent to

contractors by way of a Request for Proposals (RFP), and the responses are then

evaluated to select he successful contractor, based upon various criteria, including but


not restricted to price and design innovation. Under a design/build contract, the

contractor’s primary legal obligation is to satisfy the owner’s broad performance

specifications. The contractor is not building the facility or project to rigid

specifications or to plans prepared by a design professional. This approach means that

the contractor is responsible for both faulty workmanship in construction and for

defects or deficiencies in design (Bryan S. Shapiro, 1994).

With a design/build approach, the outside independent architect or engineer no longer

is employed by the owner. Therefore, owners that don’t have the internal expertise

relative to their project’s design and construction may have to engage an additional

independent advisor. The advisor’s role would be to offer advice to the owner on

design adequacy, to inspect critical parts of construction, to ascertain that construction

generally complies with the projects design and to prepare evaluations used for

interim payment purposes (Bryan S. Shapiro, 1994).

(a) The Role of the Employer

The difficulty with the preparation of the employer’s requirements does not end at

preparation stage. Many employers do not realise that the employer's requirements

only amount to a schematic design of the end product. In traditional form contracts,

the supervising consultant would also prepare the detailed design before issuing

relevant instructions to the contractor. The concept behind design and build a contract

assumes that the contractor takes care of the detailed design and is conferred a

relatively wide mandate when interpreting the employer's requirements (Tan, Daniel,

1997).Employer's new to the design and build concept seem to find this mandate

difficult to accept when they realise that they do not have the exclusive say or a free

hand in deciding the implementation or outcome of the end product. There is an

unfortunate tendency for employers new to the concept to issue through their

representatives numerous instructions without realising the full implications of such

instructions.(Tan, Daniel, 1997).Prudent design and build contractors will often

ensure that their contractual rights are protected by notifying of claims for delay, time


related damages and actual costs for having to implement such instructions that are

tantamount to variation instructions(Tan, Daniel, 1997).

Disputes as to whether an instruction constitutes a variation often revolve around the

employer's requirements. Has there been non-compliance of the requirements or

otherwise? It would appear that the new employers that wish to have more say in the

end product would have more detailed employer's requirements prepared. Inevitably

higher costs to the employer will result in preparation of Employer's requirements

which defeats one of the benefits of adopting a design and build contract in the first

place (Tan, Daniel, 1997).

Some employers when providing too much detail may realize that they are doing what

their contractor is being paid to do. Some may not realize that they may also be

prejudicing their contractual position by assuming responsibility for parts of the

design, particularly so if a detailed design is imposed on their contractor. Sure,

virtually all design and build contracts place "full" responsibility for design on the

contractor. It is submitted however that such provisions only operate if "full" design is

undertaken by them; otherwise the employer will be liable for the detailed design

(Tan, Daniel, 1997).

(b) The Role of the Contractor

The major difference for a contractor in a design and build contract is that it assumes

liability for design. It is incumbent on the contractor to engage a design team to come


up with a design that complies with the employer's requirements (Tan, Daniel,

1997).For the inexperienced design and build contractor the selection of designers for

the design team is vital. Not only should the contractor select team members that

know how to integrate their portion of works into the overall design intended by the

contractor, it is imperative that each team member knows how to receive instructions

from the contractor (Tan, Daniel, 1997).

It may sound surprising but a vast number of consultants in Malaysia are not

accustomed to receiving instructions from a contractor. Irrespective of the terms and

conditions of the contract at hand, some consultants either consciously or sub-

consciously attach more weight to the requirements of employers rather than

contractors. These consultants appear to be entrenched in the traditional form

arrangements and are inflexible, so it seems when taking instructions from

contractors. The "employer vs. contractor" and siding of the former stereotype should

be broken to cater for services that are now rendered to the "opposing" party (Tan,

Daniel, 1997).As it is the role of the contractor to form the design team, the selection

process for design consultants must be exercised with great care to ensure that they

are able and willing to receive instructions from a contractor (Tan, Daniel, 1997).

(c)Novation of Consultants

The concept of novation of consultants is usually only attributed to negotiated

contracts as opposed to those for an open tender (Tan, Daniel, 1997).The contractor's

problem with consultants' inflexibility in receiving instructions is sometimes

amplified when there is a requirement for a novation of the design team from the

employer to the contractor. The designers who originally prepared the employer's

requirements in schematic form now have to prepare the contractor's detailed design.

The progression may seem natural for the designers, but different problems as posed

not only to the contractor but also the employer (Tan, Daniel, 1997).


For the employer, there may be a need to re-engage an auditing team of consultants or

at least one consultant to assume the role as the employer's agent or representative to

administer the contract for purposes of certification and issuance of instructions. The

employer could also lose the benefit of the contractor's independent design and

expertise as the contractor would eventually be constructing a project based on the

same source as the employer's original design team that prepared the employer's

requirements (Tan, Daniel, 1997).The contractor's main worry when consultants are

novated is the allowable time before actual commencement of work at site. The

typical employer who has already completed preparation of all its own documentation

would only be too eager to have the contractor commence physical work on site

soonest possible. Contractors have to be weary to ensure that there is sufficient time

not only for the design team to prepare the detailed design prior to commencement of

physical work on site, but there must also be sufficient time to enable the formalities

of the novation exercise itself to be finalized (Tan, Daniel, 1997).

The hasty employer or contractor is likely to end up in disputes relating to division or

apportionment of design responsibility, the relationship between the consultants,

professional indemnity or responsibility of design team in obtaining approvals from

relevant authorities (Tan, Daniel, 1997).

Advantages

One major reason for choosing a design/build arrangement is to benefit from the good

communication that can occur between the design team and the construction team.

Many of the largest design/build companies specialize in particular areas and have

developed a smooth flow between design and construction phases of the project. This


collaboration allows the project be easily fast racked, cutting down on overall

schedule for the project (Frederick E. Gould & Nancy E. Joyce, 2003).

Good communication between the designer and the construction professionals also

allows construction input early in the design phase. Such input includes

constructability analyses, value engineering and subcontractor pricing. Cost

estimating, scheduling, long lead item identification, and ordering all become part of

the overall project planning (Frederick E. Gould & Nancy E. Joyce, 2003).

In general, this arrangement allows easier incorporation of changes due to scope or

unforeseen conditions since their coordination occurs within the same contractual

entity. The owner is less heavily involved and sits outside the direct day-to-day

communication between designer and constructor. This keeps owner staffing to a

minimum and puts the full responsibility for good communication, problem solving,

and project delivery on the design/build team (Frederick E. Gould & Nancy E. Joyce,

2003).

Disadvantages

Although it is possible to give the owner a fixed, firm price before the project begins,

this generally does not happen in a design/build arrangement. Because the firm is

hired before the design has started, any real pricing is not possible. Instead, an owner

usually enters this arrangement with a conceptual budget but without the guarantee of

a firm price. Firming up the price too soon puts the design/build team in the position

of making the scope fit the price, which carries the risk of sacrificing quality to

protect profit. If the project is fast-tracked, the owner may not have a good idea about


the final price until part of the project, such as the foundation is complete (Frederick


The owner’s ability to remain marginally involve can be both an advantage and

disadvantage. When design/build Company has an organization that is efficient at

performing the work, the project can move very fast. If the owner does not stay

consistently involved throughout the process, he or she may have to make decision

without fully understanding the issues. Once a project develops a rhythm, it is

difficult to change that rhythm. If the owner is not moving to the same rhythm, the

project may take a direction that he or she does not want but is not aware of until too

late

(Frederick E. Gould & Nancy E. Joyce, 2003).Another disadvantage is the lack of

checks and balances. In the traditional arrangement, the designer prepares a complete

set of contract documents, which is then used to measure and evaluate the

performance of the contractor in the field. The owner often hires the designer to

oversee the work of the contractor and to ensure that deficient work is identified and

corrected. But in the design/build arrangement the designer works for the same

company as the builder. Similarly, during construction the builder sometimes

uncovers certain design deficiencies, errors or omissions. The designer is contract

bound by contract to correct these deficiencies without additional costs to the owner.

In design/build the design and construction professionals are put in position of

critiquing their co-workers and perhaps affecting their bottom line by that critique.

The owner must rely more heavily on the quality and ethics of the firm since most of

the checks and balances will likely take place behind the company’s door (Frederick



2.15. Contractor

A contractor is someone who enters into a binding agreement to perform a certain

service or provide a certain product in exchange for valuable consideration, monetary,

goods, services, even barter arrangements. In the building trades, a contractor is one

who is engaged in the construction or building related services for a client. The

construction site is overseen by a "Prime", General, or Specialty contractor, who may

perform the work with employees, subcontractors or any combination (Wikipedia,

2001-2006).

2.15.1.Common problem faced by contractor

Some of the problems unfortunately only surface after commencement of a project

and if not expected, can pose real problems to unsuspecting employers and

contractors. A few of the several potential problems are mentioned below (Tan,

Daniel, 1997).

The unsuspecting employer may find that he still has to engage his own consultants

for technical guidance and preparation of material setting out the employer's

requirements. The unsuspecting contractor may find that his costs and effort for

tendering would be quite high especially if he is unsuccessful in the tender exercise.

Also, a contractor's perception of liability assumed for design could be much wider

than anticipated (Tan, Daniel, 1997)




CHAPTER 3

3. METHODOLOGY

The above diagram provides a pictorial representation of the stages involved in the

methodology of the study;

3.1. Preliminary Study

The preliminary study is the study involving the feasibility of the study performed

inclusive of identification of the methodology in which the study to be carried out,

Type of data collection to be employed, Tools to be used for the analysis. This would

provide a guideline on the EPC market study,

Methodology

Preliminary Report

Secondary

DataCollection

Primary

Preliminary study

Data Analysis I

Recommendationson strategy

Round table discussions

Completion of 2nd phase

Data collection

Final Report

Data Analysis

Presentation to TP Mgmt

Draft report &Discussion


3.2. Data Collection

Data collection involves both Primary and Secondary mode of data collection.

Secondary data collection in involves the collection of information available in the

Public domain – Internet , Oil and Gas Journals and Magazines , Newspapers , Please

refer Appendix – I for the list of sources from which various secondary data are

collected. Primary data collection is done through the form of structured questionnaire

designed based on the parameters that are intent to capture the essence of study.

Please refer Appendix – II for the questionnaire employed for data collection through

structured interviews. The companies visited for data collection are listed in Appendix

III.

3.3. Overview of Data Collected

The list of variables are listed in the table below, the data is collected based upon the

following variables.

Table 5.4.1 Variables table


VARIABLE DESCRIPTION

Operating Company / Client The company that executes the project

typically can be represented as an owner

company.

Site Location of the execution of the project ,

The name of the location along with its

state

Project description Brief description about the project to

identify the nature of the project

Year Estimated year of completion of the

project*

Capacity of plant Capacity of the plant with its unit to

identify the size of the project

Engineering contractor(s) List of engineering contractors involved

in the execution of the project for the

operating company

Licensor Technology provider for executing the

project

Construction contractor Name of the construction contractor

executed the project for the operating

company

Cost Value of the project to estimate the

market share

Project type To identify the type of project such as

LSS , LSTK , Material project


3.4. Data Analysis

Data analysis 1 is carried out with the data collected through the mode of secondary

data collection. The percentage of data collected through the mode of secondary data

collection is listed below:

PARAMETER % DATA AVAILABLE

Project Execution company 100%

Site 100%

Project Desc 100%

Cost 14%

Project Type 99%

Est yr of completion 100%

Capacity of plant 81%

Engg Contractor 81%

Licensor 73%

Construction contractor 66%

From the above table it is found that the critical parameter – Value of the project /

Cost of the project collected from the secondary mode of data collection is only less

than 14% and hence the analysis can be done only based on the count of projects

executed by the operating company and the count of projects executed by the

contractor , This analysis does not show a clear picture on the market share of the

various company and the contractor , Hence forth Primary mode of data collection is

deployed for collection of the value of the critical parameter.

Primary data collection is carried out through structured Questionnaire designed based

on the Parameters identified and filled through structured interview done with the

competitors and the clients and the same information is used for profiling of the

competitors. % of Cost data made available after the Primary data collection on the


basis of count is 62% and % of cost data available based on the value that is available

is 76% . Since the number of data pertaining to cost value is available the market

share can be calculated and is found to be 1438 Billion Rs approximately based on the

projects executed from the last 5 years.


CHAPTER 4

4. DATA ANALYSIS

4.1. Project – Time and Cost:

Year Vs Value of Project

0

100000

200000

300000

400000

Value Millions

Value Millions 8904 496 250 239961 299215 227971 343686 172537 86159 46000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2015

Out of 310 projects listed in the study the project value seems to have been dispersed

during the year 2008 to 2012, the study covers mostly the projects which have been

completed in the last 3 years or in the process of completion. The major chunk of projects

falling within the recent years gives us higher confidence on the data that has been

collected.


4.2. Geographical Spread

The geographical spread of the projects reveals that 29% of the projects are in the

State of Gujarat followed by 14% in Punjab. The Southern States account for 13%.

Haryana & Madhya Pradesh accounts for 9% each and Tamilnadu accounts for 8.5%.

Few States contribute to a large chunk of the projects. This leads us to the conclusion

that concentration in Gujarat, Punjab, Haryana, Tamilnadu, Orissa and the Northern

States would more or less constitute to about 75 %, Brahmaputra fertilizers,

Brahmaputra cracker and Polymer and BRPL have executed their projects only in

East.

On the analysis of Operating companies / clients , 33 operating companies have

executed projects only in one zone with composition being 10 companies in the east ,

East 15%

North 32%

South 13%

West 40% 29% 9%

2%

2%

14%

7%

9%

8%

1%3.5%

8.5%

4%

2% 2%

Project intense areas

Total No of Projects - 308

1%

% Of Distribution - Across Zones

South, 13%

West, 40%

East, 15%

North, 32%

Location of Projects executed


5 companies in North , 8 companies in South and 11 companies in west. 7 companies

have executed projects in 2 zones with one of the major operating company IFFCO

executing project only in North and west. Only one company have executed project in

3 zones , IOCL have executed projects in 3 zones except the southern zone.

On the analysis of the contractors executing the contract based on the geography,

following observations are made; Major contractors to have executed projects in

North and West are FW and Samsung Engineering India. Punj Lloyd, Samsung and

UHDE India have executed contracts in 3 zones except in the North Whereas L & T

have executed contracts in 3 zones except East. In General East has been dominant by

the contractors UHDE, Punj Lloyd and Samsung whereas North zone is dominated by

L & T in the state of Punjab and Haryana. Project intensive zone in the east are in the

states of Bihar and Orissa. Southern state of Tamilnadu is the only state from the zone

being project intense.


4.3. Operating Company / Clients

An analysis of the client wise implementation of the projects shows that

19% of companies have executed about 82% of the projects and the rest of 18% of

companies have contributed to about only 18% of the project value. The Major

contributor from the Operating Company being IOCL with about

18%

82%

19%

81%No Of Clients Value of Project

Clients VS Value of the Projects (Million )

050000

100000150000200000250000300000350000400000

I ndian

OilCor

pLtd

ONGCLt

d

GuruG

obind

SinghR

efi...

I ndian

Farm

ersF

ertC

oop

Bhar

atOman

Refine

ries

Nagar

j una

OilCor

pLtd

Chen

naiPe

trole

um(C

PCL)

Gujar

atNar

madaV

alle..

.

Other

s

Million r

Operating Company – Pareto Analysis


15% of the Companies have implemented 60% of the project. All most 85% of the

projects have been implemented by 40% of the clients. Major clients have been

Reliance, Essar, Indian Oil, IFFCO and Nagarjuna.The major companies that have

executed projects during the study period are IOCL, Essar Oil, NOCL, IFFCO and

Reliance group of industries.

List of Operating Company with the number of Projects

Table 5.5.3.1

Operating Company / Client No of Projects

IndianOilCorpLtd 88

EssarOilLtd 28

NagarjunaOilCorpLtd 21

IndianFarmersFertCoop 17

ReliancePetrLtd 17

HindustanPetrCorp 14

RelianceIndustriesLtd 14

BharatOmanRefineries 12

MangaloreRefinery&PetrochemicalsLtd,(MRPL) 12

ChennaiPetroleum(CPCL) 10

ONGCLtd 10

Others (42) 110


4.4. Competitors

Major competitors of Technip are Toyo, L &T , Foster Wheeler , Aker Solutions ,

Punj Lloyd , Samsung engineering , Jacobs and Linde. L & T has been the biggest

contractor and they seem to have cornered most of the projects of Indian Oil and

HPCL mittal energy. This implies that L & T has been very successful even in the

public sector projects where price is the ultimate criteria.

There have been many projects where more than two contractors have been involved.

Out of 354 projects, 118 construction contractors details are available of which more

than 50% of the projects, Engineering and Construction has been carried out by the

same contractor. PDIL figures prominently in most of the fertilizer projects and they

are the leading PMCs in the fertilizer arena. Haldor Tapsoe has a dominant share in

the fertilizer / chemical sector. Foster Wheeler, Aker and Linde have a significant

share of the Reliance project.

Toyo is mainly dominant in Western India while L & T is present dominantly in the

North followed by the West. Punj Lloyd seems to be concentrating in the East and

West.

49 projects have been executed by more than 2 contractors under the scope of

engineering, of which for 12 projects the construction contract is executed by one of

the engineering contractors


Competitor Portfolio

L&T

Business Area:

• Infra

• Petrochemicals

• Refinery

• Oil & Gas

• Fertilizers

• Chemicals

• Power

Core Competency

• Engineering , Construction , Manufacturing

Employee strength- 34000 (Inclusive of construction Arm)

Presence in India- 50 Locations

Projects from last 5 years- 145359 Millions

Strengths:

• Largest Engineering and Construction wing in India

• Engineering backed by Production facility

• Shipyard capable of constructing vessels upto 150 meters length and displacement of 20000 tonnes

• Only Indian EPC company capable of executing large , Process intensive projects for Oil and Gas , Refinery , Petrochemicals and fertilizers sector.

• Mergers and Acquisitions to move up the value Chain

Strategy:

• Knowledge city – R & D center in Vadodara Gujarat


• Support for Engineering activity

• Target – 5 Years – 5000 Cr Project execution.

• L & T in China – Critical components for petrochemical projects.

• Strategic 5 year initiative – Lakshya

• L & T Bank

Strategic Ventures:

• L & T & Chiyoda – IT enabled design and Engineering

• L & T & Ramboll – Infrastructure

• L & T & Zubair – Civil , Mechanical and Engineering services

• L & T & Al Jazeera International trading Co – Petrochemical

• L & T Saudi Arabia – Petrochemical and Infra Projects support

• L & T Gulf – Pipeline Engineering

Sector Wise Split

49%

25%

5%

21%

Refi nery

Oil & Gas

Petro

Fertilizers

Geographical Presence:

L & T Predominant in North with 67% and followed by West – 30% , But no projects executed in East.


Projects Execution:

L & T executes contracts for construction wherever they have done engineering for the clients

L & T has been successful in winning the PSU contract, perhaps being the leading Indian EPC company

Major Clients List• GNFC - Gujarat Narmada Fertilizers Ltd

• IOCL – Indian Oil Corp Ltd.

• MRPL – Mangalore Refinery and Petrochemicals Ltd

• RCF – Rashtriya Chemicals and Fertilizers

• HPCL – Mittal Energy

Toyo India

Business Area:

• Infra

• Petrochemicals

• Refinery

• Oil & Gas

• Fertilizers

• Chemicals

• Power

Core Competency

• Localization in Globalization

• Employee strength: 2000 (Skilled – 1700 – 85%)

• Presence in India: > 4 Locations

• Projects from last 5 years: 112297 Millions *

Strengths:


• Toyo India – Largest wing in Global Toyo – Hub for engineering services.

• Global Toyo – Single Solution provider

• To Share knowledge and best practices

Strategy:

• To enter into Water and Power segments with special focus on Waste management.

• Leverage 34 years of experience to gain more clients.

Sector Wise Split

23%

46%

31%

Refi nery

Oil & Gas

Petro


Toyo is dominant in Western India with 63% of Project execution and in East with 32%.They have not executed any projects in North.

Projects Execution:

Toyo is one of the major project executors for IOCL & HPCL. The Other Major Client includes ONGC.

Toyo (Engineering) and Jacobs (construction) was chosen for Execution of Projects in Gujarat..

Sulfur recovery project executed in Vishakhapatnam, TP KTI have been the licensor for the project with the client being Hindustan Petrocorp.

Have not executed any projects related to Fertilizer sector in the past 5 years in India.


Clients Essar Oil

IOCL – Indian Oil Corp Ltd

ONGC – Oil and Natural Gas Corp

HPCL – Hindustan Petroleum Corp Ltd

Punj Lloyd

Business Area:

• Infra

• Petrochemicals

• Refinery

• Oil & Gas

• Fertilizers

• Chemicals

• Power

• Pipelines

Core Competency

Engineering & Manufacturing Employee strength: 14650 (90% - Skilled)

Presence in India: > 3 Locations

Projects from last 5 years: – 142136 Millions *

Strengths:

• Only contractor to have involved in 3 LNG terminal in India (Dahej , Hazira and Dabhol)

• Benchmark in Pipeline projects with record time implementation.

• Offshore projects exploitation backed up by production facility.


Strategy:

• To Capitalize upcoming fertilizer sectors in Eastern India

• Turnkey solutions in Power sector

• Acquire companies to facilitate growth in Power sector.

Sector Wise Split

99%

1%

Refi nery

Oil & Gas


Punj Lloyd has exploited markets in Eastern and western part of India, but has not executed any projects in North.

Projects Execution:

Have executed projects for IOCl > 58000 Millions (More than 40% of the total value of Projects executed in the last 5 years).

Punj Lloyd has also done the construction work for Projects wherever they have done engineering.

The Major sector of execution of Projects is related to Refinery

Clients• Essar Oil


• IOCL – Indian Oil Corp Ltd;

• ONGC – Oil and Natural Gas Corp

• HPCL – Hindustan Petroleum Corp Ltd

Samsung Engineering India

Business Area: • Infra

• Petrochemicals

• Refinery

• Oil & Gas

• Fertilizers

• Chemicals

• Power

• Pipelines

Core Competency

Engineering & Manufacturing Employee strength: 400 (80% - Skilled)

Presence in India- > 3 Locations

Projects from last 5 years– 74143 Millions *

Key Facts:

• Estd in 2006 to serve as Global Engineering center.

• Within a small time frame have captured market – Projects worth > 7000 Crores in Just 4 years.

• Communication with suppliers through Samsung Engineering Global alliance (SEGA)

Strategy:

• Vertical market exploitation globally.


• Convert Samsung Engineering India ( SEI) to a R & D center as well as EPC service provider.

• Increase employee strength

• Boost localization Philosophy across all levels

• Strengthen the JV with Tecnimont for projects in Oil & Gas sector.

Sector Wise Split

43%

57%

Refi nery

Oil & Gas


Have executed Projects only in North and West with only 2 major clients IOCL and ONGC

Projects Execution:

All Projects executed by Samsung are related to Ethylene.

Out of 3 Projects, 2 Projects construction scope is carried out by Samsung engineering by themselves.

Clients• IOCL – Indian Oil Corp Ltd

• ONGC – Oil & Natural Gas Corp Ltd

Jacobs Engineering India Pvt Ltd


Business Area: • Infra

• Petrochemicals

• Refinery

• Oil & Gas

• Fertilizers

• Chemicals

Core Competency

Sulphur & Ammonia Technology

Employee strength: 2000 (85% - Skilled)

Presence in India - > 5 Locations

Projects from last 5 years – 46277 Millions *

Key Facts:

• JSTEPS – Jacobs System To Ensure Project Success

• Won 2008 Environment Agency’s Award for Environmental excellence

• Jacobs Value Plus Program – Using innovation to reduce cost for Client.

Strategy:

• To Enter into Power sector

• Acquire companies for Process licenses

• Grow to 10000 People from current strength of 2000 in just 5 years

• Increased repeat orders

• Higher compensation and more career opportunities.


Sector Wise Split

99%

0%1%

Refi nery

Oil & Gas

Others

Clients List

• CPCL - Chennai Petroleum Corporation Ltd

• MRPL - Mangalore Refinery and Petrochemicals Ltd

• IOCL – Indian Oil Corp Ltd

• HPCL – Hindustan Petroleum Corporation Ltd

• Essar

UHDE India

Business Area:

• Infra

• Petrochemicals

• Refinery

• Oil & Gas

• Fertilizers

• Chemicals

• Power


Core Competency

Engineering, Construction, Manufacturing

Employee strength: ~ 1000

Presence in India - > 2 Locations

Projects from last 5 years – 46110 millions *

Sector Wise Split

16%

35%

13%

36%Refi nery

Oil & Gas

Petro

Fertilizers


UHDE pre dominantly have executed projects in East ( 64%) and West (35%)

Orissa, Assam and West Bengal have contributed for the 64% execution in the east.

Projects Execution:

UHDE has been dominant in Oil and Gas sector (35%) and Fertilizers sector (35%) of their total project execution

The technologies used in execution of Fertilizers sector are provided by UHDE Germany.


List of contractors

Table 5.5.4.1

Contractor

No Of

contracts

PDIL 43

ToyoIndia 42

L&T 33

FW 17

AkerSolutions 16

PunjLloydLtd 15

HaldorTopsøe 12

Technip 12

CB&Ilummus 10

UhdeIndia 10

EIL 8

Siemens 8

Snamprogetti 8

Linde 7

SamsungEng 7

MackenzieHydrocarbons 5

JacobsEng 5


4.5. Sectors

Graph 5.5.5.1

Majority of the projects have been in the fields of Refinery, Oil and Gas constituting

two thirds of the project. Fertilizer projects have been significant at about 15%.

Sector wise - Split

Sector Classification

12%

56%

12%

16% 4% Petrochemicals

Refi nery

Oil & Gas

Fertilizers

Chemicals & Others


Strategy for Technip India

STRATEGY – To Execute

Resource Sharing:

• Share based on Expertise and workload – TP / TP KTI

• Division of work – Scope of work shall be divided on the basis of

a) Consideration of Technology

b) Geography and Logistics

c) Customer Proximity

d) Synergy of Competence / resources


EPC Contracting Scenario – Public Sector Undertakings (PSUs)

• Different methodologies adopted by various customers in India for Project

Execution.

• State Companies (Public Sector Undertakings) of late are following LSTK –

EPC contracting technique.

• A few even prefer total Turnkey including Technology.

• Some prefer to finalize the Process Licensor first before floating bids for EPC

activities on LSTK basis.

• Most of the PSUs, appoint a PMC first to assist them in selection of

Technology and later for selection of EPC Contractor.

• PMCs are also involved in Design Review, Project Management (Including

Project Planning & Monitoring, Cost Control), Inspection & Expediting,

Construction Supervision and Commissioning Assistance.

• International Competitive Bidding or Domestic Competitive Bidding is

followed depending on the complexity of the project and funding availability.

• The Companies go by the lowest evaluated offer for placement of orders,

following central vigilance commission guidelines.

EPC Contracting Scenario – Private Sector

In the case of Private companies (like Reliance, Essar etc.), EPCM contracting

methodology is normally followed.

Customers would appoint Process Licensor and obtain Basic Engineering

Package.

Customers would definitely like to keep Procurement to themselves.

PMC may not be required as EPCM methodology is followed.

Customer’s own Project task force will act as Owner’s Engineer.


Customer will involve themselves in Process Licensor selection and EPCM

Contractor selection.

Customer will generally approve the Design / Drawings and place the order

for hardware based on the EPCM Contractor’s technical recommendation.

(Price negotiations with vendor are done by the Customers directly).

EPCM Contractor’s scope is generally restricted to FEED, detailed

engineering, Procurement Services, Construction Supervision and

Commissioning Assistance being done on a lumpsum service basis.


CHAPTER 5

5. CONCLUSIONS

More than 65% of projects are completed during the year 2007 – 2011.

States of Gujarat, Haryana, Maharashtra, UP and southern states account for

major project execution location.

15% of clients have implemented more than 60% of the projects.

Major operating company/client includes IOCL, Essar Oil, Nagarjuna,

Reliance group of industries, IFFCO and HPCL.

Over 80% of Projects are executed in the fields of Oil and gas , Refinery and

Petrochemicals

Major competitors of Technip are Toyo, L &T , Foster Wheeler , Aker

Solutions , Punj Lloyd , Samsung engineering , Jacobs and Linde.

118 construction contractors details are available of which more than 50% of

the projects, Engineering and Construction has been carried out by the same

contractor

Haldor Tapsoe has a dominant share in the fertilizer / chemical sector


Foster Wheeler, Aker and Linde have a significant share of the Reliance

project.

Toyo is mainly dominant in Western India while L & T is present

dominantly in the North followed by the West. Punj Lloyd seems to be

concentrating in the East and West

L & T has been the biggest contractor and they seem to have cornered most

of the projects of Indian Oil and HPCL mittal energy

5.1. Further Study

The second phase of study involves the collection of primary data through the mode

of academic questionnaire. The analysis from the first phase has enabled us to identify

the Major Clients / Operating Company in India executing projects in the field of Oil

and gas, Refinery, Petrochemicals and Fertilizers sectors. Data from these clients can

be made available through the established relationship of TPIL with the clients. The

competitors of TPIL are identified from the first phase; further data from the

competitors are to be obtained by deploying a student from B School will enable

competitor profiling and the strategy formulation in the second phase of study.



APPENDIX 1

References & Bibliography

List of Magazines:

Projects Monitor

Projects Alert

Projects India

New projects update

Hydrocarbon processing

List of Websites

http://www.ibef.org/

http://www.punjlloyd.com/

http://www.samsungengineering.co.kr/

http://petroleum.nic.in/

http://www.constructionboxscore.com/hpi_customer/

http://www.hydrocarbonprocessing.com/

http://www.infraline.com/

Warchol, J. Amadi-Echendu, J. (2007). ―Critical success factors for brown-

field capital and renewal projects‖ South African Journal of Industrial

Engineering. FindArticles.com.

http://findarticles.com/p/articles/mi_qa5491/is_200705/ai_n21296886/

Wideman, R.M. (1989). ―Successful project control and execution‖.

International Journal of Project Management, Vol.7, Issue 2, pp. 109-113.



http://www.infraline.com/

http://www.hydrocarbonprocessing.com/

http://www.constructionboxscore.com/hpi_customer/

http://petroleum.nic.in/

http://www.samsungengineering.co.kr/

http://www.punjlloyd.com/

http://www.ibef.org/


Questionnaire

Part I – General Info

1. Name of the Company Established in

2. The business of the company is associated with the following sectors (Tick

wherever applicable)

□ Infrastructure □ Petrochemicals □ Refinery □ Oil & Gas

□ Fertilizers □ Chemicals □ Power

3. The following services are offered by the company (Tick wherever applicable)

□ Process Licensing □ Engineering □ Procurement □

Construction

□ Fertilizers □Chemicals □ Power


4. Area of Expertise / Core Competency :

_____________________________________________

5. No of Branches in India :

________________________________________________________

6. Location of the branches :

________________________________________________________

7. Number of Employees in the company :

_____________________________________________

8. Number of Skilled Employees / Ratio of the skilled

employee:____________________________


9. Please select from the following list , the companies whom you consider to be

the competitor

Company Engineering Procurement Construction Project

Mgmt

Comm /

Pre

comm

Aker

Solution

Foster

wheeler

L & T

Linde

Naftogaz

Punj Lloyd

Samsung

Engineering

Siemens

Tata Projects

Technimont

Technip

Toyo

UHDE

10. Do you follow any quality process in your organization

11. Please list the quality standards followed in your organization


Part- II – Project Details

12. Details of the Major projects executed from 2005 till date / Current projects

S

N

o

Yea

r

Projec

t Name

Clien

t

Scop

e

Contrac

t Type

Capacit

y

Appro

x Value

(Rs)

Contractor

s

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19


20

Part - III – Strategy and the Future

13. What are your plans for the future, Doest the company have 3/5/10 year plan

in place?

14. What do you think the future of EPC business in India is like?

15. What could possibly happen in your market sector that would drastically shift

the current way the business is done?

16. How do we differentiate ourselves from our competitors?

17. Why are those strengths important for our customers?


Documents

TP India Oil & Gas - Report Final