Einstein defined insanity as "doing the same thing over and over again and expecting a different result." That is my view of the current state of engineering, procurement, installation and commissioning (EPIC) contracting, especially in regard to the large, complex project being pursued without a clear understanding and assignment of risk.

It's time for a new approach; it's time to be honest about the damage we're doing to the industry; it's time to inject some common sense into the contracting process for these jobs; and it's time we start working together to deliver on-time projects that fuel the economy rather than leaving a trail of litigious bloodletting.

This discussion will focus on large projects, the type commonly seen offshore West Africa. The best reason to use these projects for our discussion is the industry's dismal record of performance to date.
So what are the "different" results in Einstein's insanity definition? Generally, the major West Africa projects to date are all late and tend toward large overruns. Knowing that risk does not disappear, the general contractual approach has been to shift risk from the operator to the contractor.

Contractors are always obligated to play by rules set by their clients, who, unfortunately, cannot always control the rules. Clients and contractors often create the real damage with poor decision-making from the outset.

The illusion of competitive bidding further constricts the business goal. Execution of a dictated pre-qualification process designed to vet potential bidders on a technical, commercial and financial basis normally incorporates "fudge factors" to ensure the proverbial three-bidder rule.

One very important dynamic in play is the monumental difference in financial strength between the client and the contractor. This difference goes to the very heart of this argument, because the owner suffers as much or more than the contractor. Nonetheless, the contractor suffers with the budget and schedule overruns as well. And both parties take the whip of the financial community in the capital markets.

Both the contractors and the client share in the culpability. In the past, the industry has resolved its project issues by throwing more money at a project. However, recent market conditions combined with too many "qualified" bidders, have resulted in significantly tightened margins. Further, while the prudent contractor may diligently seek protection, pressure to secure market share can lead to inappropriate risk-taking to become low bidder and win selection. In reality, nobody wins.

So what can be done?

• Partner with the right contractors with the right capabilities.
• Determine a realistic sharing of risk. Know who can absorb risk and who can control it. As one option, it may be possible to cap the risk of the contractor who can then focus on understanding and controlling the risks.
• Repeat contracts with the same company or group. The track record is clear.
• Remunerate contractors at some level for bid preparation. What type of terms/conditions might be workable?
• Pre-select a contractor, which works together with the client to jointly arrive at a bid.
• Encourage contractors to perform some tasks at near-cost levels in a trade-off to not be exposed to, or to have limited exposure to, certain risks.
• Recognize that a failed contract or contractor affects returns and market reputation.
• Incentivize only those portions of a contract where the contractor can exercise significant control.
• Work jointly to benchmark risk.
• Do not force early design verification onto the contractor to shift risk.
• Consider risk of additional cost in focused categories: risks in control of the client, risks in control of the contractor, risks equally shared and risks potentially unknown by either party.

John B. Reed is the chief executive officer of Intec Engineering.

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