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Get the Most Out of an Owner-Contractor Alliance

By Cosimo Cannalire, TechnipFMC |

This article provides guidance for setting up a robust alliance between plant owners and EPC contractors to minimize risk and maximize synergies during complex, capital-intensive projects

The most meaningful collaboration pathway among plant owners and engineering, procurement and construction (EPC) contractors is to create an alliance. Both plant owners and EPC contractors can mutually benefit from a well-designed alliance, which enables both parties to work closely to refine established operating principles throughout the life of a project, and to collaborate on innovative operating approaches and strategies. This article discusses key elements of such an arrangement — from the development of the initial pillars of the relationship to the need for confidentiality and exclusivity — and provides guidelines that can help all parties in an owner-contractor alliance to maximize the benefits over the long run.

Both parties would benefit when they consider the drivers and pitfalls of traditional partnership practices and test today’s newer collaboration models and innovative contracting schemes. When certain questions can be answered — such as why does an owner seek an alliance, and what are its potential pitfalls (perceived or real)? — all stakeholders are able to develop an appropriate alliance agreement that is tailored to meet the site-specific considerations of the project or business endeavor.

While alliances are beneficial for both parties, such arrangements are difficult to create and often are not easy to maintain. The following discussion offers recommendations for how to properly set up and maintain a fruitful alliance deal.

The specific areas to be investigated when dealing with an alliance are as follows (each is discussed in detail below):

  • Initial expectations
  • Commercial considerations
  • Maintenance issues
  • Project-execution details
  • Coordination responsibilities

 

Initial expectations

Define the relationship. The scope and mission of the alliance must be defined. For instance, is the alliance being sought for a specific technology, for a determined project phase, or for a specific geography?

Establish metrics and objectives. Because demonstrable results count in an alliance, both parties must work together to define and agree on the most appropriate metrics to be evaluated throughout the life of the working relationship. In particular, leading and lagging indicators must be established, along with key performance indicators (KPIs) that are most relevant for a specific project or projects. Typically operational, strategic and working processes are considered (Table 1).

1

Agree on how to handle “gain share” and rewards. Based on the considerations listed above, a “gain share” mechanism must be established to reconcile variation in KPIs (for instance, variation in projected capital costs). Both parties will need to define and determine how to share and balance any financial rewards or penalties that may arise throughout the life of the project.

Seek alignment on core values and principles. These include, for instance, considerations related to health, safety and the environment; such so-called “sacred cows” must be identified and agreed upon by both owner and contractor to ensure appropriate alignment with respect to these key issues.

Define confidentiality and intellectual property (IP) requirements.To establish a relevant alliance, clear rules must be established with respect to IP and confidentiality issues, and they must be in line with the agreed-upon exclusivity provisions (see next bullet point).

Set expectations about exclusivity.The mandate in this respect must be clearly defined. Is it linked to technology, to a project phase (for instance, front-end loading), to a particular geography? Is it applicable to the contractor’s organization at large or to specific operating centers? Is it relevant to a specific type of project (for instance, greenfield, brownfield, debottlenecking or expansion), or to retrofitting or upgrades of technologies? Is it limited to a specific time duration? These are the types of questions to be asked.

Agree on how to share business information. Clear rules must be defined in this respect to protect all parties. The more that effective sharing takes place thoughout the alliance, the more the contractor will be able to gain insight into the project owner’s business practices and objectives, and be able to support the the owner’s case more appropriately.

Identify key professionals and their roles and responsibilities.The identification of a core team of professionals on the contractor’s side is key to guaranteeing continuous improvement, continuity and success within the alliance.

Agree on the alliance location.While there may not be one single location or geographical place that defines the alliance, it is still helpful to gather all of the contractor’s professionals associated with the alliance in a single office. This allows the contractor to create a “competence center” for that specific project or arrangement.

 

Commercial considerations

Define accounting, control (especially for shared expenses) and auditing (for rates structure). These important rules of conduct must be established at the deal inception and then refreshed periodically throughout the life of the alliance.

Establish common investments. If the investments (such as those related to the shared information technology domain) might be of value for the contractor even beyond the boundaries of the specific alliance, a shared funding mechanism should be established.

Establish rates, fee structure and a benchmarking framework for incentives. In many alliances, contracting deals use a framework through which the contractor is paid for what it is asked to do in a reimbursable manner, and not via a lump-sum, fixed-cost framework. This is the approach most alliances select, given its flexibility. The appropriate rate structure must be established (including salary and overhead expenses), and it must have a formal, auditable structure. When the alliance is exclusive and guarantees a certain amount of work for the contractor, the overhead costs will be reduced for the contractor, thus incurring fewer “chase costs” on the contractor’s side to develop other work and revenue leads. The fees charged during the project’s front-end loading (FEL) phase could be structured by dividing it into a fixed component, plus a variable add-on one that is tied to performance. During project execution, an incentive plan should be defined on a case-by-case basis, which typically creates a cap for both the rewards side, as well as “pain areas.” Such incentives are typically benchmarked internally by the owner or via an external consultancy. Special attention should be dedicated to project-to-project incentives, which should also be benchmarked and rewarded through a gain-sharing or equivalent mechanism.

Maintenance issues

Identify core technology.It is important for all parties in any technology-based alliance to figure out whether the working arrangement applies to just the latest technology, or to all prior and future vintages of the technology employed, and whether it takes into consideration pilot-plant testing and transitional work to move the process from the research-and-development (R&D) stage to full-scale commercialization. Any maintenance or upgrade of technology should ideally take place between commercial projects and should look at the project execution side of it. Technology application must be reviewed in terms of its feasibility from a project-execution perspective. In a commercially proactive mode, the contractor should develop this type of effort — for instance, zeroing the fee and being compensated just for its actual costs. Relevant domains where these considerations apply include, for instance IT, reliability modeling, and cost-versus-risk estimating and scheduling tools.

Agree on governance and oversight.The structure must be lean, but effective, and must work both top-down and bottom-up. The alliance must include representatives of all current, active projects, to keep the alliance associated with commercial reality. Alliance managers would be key players, especially at the deal inception, and will need to demonstrate full-time presence and participation. The sidebar above shows a typical organizational structure that should be considered to help manage such an alliance.

Plan adequate training.Rules related to training activities refer to the alliance’s overall mission and any drivers that will need to be established in both the owner’s and the contractor’s organizations.

Identify resource requirements related to business objectives. Attention will need to be devoted to the balance between continuity of work and deployment of key contractor’s resources, as the deal has to avoid idle time, as much as possible. The key contractor professionals cannot remain idle waiting for work to come, as this would impact their morale and motivation.

Capture and share lessons learned.A transparent feedback mechanism must be established to allow continuous improvement to occur throughout the life of the alliance.

Define terms related to R&D joint collaboration. Special provisions must be put in place to define how the contractor’s personnel should collaborate with the owner to move the project forward from the R&D stage.

Commit to continuous improvement.The project owner and contractor should evaluate the deal in such a way as to avoid the status quo,and instead seek ongoing advancements and best practices.

 

Project-execution details

Set “engineering-reuse” goals . Within the context of continuous improvement, the reuse of engineering (in terms of leveraging the existing experience with continuous improvement and development of best practices in mind) must be a means to an end, and not the goal — hence underscoring the need for a smart, open-minded approach.

Establish productivity targets. Such targets are linked to the above-mentioned KPIs, and will provide an ongoing measure of the performance of the alliance with regard to key agreed-upon objectives.

Strive to optimize efforts related to specifications and standards. One of the advantages of an alliance should be to simplify and coordinate efforts related to helping the project meet the required specifications and standards. Working closely together, the partners can bring about a lean approach with less redundancy of effort.

Develop a project-execution strategy to ensure continuity of projects .A clear strategy will need to be developed to ensure smooth project execution, especially in terms of balancing the optimization of a single initiative versus a suite of projects (as these two competing drivers may not necessarily be aligned).

Set goals for cycle-time improvement. The partners in any alliance should seek to reduce project lifecycle time through standardization and efforts to improve efficiency.

Define change-management strategies (related to technology and project execution). Clear rules should be established, especially when management of change could affect alliance KPIs.

Establish a standardization philosophy. Likewise standardization should be exercised in a smart way, to balance progressive introduction of technology and project execution improvements with reuse of engineering.

Standardize engineering deliverables and documentation efforts . Efforts related to these key project objectives should be standardized wherever possible, aiming at simplifying the quality and quantity of deliverables based upon the owner’s actual needs.

Coordination responsibilities

Manage information and seek consistency of messaging. Efforts should be made to streamline communications within and outside the alliance environment, and to properly monitor communications to ensure consistency of messaging.

Leverage alliance benefits to current projects and vice versa. There must be a useful transfer of value provisions from the alliance efforts to benefit all mutual projects, and a flow of wisdom and knowledge to make best use of project learnings and best practices to benefit all alliance partners. With a robust alliance framework and deliberate effort, specific learnings and best practices can then be carried forward from project to project.

Ensure understanding and implementation of alliance strategy by project teams. Proper training of the project teams can help to ensure that all participants are aligned and can exploit the many benefits of a well-designed alliance.

Interface with third parties. The partners should work to develop consistent rules at the outset, to specify homogeneous ways in which all parties should interface with the world beyond the alliance — for example, with regard to licensees, joint-venture partners, other contractors, manufacturers, suppliers and more.

 

Closing thoughts

Setting up a well-designed owner-contractor alliance takes effort, and maintaining it requires time and attention. The above-mentioned alignment areas should overcome any conflict among the parties, stimulating the proper top-down and bottom-up behaviors and processes that are, in an alliance, deeply different from a transactional deal. Alliances are not just deals; rather, when designed and executed appropriately, they can provide more in terms of “soft values.”

The focus should be to create win-win solutions that are both possible and necessary for all parties. When the proper steps are taken to develop a strong alliance, all parties can exploit accelerated technology development, and benefit from leading project-management practices and tools, as well as proper effort to avoid the cost penalties associated with poor quality (with regard to project design and execution). Alliance members must seek ongoing productivity improvements, have the courage to speak up if any issues arise, and aim for consistent account management and accountability by all parties in the deal.

Edited by Suzanne Shelley

Author

08EP~CosimoCannalire~PortraitCosimo Cannalire is vice president of Alliances for TechnipFMC (TechnipFMC, EMIA, Viale Castello della Magliana, 68, Rome, Italy 00148, Phone: +39 06 65983354; Email: cosimo.cannalire@technipfmc.com), and has been chairman of the Technip’s College of Experts, a group representing 650 technology experts within the company. As a key account manager (KAM), Cannalire has been in charge of the TechnipFMC’s PTA Alliance with BP since 2000 (recently extended to acetic acid), and of TechnipFMC’s GTL Alliance with Sasol since 2013. He is an executive member of the Italian Assn. of Chemical Engineers. In 2000, Cannalire received the Jacques Franquelin Award, assigned within TechnipFMC to the most innovative managers of the Group, and in 2012, he was chairman of the jury assigning that award. He speaks often at international engineering conferences and has published numerous articles in CPI-related trade journals. Cannalire holds a master’s degree in chemical engineering from the Rome La Sapienza University.

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