Abstract
Project success has been a central topic in the project management literature. The high volatility attended with oil and gas upstream projects has enhanced the need for relational contracting approaches. Successful Large International Engineering and Construction Projects can deliver value to project parties (clients, sponsors, contractors, subcontractors, etc.) and other stakeholders (users, investors, communities affected by the project, etc.) in the project supply chain. Supply chain and procurement strategies play a significant role in project success, due to their impact on project value and on the way project risks are managed. In this study, we review insights gleaned from 13 oil and gas senior procurement executives, from which we derive a set of propositions and some preliminary results related to the success of these elements. In general, we find that relationship management plays a critical role in the outcomes associated with oil and gas project success. Procurement relationship management practices affect the way the needs of project stakeholders outside the contract (users, suppliers, communities affected by the project, etc.) are attended as well as the way project relationships are managed inside and outside project teams. As a result, those strategies are also related to important drivers of project success, such as relationship and stakeholder management.
Keywords
Introduction
Recent studies in the oil and gas construction industry literature identify several limitations in using supply chain management practices in Large International Engineering and Construction Projects (LIECPs). Azambuja and O’Brien (2009) argue that construction supply chains differ from manufacturing supply chains, as they are characterized by a fragmented structure and transient locations that are recreated several times between trades. In this context, developing collaboration between partners (a key supply chain management concept) poses numerous perceived challenges. Cox and Ireland (2002) found that relatively few organizations in the construction industry can apply collaborative supply chain management principles to their contracting practices. Many of the organizations studied lacked internal resources to pursue high levels of commercial collaboration, and lacked the frequency/volume of demand that enables a long-term commitment to suppliers. A review of the research on construction supply chains concludes that future research is needed on longitudinal studies, organizational barriers and benefits to partnering, to establish the conditions under which collaborative relationships can take place around contract formation (Bemelmans et al., 2012).
Managing projects in the oil and gas sector is particularly challenging, due to the extreme circumstances faced in oil and gas environments that lead to project disruptions and difficulties. A significant set of challenges are attributable to the macro-level factors associated with the environment in which oil and gas projects take place (Figure 1). Because the majority of oil-exploration projects are in remote regions with poor logistics infrastructure and are risky, there are significant challenges in the mobilization of equipment. Secondly, there are numerous sources of unquantifiable sources of instability, including regional conflict in producing areas, theft and uncertainties raised by the nationalization of oil companies, which can lead to significant disruptions in both investment cycles and short-term availability (Ebrahim et al., 2014). Finally, corrupt contract award practices in oil-producing countries have a major impact on project outcomes, particularly at procurement and in permitting, permissions and regulatory negotiations with local governments. Transparency International provides a list of public perceptions of public corruption by country, and a comparison of these scores relative to the top oil-producing countries is shown in Table 1. A score of less than 50 generally indicates a high degree of corruption and lack of transparency in contracts. As shown in this table, more than 50% of the world’s production occurs in regions that are highly corrupt and one country (Saudi Arabia, producing 14% of the world’s production) is also considered somewhat corrupt.
Challenges in oil and gas project procurement management.
Transparency indices for top 25 oil and gas production companies.
Another challenging issue is the shifting investment cycle associated with oil and gas. Oil-price volatility impacts the hedging and contracting of projects whose cash flows are influenced by the expected price of the commodity. Long-term uncertainty in future oil prices can alter the incentives to develop new fields in producing countries, and can also bring projects to a sudden halt if prices drop suddenly (Matar et al., 2013). Research in this area finds few promising avenues for forecasting oil prices, leading to on-going project uncertainty in the operational procurement and project management environment. In 2014, several major production sites were being shut down on short notice due to the sudden drop in oil prices, as a result of Organization of Petroleum Exporting Countries (OPEC) actions to continue production levels. 1 In addition, perceptions of risks associated with major projects due to perceptions of political instability, local threats and other factors can cause budget cycles to mothball projects on short notice.
Significant contracting challenges exist. As noted earlier, the tolerance for corruption in oil and gas procurement environments is directly related to the level of transparency associated with the regional culture (Ebrahim et al., 2014). In addition, there are significant challenges that exist in commodity volatility associated with major raw material inputs into oil and gas exploration as well as downstream capital projects, including fabricated steel, nickel, copper and other major commodities (Handfield et al., 2013). This requires significant effort to hedge prices for these commodities, as well as to monitor and to plan for purchases against uncertain project schedules, leading to significant shortfalls between supply and demand.
Significant challenges also attend securing commitments for another important commodity: human capital. Shortages in skilled trades have been widely documented in the field, and are linked to capacity challenges in securing supplier resource commitments in the face of long-term unstable demand forecasts. Supply resource constraints can negatively impact projects, causing delays, cost overruns and potentially adverse effects on the company’s reputation.
Traditional approaches to contract management are not effective in light of these major challenges. Supply shortages, corrupt local influences, volatility, project uncertainty and macroeconomic factors have shifted the balance of power in major projects, and there is a need to identify more collaborative approaches to managing supplier contracts that share the risks and rewards of projects in these environments. While this is not a new concept, the practical approaches associated with managing major projects in the oil and gas industry are indeed not well understood.
Despite the difficulties of adapting collaborative supply chain practices, studies suggest that the oil and gas construction industry is beginning to encourage collaborative working arrangements in all contracting and procurement activities (Oyegoke et al., 2009). Through long-term partnerships, project parties can effectively build collaborative working arrangements to enable reduction of project costs, while creating mutual benefits for all parties involved (Turner, 2006). Clients/owners benefit primarily by reduction of project costs and risks, whilst improving overall project performance; contractors can increase overall profitability through shared gains and predictability of project workflow, allowing improved workforce stability and resource management/allocation. The mechanics of achieving these outcomes, however, are not well understood (Turner, 2006).
In this research, we begin by identifying five propositions that establish the theoretical basis for project collaboration, shown in Figure 2. These include (i) the importance of measuring the right project outcomes; (ii) the adoption of project scoping approaches; (iii) the importance of team engagement in early contracting stages; (iv) change management and communication; and (v) the management of projects risks and value.
Summary of the proposition structure.
Project success measures
Traditional project management focuses on project compliance, to delivery, budget and scope requirements (Kerzner, 2013). Under this traditional perspective, the project team and project managers’ competence and efforts are the primary criteria associated with project success. However, reviews of large and complex project failures found that the root cause was often not a shortage of project managers’ knowledge, but rather issues related to project definition and the “fuzzy front-end” negotiation of project contracts (Miller and Lessard, 2001). The focus on cost, time and scope is intrinsically related to the idea of adding value to projects. A more comprehensive approach to project value management explores differentiated services in project execution (Pryke and Smyth, 2012).
Fewings and Westcott (2013) argue that value and risk are intrinsically related and critical for project success. While value management seeks to maximize project cost and function, risk management seeks to minimize the uncertainty of not complying to cost and functionality targets. This, in effect, is a chicken and egg scenario: if a project contract does not adequately define the project scope, then cost and functionality issues will arise. Since procurement, project managers and stakeholders often have different perceptions of value and hold different attitudes relative to acceptable risks, these components become indelibly intertwined in LIECPs.
The value-added perspective is also related to the satisfaction of client and stakeholders, going beyond a simple cost-effective project outcome (Pryke and Smyth, 2012). Delivering value and satisfaction often involves a multitude of stakeholders and a diversity of potential requirements. Due to the large social impact of LIECPs, users and community groups (society, professional, etc.) may be important stakeholders in defining success. From this perspective, elements of the project governance system (e.g. ethics, corporate citizenship, etc.) assume an important role in ensuring project success. Accountability and transparency facilitate the development of trust between the project team and external stakeholders.
Another differentiator of success is related to the authority and accountability of Contract Managers in managing change (Cummins, 2008). Issues arise relative to whether the contracts organization has solely deal-based responsibility, versus a more strategic role in overall company policy and commercial/contractual strategy. For example, does the function simply implement and protect other people’s rules, or does it advocate change and participate in key policy discussions? Cummins (2008) notes that forward-looking “best practice” contracts groups are those with a holistic responsibility for the contracting process (pre- and post-award). They are increasingly involved in establishing contracting policies that support market and business strategy – and this is something that cannot readily be done if resources are fragmented.
Shenhar et al. (2001) suggests that adopting effectiveness measures will more often lead to project success, by relating success to long-term impacts to the business. Doloi (2009) argues that trust and confidence are not enough, but that communication and measurement are critical conditions for partnering success in complex projects. A more strategic-oriented approach presented by those studies considers that while in the short-term project efficiency and customer impact are very important to project success, in the long-term those metrics becomes less relevant than business success and preparation for the future.
Project scoping approach
A strategic approach for projects will typically spend more time on the initial project stages rather than just the project delivery stage (Morris and Pinto, 2007). Research suggests that project managers who focus on external and front-end issues have better long-term outcomes. For example, Walker et al. (2008) note that a project with a well-established initiation and design, even if poorly delivered, is more likely to be considered successful than a poorly initiated and designed project delivered by a top-level project team. Some projects considered successful from a pure efficiency perspective may be considered tremendous failures in the long-term by users/owners. Finally, projects that fail to meet efficiency metrics may be considered successful when measured in terms of impact, relevance and sustainability.
A natural caveat to this idea is the fact that identification of what makes a project successful must be clearly articulated during the project scoping process. To be successful, there is a need for an open dialogue and clear communication of roles, responsibilities and expectations across project owners, project managers and stakeholders. Having multi-project awards has also been shown to have an important impact under a portfolio or program approach. In such cases, the same “A-team” is responsible for delivering successful project outcomes over time, by joint learning and communication, and is more likely to deliver successful future projects as well (Cooke-Davies, 2010). Repetitive activity allows organizations working on projects to adopt standard procedures and best practices over a series of projects. According to Davis and Walker (2009), a capability maturity approach can be used to measure the degree to which social capital may be generated across projects, within an organization or in a supply chain. Improved relationship management through open dialogue breeds familiarity and open engagement, leading to improved visibility of risks and problems that might arise early in the project scoping process, leading to more open discussions on how to manage threats and risks in future project delivery outcomes.
The following proposition identifies the importance of procurement engagement and communication in the early stages of contracting as an element of predicting project success, either on a portfolio basis or on a project-by-project basis.
Engaging team members during early contracting stages
Early risk identification is also a function of getting the right people at the table early on in the negotiation process. Given our proposition that project success is intrinsically related to value and risk management, it follows that having key stakeholders at the table during contract scoping will more likely lead to identification of project risks, and better outcomes. This is especially true for LIECPs in which clients and sponsors (especially investment companies) are seeking returns on large investments with multiple stakeholders involved. Issues of concern may include social, environmental, community-based and political impacts of a project. Beyond the immediate internal project management team, other stakeholders will include users, communities, third parties, governments and others that may be deeply affected by the project outcomes. As relevant issues are identified, project managers will gain visibility to potential risks and establish the right protocol for communication, project planning, staging of project resources and risk mitigation actions prior to project execution. The creation of goodwill through on-going development of social and intellectual capital between parties in collaborative project procurement is a natural outcome that benefits all parties involved (Davis and Walker, 2009). Early stakeholder engagement highlights the need for a review of key milestones at appropriate times, and on-going tactical project management details that require attention both within the project team and in the supply base/EPC community. (“EPC” refers to “Engineering Procurement Contracting” organizations, that are the primary contractors on major oil and gas projects). Under these circumstances, we predict that improved value and risk management outcomes are important drivers of LIECP success, supported by stakeholder and relationship management.
The right level of engagement also sets the stage for the right level of change management and visibility to occur.
Change management and communication
As supply chain partners face an on-going climate of change in oil prices, resource constraints and budgeting stops and starts, clear communication related to project portfolio management becomes key to long-term project success. Availability of project partners and constraints associated with regional geographies and capital project plans will affect project management and project outcomes. For instance, partner availability may be a critical element in industries such as oil and gas, since the on–off nature of projects makes it challenging for contractors, sub-contractors and suppliers to establish the right level of resource capacity (McCormack and Cavanagh, 2008). Global constraints such as labor rates, labor availability and qualification (particular in trades such as welding), as well as cultural issues, will impact project timing and outcomes (Doloi, 2009). This makes it all the more important for clear and on-going communication to occur not just at the beginning of the project, but also over the entire life of the project. Early warning of potential issues can alleviate bottlenecks and allow all parties to better manage resources, costs and manpower over a longer term planning horizon.
Managing project risks and value
For traditional projects, value is usually measured against cost targets. However, the perception of value may mean more than a monetary perspective of achieving project outcomes at a minimum cost. Pryke and Smyth (2012) present the “added value” concept that considers the explicit value of a project, rather than a pure cost-saving strategy used by a contractor. Political, social and especially environmental costs may play a big role in their evaluation of potential project benefits.
Fewings and Westcott (2013) emphasize that value and risk are intrinsically related and critical for project success. While value management seeks to maximize project value in relation to cost and function, risk management seeks to minimize the uncertainty of not achieving expected cost and functionality. Pryke and Smyth (2012) argue that relationships are an important component of adding value in complex projects, and that a relationship approach achieved through relationships between people, between people and firms, and between firms, may also mitigate risks in complex projects.
Risk management has been described as a process composed of several steps: the overall planning for approaching and executing risk activities; risk identification and characterization; risk analysis (qualitative and quantitative); risk response; and risk monitoring and control (Committee, 2002). Miller and Lassard (2001) present two broad approaches to the first step of the risk management process, the overall planning of risk management:
the decisioneering approach assumes that the future is probabilistic; and
the managerial approach assumes the future is indeterminate or, at best, highly uncertain.
While decisioneering focuses on scenario decision-making based on expected outcomes utilizing tools such as hedging against risks, a managerial approach focuses on a different repertoire to cope with risks that focuses on shaping institutional response to risks. Soon (2009) has also examined the contextual phenomena of risk in megaproject settings and cultures. The author advocates that while managerial approaches for risk management are adequate to the project planning phase, decisioneering approaches may be important to the development and contractual phases of a project.
Following the overall planning of risk activities, the risk management process moves towards risk identification and classification, followed by risk analysis and risk response. Risk identification seeks to draw in stakeholders to list areas of uncertainty (Ayers, 2009). Miller and Lessard (2001) propose a taxonomy for identifying and classifying risks in large projects depending on the intensity of completion difficulties (technical, construction, operational), market-related difficulties (market, financial, supply) and institutional difficulties (regulatory, social acceptability and sovereign) that those projects pose to sponsors. In this context, oil platforms are considered technically difficult, while nuclear and hydroelectric plants have high social and institutional risks, and urban-transport projects have high market risks, especially when they are built under concessionary schemas.
In the context of this study, oil and gas projects are not limited to oil platforms, and may fall into any of the four categories shown above. For example, pipelines have been exposed to high social risks, while also facing market risks. The massive drop in oil prices has also led to a situation where the financial risk associated with many oil and gas projects has led to them facing decommissioning.
In the next section we describe the methodology applied in this study.
Methodology
These propositions provide a context and direction for this exploratory study. A summary of the proposition structure is shown in Figure 2. These propositions in their current form cannot be explicitly tested, but we instead sought a methodology that would provide a baseline for further exploration and discovery around the relationships proposed therein.
We began by identifying a convenience sample of 13 senior procurement executives representing the major oil and gas companies in the Fortune 500, including BP, Chevron, Exxon, Shell, ConocoPhillips, Spectra Energy, Talisman Energy and Duke Energy. Individuals interviewed included seven (current or past) chief procurement officers, five contract directors and one chief legal counsel for the organization. All of these individuals had significant experience in working on large complex projects in the oil and gas sector. Comments were captured from phone or in-person interviews, coded in a table and organized around the major propositions identified in this research. Major comments related to the key propositions have been extracted, and can be seen in the Appendix to this paper.
Next, we conducted a survey of oil and gas executives through the International Association for Contract and Commercial Management (IACCM) survey tool using a sample of oil and gas executives familiar with complex projects, using questions that were mapped to the propositions. A total of 52 responses were received for successful projects, and 38 for unsuccessful projects. The sample represented major companies involved in the oil and gas supply chain included 26 (50%) upstream owners, 4 (8%) downstream owners, a major utility (1%), 8 (15%) major EPC companies, 7 (13.5%) major tier 1 suppliers and 6 (11.5%) major tier 2 suppliers. The lack of a midstream owner company may be due to the infrequent occurrences of major construction projects, as many pipelines are already well developed, and existing pipelines are in some cases still pending regulatory approval. A summary of comments from the interviews is included in a table in the Appendix.
The two samples of 38 successful and unsuccessful projects were compared using chi-squared tests, using a hypothesis of independent samples. That is, the distribution of responses were tested to see if they were significantly different using a Pearson chi-squared test and likelihood ratio, to determine if the hypothesis of independence was not denied. The questions were analyzed and explored in the context of each of the five propositions identified earlier in the paper.
The survey asked individuals to compare their “most successful” oil and gas project, as well as their “least successful” project. The greatest reason for considering a project success was value for customers (35%), followed by comparison to other projects (27%), impact on stakeholders (23%) and market growth (15%). Project delays and contract scope seem to be the major reason for problems in the outcomes. A chi-squared test using cross-tab results showed the two samples were independent (p = 0.30).
Results and discussion
A number of key points emerged from the analysis of results associated with each of the propositions identified in the earlier part of this paper.
Proposition 1 – Project measurements
As shown in Table 2, projects deemed “successful” emphasized measures that focused on being “on-time” (46%), meeting contractual scope (39%), and cost (15%). On the other hand, projects that were “unsuccessful” were deemed as such as they failed to meet contractual scope (47%), were not completed on time (34%), or under cost (18%). Although the distributions amongst these factors are approximately the same, the tests show a significant difference for the reduced sample. There are differences in the review periods associated with defining and measuring project performance metrics. According to Samset (2009), project outcomes related to effectiveness measures are preferable to efficiency-related measures, as strategic performance in the long-term outweighs short-term tactical efficiency outcomes. Our results suggest some measure of support in that cost (efficiency) is not the primary indicator of success.
For the successful (unsuccessful) project, why do you consider that project a success (failure)?
Studies in the construction management literature relate procurement and supply chain decisions to project success drivers (Rwelamila and Edries, 2007). The selection of appropriate procurement choices that adequately match the objectives of key stakeholders is an important contributor to project success (Handfield and McCormack, 2008), and also identifies many of the potential risks that might evolve. Procurement choice has evolved from a traditional non-integrated approach between project phases to more integrated choices coordinated by contractors, such as design and build and Turnkey, and management-oriented approaches (management contracting and contracting management) in which integration of project phases is conducted by a third party.
The definition of client procurement choices puts a great emphasis on risk allocation (Flanagan and Norman, 1993). From the traditional project procurement, the imprecise allocation of risks in a large number of client–customer interfaces has hampered procurement and supply chain strategies in the construction industry (Burtonshaw-Gunn, 2008). The understanding of risks, as well as the frequency of performance measures and performance updates, associated with a project will have a strong influence on the selection of the appropriate contract strategy and related outcomes for all parties within the project supply chain.
Procurement choices address initial questions of how risks can be distributed among parties and which party can best manage the risk (Soon, 2009). Flanagan and Norman (1993) suggest the allocation of risk responsibility where it can be managed best. Fewings and Wescott (2013) suggest clients should choose the degree of risk to take relative to the supplier’s final price. Once risk responsibility is allocated, contract choices need to address how the risk-taker should be compensated for taking the risk and also which risks could be shared and how (Soon, 2009).
Procurement strategies start with procurement choices during the design phase that will lead to bids at the tender process, and will result in the choice of contract terms. Traditional procurement strategies, such as design-bid-building, allocate risks separately to the design and construction. Those traditional procurement approaches adopted in large construction projects create conflicts between project parties and price increases to deal with risks and uncertainties (Morledge et al., 2006). In design-build methods, clients look for one single entity to be responsible for design and construction phases of the project. The design-build approach is considered faster than a more sequential process used in traditional transportation projects (Soon, 2009). Some studies suggest that in the design-build approach, clients may pass those risks to contractors and from them to subcontractors and suppliers up the project supply chain, leading to higher project costs (Flanagan and Norman, 1993). By the same token, risks are associated with opportunities of cost savings that may be all directed to risk-takers (contractors in the design-build approach). It also tends to provide a “hands-off” mentality, which reduces the frequency and discussion of performance measures.
Proposition 2 – Communication in project scoping stages
Proposition 2 sought to determine whether greater communication and role clarity was a factor in project success. As shown in Table 3, our results suggest that risks managed over the course of successful projects were more often managed through regular performance reviews (44% for successful versus 27% for unsuccessful), and through effective measurement systems (27% versus 5%). Although the reduced sample shows no difference, the overall differences in measurement systems for the full sample shows that measurement does indeed play a role. Measurement systems serve as a sounding board for regular communication, and it follows that effective performance measurement systems are also a vehicle for project success (as shown in Table 3).
How were the risks managed over the course of the project?
All of the executives interviewed during the course of the study similarly echoed the importance of using the “right” measures. A preoccupation with cost targets was deemed to provide only a limited as opposed to a holistic view of contract performance, and many emphasized the need to go beyond a value proposition expressed in dollars or reimbursable costs. A number of interesting contractual measures were identified through the interviews: percent of contracts with a contract management plan – execution plan post award; percent undergoing regularly scheduled performance reviews; key process expectations – % of contract managers that have undergone training in their roles.
Several executive comments in the Appendix also point to the importance of having the right measures in place as a key to performance.
Risk analysis has been based on several qualitative and quantitative tools (Handfield and McCormack, 2008). Traditional risk analysis looks for the likelihood of occurrence of a particular event or outcome; consequences of the particular event or outcome occurring; and the causal pathway leading to the event (Ritchie and Brindley, 2007). According to Soon (2009), it is inevitable that risk analysis is part technical and part political. Based on the idea that real and perceived risks are heavily influenced by the project context, that author suggests that it is in the political arena where it is determined which risks are unacceptable and which are not. An alternative approach for risk analysis has been proposed by Loosemore (2012). That author proposes a collaborationist perspective for complex projects that relies on human irrationality in relation to perceptions and responses to risk rather than on the mathematics of probability. According to him, a subjective perspective may also be considered to analyze risks in complex projects.
Risk response is the concrete outcome of risk management and it relates to the way risks are managed. It includes actions of risk reduction, risk avoidance, risk transference, risk mitigation and risk retention (Ayers, 2009; Soon, 2009). Soon (2009) suggests compensatory mitigation as a response to overcome stakeholders’ resistance in transportation projects. According to her, while avoidance would lead to project realignment and mitigation would focus on project changes and construction techniques, compensatory mitigation would provide financial compensation for the project damages. Miller and Lessard (2001) present four main risk management techniques, depending on the type of risk (systemic or project specific) and the extent to which risks are controllable. Their proposed risk responses are shape and mitigate, shift and allocate, influence and transform institutions, and diversify through portfolios.
Proposition 3 – Number of stakeholders in the project scoping stages
The importance of communication and early identification of risk is a critical component of managing complex projects, and we find strong support for both Propositions 2 and 3. Our results in Table 4 suggest that successful projects involved contract negotiators identifying major projects risks in 77% of the cases, but only 40% in unsuccessful projects. That is, explicit discussion of the likelihood of risks, and effective identification of risks, was an important component of the scoping process occurring during contract negotiation. It is also interesting to note that for unsuccessful projects, 21% of respondents had no idea whether risks were anticipated or not (versus 11% for successful projects).
Were those risks anticipated during contract negotiation?
Executive responses in our interviews also emphasized the importance of early scoping. Several studies link relationship and stakeholder management to the management of value and risks in large projects. Morledge et al. (2006) note that the integration of softer interpersonal skills and rational problem-solving skills are keys to successful value management. Bidanda et al. (2006) show the interconnection between relationship management, stakeholder management and contract management, in decisions of delivering global projects. According to them, relationship characteristics must be defined before the transition to contracts and they must address conflicts with project stakeholders. According to Walker et al. (2008), a key question in large projects is about the contribution built into a procurement process to add value to other stakeholders in the project supply chain. Those authors present a methodology to identify and recognize perceptions of key stakeholders that helps to build robust project relationships and to improve the chances of project success.
Pryke and Smyth (2012) note that managing relationships is about managing people. The authors propose that managing relationships in a complex project is about managing relationships embedded in the multi-organizational project team, and also embedded in the project organizations. All projects in the client portfolio with the same contractor will be affected by the client–contractor relationship (London, 2008). According to that author, this influences commitment from those parties to work collaboratively (relational contract) to address contract terms in the most effective way, and also to address several issues not well defined in the contracts or even not predicted at all. Managing relationships can allow contractors to go the extra mile in service quality that may not be entirely enforced by contracts. Based on successful relationships developed in previous projects, contractors may be awarded repeated business by the same client.
Relationships must be managed beyond parties of a specific project to include external stakeholders, as well as beyond a specific project to include programs or portfolio of projects from the client organization. Since there is a long and costly investment to build up a relationship, communication with stakeholders must happen at the project generation phase (Cova and Salle, 2012). Those authors also emphasize that a major concern for stakeholder management is about communication with stakeholders outside any project opportunity, in order to plan capacity around future new projects.
A final thought in discussing relationships is related to procurement and supply chain decisions in global project teams. Developing teamwork appears as a challenge when procurement and supply chain decisions put together global teams with different cultural backgrounds. McCormack and Cavanagh (2008) describe a team concept of creating one common center and full alignment between a number of preferred contractor services and the procurement team in a company in the American oil and gas industry. The parties in this case study worked together as though they were one company with one set of objectives. The team concept created a high-trust environment that allowed for accelerated learning and has enhanced integrated expertise. As a result, drilling costs, planning and drilling times were reduced and there was an increase in success rate in wells drilled. That procurement team became one of the preferred employers for service suppliers within its operating region.
The results in Table 5 show that the major difference between successful and unsuccessful projects is the significantly greater number of times that stakeholders are included in early contract discussions (13% versus 5%). Although project team members and managers are involved, the importance of including stakeholders cannot be denied.
Which parties were involved in scoping project contractual elements at the beginning of the negotiation process?
Executives interviewed also emphasized the need to get the “right” parties engaged early on in the contract renewal or new project contract negotiation process. There were also discussions around the approach to drive multi-project contract agreements, to drive standards ways of working and common, standardized approaches that have been shown to be effective:
Proposition 4 – Communication during the project
Risk monitoring and control involves monitoring known risks and identifying new ones (Ayers, 2009). Miller and Lessard (2001) note that every large and complex project, despite risk management practices, deals on average with four major unexpected and potentially catastrophic risk events. Such unanticipated risks originate from stakeholders’ claims, especially infrastructure projects that, due to their social impact, may suffer pressure from political groups. According to those authors, the way of dealing with unanticipated risks differs from the traditional risk management approach adopted for projects.
In project-oriented companies, projects are not analyzed individually, but compete for limited resources with other projects in the same program, for evaluation against a portfolio of current and potential projects. Clausen (1995) notes that the discontinuity of projects in the program or portfolio of large clients may lead to firms of the consortia avoid committing resources to the program. To improve value in their projects, clients must align projects in portfolio or program management with their organization’s vision, priorities and objectives. This context highlights the importance of the project management office (PMO) that not only deals with choice and management of different projects, but also provides a pool of personnel, coaches and consultants for those projects (Committee, 2002).
In addition to a client portfolio, LIECPs are also subject to conditions of the global environment. A global project may bring participants from different nationalities to different locations around the globe. Country-specific requirements about labor, culture and legal constraints may affect procurement and supply chain decisions. In this context, large projects move from institutional frameworks based on the assumptions of rational management to frameworks based on shared governance (Miller and Lessard, 2001). This relational venturing approach to large projects has impacts on the way project procurement and supply chain decisions are taken. Another condition of the global environment lies in the composition of global and local sourcing. Companies in the oil and gas industries in emerging countries are committed to local and regional development, requiring a percentage of local content into their projects. As a result, global main contractors must be capable of developing partnerships with local suppliers to be competitive when bidding for contracts overseas.
Market supply also affects project procurement and supply chain decisions. In the oil and gas industry, long-term partnering has been successfully used in the traditional drilling business, where the drilling effort is determined by who is available not by who is the best fit (McCormack and Cavanagh, 2008). Since contractors and subcontractors are involved in multiple projects at the same time, subcontractor availability may become a critical issue in construction projects (Azambuja and O’Brien, 2009). According to these authors, most supply chain construction risks lie in suppliers that provide long lead-time products or those who have limited capacity to handle market demand. They suggest subcontractors tend to allocate resources to preferred customers or to gain internal efficiency. In fact, given two equivalent projects, a subcontractor will prefer to allocate resources to the more reliable of the two.
Because of the continuous changes that occur during a project, communication becomes an essential element. Our survey results suggest that in unsuccessful projects, managers relied significantly more often on daily phone calls and emails. As shown in Table 6, successful projects were more likely to include a formal documentation of the situation (59% versus 37%), and a detailed action plan that was clearly communicated to all key parties involved (31% versus 21%). Supporting Proposition 4, our results show that clarity, transparency and visibility of risks to all parties is the hallmark of successful projects, as they create awareness, which in turn drives risk mitigation and response. Too often, emails and phone calls occur only between two individuals, without an appropriate forum for communication of risks and issues as they arise.
What were the project responses to those risks?
The emphasis on communication as a critical enabler of project success was echoed multiple times by executives interviewed form the oil and gas industry, as shown in the Appendix.
Proposition 5 – Treating risk as uncertain, not probabilistic
Project changes can occur due to changed conditions, variations in market suppliers of construction materials, errors in estimated quantities and price indexing. In order to address those issues, contracts establish payment methods, warranties and incentives clauses. According to Soon (2009), payment methods are related to risk management in the extent they make the contractor responsible for the entire project lifecycle (payment by availability) or they make project risks be assessed more accurately (target pricing). Warranties have been designed for removing payments from elements that do not attend requirements as written in contracts. Incentives are used when sponsors are interested in contractors exceeding contract objectives, such as reducing project time (Soon, 2009).
Procurement choices have not only moved to a better integration between project phases, but also to a more collaborative or supply chain-oriented approach between project supply chain parties in order to deliver better value to contract parties and other stakeholders directly or indirectly related to a project (Walker et al., 2008). London (2008) suggests that suppliers are picked up for a project among a pool of supply chains rather a pool of firms in a supply base, and that, a permutation of one firm can dramatically alter the supply chain configuration. That author proposes a model to help firms to understand the various players and relationships involved in the construction supply chain and to help visualization of project supply chain risks.
As project significance increases, there is a progression from single project partnering to multi-project strategic alliances and joint ventures (Morledge et al., 2006). Turner (2006) explains that multi-project or long-term project partnering is also used in small retrofit and maintenance projects in order to avoid confrontational working arrangements and setup costs of several partnerships. Walker et al. (2008) defend the notion that partnership alliances and frame agreements are procurement choices that can also address stakeholders' concerns about the social costs of outsourcing.
The likelihood of greater integration between parties is more likely to also result in strategic investments in the relationship, notably the alignment of contract management systems, portals, workflow management systems and other investments that created improved collaboration and sharing of information on projects. Our results in Table 7 suggest that successful projects are more likely to have investments in contract management systems that allow on-going monitoring of project performance against contracts (48% versus 32%), leading to improved visibility of potential issues that come up. Unsuccessful projects relied more on procure-to-pay systems and supplier portals. The latter types of systems are more likely to be “static” in nature, and do not allow direct engagement and identification of issues as they occur. Treating risks as inherently uncertain creates an environment for a more open dialogue when identifying the realities of day-to-day project management, as opposed to finger pointing that may arise when probabilistic risks are assumed at the outset, but never managed or monitored over time. Investment in systems is an important vehicle for effective communication of real-time issues and alerts that lead to managerial responses to risk.
What technology resources were used on this project?
The results in Table 8 also show that in 75% of the successful projects, damages were addressed through contractual guidelines, and assessed based on potential approaches that had already been agreed on. This approach also suggests a more managerial orientation is prevalent with successful projects (versus a decisioneering or probabilistic approach). Unsuccessful projects were three times as likely (37% versus 11%) to engage lawyers to solve problems, which generally occurs in decisioneering types of engagements. Good contract writing upfront can resolve and avoid a lot of litigation headaches later on during the project demobilization, even when significant complexities and risks exist.
How were the associated damages to the project handled?
The challenges of being able to quantify risk and factor that into a contractual lump sum bid was acknowledged by many of the executives interviewed. Many expressed doubt that risks could be identified early, but that flexibility in management of contracts throughout the lifecycle of long, complex projects was an imperative for success.
Implications for future research
This exploratory research has provided insights into the role of stakeholder engagement, communication, identification of risks and contract negotiation approaches on the outcomes for successful versus unsuccessful complex projects. The results suggest that stakeholder and relationship management are intrinsically related to risk and value management outcomes. In supporting the propositions identified in our research, we confirmed a number of important contract management guidelines that are imperative to success, but have also raised issues that merit further research and attention.
Firstly, early engagement can take many forms. The composition of contract negotiation and management teams is important, but an equally important parameter has to do with the skills and training of these individuals, and their level of experience in anticipating and identifying project risks. There is surely an argument to be made that the maturity of project team personnel and project organizations affects performance of construction projects, but there is almost no research that explores this parameter in more detail. Client and contractor organizations may improve their contract management process capability from an immature or ad hoc process to a continuously improved or mature process. The research complements other findings that suggest that a team vision and risks be articulated early in the project procurement to the selection and team building processes in order to improve the project alliance capability (Davis and Walker, 2009).
A second parameter of interest has to do with the role of technology in identifying and mitigating risks. Our results suggest that systems such as work force management, contract management and federated Wikis are in the early stages of deployment. Future research on the application of these technologies to the identification and management of risk will prove to be illuminating.
Conclusions
Our exploratory research provides strong support for the need for early contract engagement, involving multiple stakeholders, using a managerial approach to risk identification, as well as the application of proper measurement systems that focus on effectiveness, not just efficiency. Project management professionals in the oil and gas industry must learn to adapt new management approaches to deal with increasingly risky and complex large projects. Alternate procurement and project management approaches focused on stakeholder engagement and risk identification must occur to improve operational knowledge in managing such large projects. Due to lengthy project cycle-times, the learning process for procurement and supply chain managers from participation in previous projects, as well as from managerial experience in other projects, is a research avenue in the management of large projects. Talent management will be critical, and up-skilling the types of individuals working in major project contracting roles is an imperative. As one executive noted in our interviews, “We need to have the right level of people with MBAs who are intelligent and understand commercial terms to manage contracts”. Conversely, another executive noted that “Those tasked with implementation and oversight often do not have the right background to manage these projects”.
Our results seem to support a growing belief in the project management community that robust contract management is a significant factor in maintaining alignment and achieving relative success for complex projects. However, the research also raises a number of other questions:
Is there actually such a thing as a “procurement strategy” (beyond the initial make/buy decision), or is it rather a relationship and contracting strategy?
Is a major part of the problem that procurement often fails to understand the critical need to define the relationship model and structure commitments and obligations accordingly?
What is the optimal composition of project management teams during the initial stages of contract negotiation, and what role do these team members play in on-going performance measurement, risk monitoring and risk mitigation throughout the lifecycle of the project?
Rather than solely a contractual-based perspective, we provide a multi-perspective approach supported by relationship and stakeholder management. With refinement and development for specific LEICPs, the framework we proposed can be used as a tool to leverage procurement and supply chain decisions in large projects.
Footnotes
Funding
This research received no specific grant from any funding agency in the public, commercial or not-for-profit sectors.
Note
Appendix: Survey
Dear Sir or Madam,
We are currently engaged in a research project benchmarking how organizations are managing complex contracts. We are requesting a brief survey to consider current practices in managing large scale complex contracts in the oil and gas sector.
References
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