Collaborative Approaches to Design-Build Contracts in Oil and Gas Construction

Many companies are still proclaiming that they have  “collaborative relationships”, but nowhere is this less the case then in the construction industry in oil and gas. In this environment, traditional Design-Build relationships are more risk-prone and litigious then ever.

Recently I met with a group of companies in Niagara Falls, at a meeting hosted by Aecon, a large construction company, that hosted their customers in a number of industries. Aecon is seeking to build a new method for integrative partnership development. Their founder stood up at the end, and emphasized – “Partnerships have always been a part of Aecon – the company was indeed founded on partnerships.” Some of the discussions focused on performance-based contracts, and examples were discussed. In an example of such a contract, one of the clauses that really caught my attention was the following.

Relationship of the Parties. Although this Agreement establishes a relationship of mutual trust and good faith among the Parties, who recognize that their individual success is directly tied to the performance of other Project Participants, it does not create an agency relationship, fiduciary relationship, partnership, or joint venture among or between the Parties.

If you read this clause, what it means that the parties agree that both parties are mutually accountable and agree to work together!

The Architect and Contractor are each independent contractors solely responsible for directing and managing their own forces and services within their respective area of responsibility as described in a different section of the contract.  All responsibilities are clearly laid out, and agreed to, within the context of the agreement. The Parties acknowledge that this Agreement is not a design-build agreement and that each Party, and each individual entity that is a Party, is responsible for its own errors, omissions, or construction defects to the extent provided in this Agreement. Likewise, nothing contained in this Agreement makes any Party jointly and severally liable for the negligent acts or omissions of any other Party, except that (a) the Contractor is responsible for the acts, errors, and omissions of its subcontractors, and the Architect is responsible for the acts, errors, and omissions of its consultants; and (b) the Incentive Compensation Layer (“ICL”) may be eroded if errors or omissions of Architect, Contractor, or those for whom they are responsible increase the incurred Chargeable Costs.

What a simple and well-defined statement! The description provides very clear guidelines on how to handle issues as they arise. Responsibilities are clearly laid out, and impacts understood!  This is what contracts are supposed to do – lay out responsibilities, and drive appropriate channels for review of performance metrics, drive problems to their root cause, and establish the roles and responsibilities for all parties to resolve issues.  This not only prevents problems later in the contract, but ensures continuity of the relationship and drives both parties to continuously improve it.

As one representative from Union Gas noted: “The scorecard we built for this agreement has our mutual interests at stake, and we are both invested in this.  Things happen on a major project:  permits are late, materials are changing, but we are able to keep the commitments and continue to get better despite the problems that occur.  This is what we mean when we talk about trust.”

What was also apparent in this relationship is that when problems occur, trust combined with metrics is what drives the relationship to grow.  For example, one of the contractors noted the importance of project controls in managing issues. “Trust involves on-going work, transparency, open books and being results focused.  We think about project controls, and in 2013  we really missed the mark.  We were working through the jobs and didn’t have a handle on the costs and schedule and we failed in that aspect.  We admitted this upfront, and then worked to develop a tool that would allow us to monitor and review projects costs and workflow on a more regular basis, and be able to catch problems early on to resolve them.”

The conference was not only well-attended but brought forward a number of insights on how to mange long-term partnerships in the volatile project management environment of oil and gas.