Contract is a very important part of project execution, especially when the size grows bigger. As in any project, Oil & Gas sector comes across different types of contracts and agreements at different stages or phases of project. Though the contract and agreements are used interchangeably, however legally there is a marked difference between them. A very broad definition of both hereunder provides an insight:
An agreement is an understanding/ arrangement between two or more parties; while contract is an agreement with terms and conditions that can be enforced by the court.
Without going into further deliberation on the differences in this article, I would rather go into the strategies and processes.
Types of Contracts and Agreements
In Oil and Gas projects, we come across different types of contracts and agreements. Broadly speaking, with reference to phases and specialties, following are the examples:
- Feasibility Study Contract
- FEED Contract
- PMC Contract
- Licensing Agreements
- Execution Contract
- Specialized Contract and Agreements
All of the above may or may not form part of the project during its lifecycle, but most of them would be there within. With the types of Contracts/Agreements stated above, contracting strategies are firmed up.
Figure – 1: An example of contracting sequence with one type of strategy
With reference to the execution, responsibilities and payments terms, Contracts may be described as follows:
- EPC: Engineering, Procurement and Construction Contract
- PC: Procurement and Construction Contract
- C: Construction Contract
- LSTK: Lumpsum Turnkey Contract
- Cost Plus converted to Fixed Price Contract
- Reimbursable Contract
- Standby Contract
In projects in general and Oil & Gas projects as particular, there may be different types of strategies for contracting. Few of them are as described:
- Feasibility by Consultancy Contract, FEED by Project Management Consultant (PMC), site execution by EPC Contract with supervision by PMC.
- Feasibility by Consultancy Contract, FEED by Consultancy Contract, site execution by EPC Contract.
- Feasibility in-house, FEED by Consultancy Contract, Detail Engineering and site execution by Cost Plus Converted to Fixed Price Contract.
- Feasibility, FEED and Detail Engineering in-house, Procurement and Construction by PC Contract.
- Feasibility, FEED, Detail Engineering and Procurement in-house, and Construction by reimbursable Contract.
- Feasibility and FEED by long term Engineering Consultancy Contract, site execution by EPC Contract.
The above are very few examples of contracting strategies that is followed in the industry.
In general the tendering, which is a very important contracting process, follows the following path, and this path is called tendering cycle:
- Preparation of ITB/ITT (Invitation to Bid/Tender)
- Review and Finalization of ITT/ITB
- Obtain appropriate approvals for issuance of ITT/ITB to bidders/tenderers
- Issue the ITB/ITT to bidders
- Hold Pre-Tender/ Pre-Bid Meeting with bidders/tenderers for clarification.
- Preparation of bids by bidders/Tenderers
- Submission of bids and Closing of Tender
- Evaluation of bids
- Finalize the evaluation and prepare recommendation to Award
- Obtain appropriate approvals to award the Contract
- Award of contract
- Sign the Contract
- Execute the Contract
- Close the Contract
Figure – 2: An example of Tendering Cycle
Contract types examples with respect to phases and specialties are described as follows:
Feasibility Contract: This type of contract is handled by specialized consultant who studies the project concept/idea and provides a report on the feasibility of proceeding further into the project. The deliverable is a feasibility report and it is manhour based. Costing is done on the manhours required for deliverables. This contract can be fixed price or reimbursable type.
FEED Contract: This type of contract is handled by consultant specialized in basic design which forms the base of the project. Deliverables are scope of work for execution, ITB/ITT for execution, Class 3 TIC estimate and execution schedule. Many reviews are carried out during this contract. Costing is done on the manhours, cost of reviews and services costs for obtaining Quotations. This contract can be fixed price or reimbursable type.
Execution Contract: This type of Contract is further divided as follows:
- EPC Contract: This type of contract is handled by Contractors specialized in Detail Engineering, Procurement, Construction and Commissioning. Deliverables are the facilities, plants, buildings, etc. Costing basis is the detail engineering manhours, material/equipment and their procurement cost and construction resources cost.
- PC Contract: This type of contract is handled by Contractors specialized in Procurement, Construction and Commissioning. Deliverables are the facilities, plants, buildings, etc. Costing basis is the material/equipment and their procurement cost and construction resources cost.
- Construction Contract: This type of contract is handled by Contractors specialized in Construction and/or Commissioning. Deliverables are the facilities, plants, buildings, etc. Costing basis is the construction resources cost.
- Reimbursable Contract: This Contract is done on reimbursable basis, it may contain one of the following:
- Detail Engineering, Procurement and Construction
- Procurement and Construction
- Detail Engineering
- Cost Plus converted to Fixed Price: Under this type of execution contract, the Contractor carries out Detail Engineering on reimbursable basis and then the cost is finalized for Procurement and Construction to be carried out by them. Procurement and Construction may be done by other Contractor based on competitive bidding too.
Process Licensing Agreements: These agreements are for utilizing the Process Licensing Technology of a particular Licensor for Process Plant/Units. The deliverable is the process of technology and guarantees. It provides inputs right from FEED and services include support thereafter. Following are the typical components of this agreement:
- License Agreement
- Engineering Agreement
- Performance Guarantee Agreement
- Catalyst Supply Agreement
In many cases, post-signing the execution contract (EPC, Reimbursable, etc.), especially EPC, the Contractor represents the Company for Licensing during the duration of the contract and a Tripartite Agreement is signed in this regard between Company, Contractor and Licensor.
Figure – 3: Typical components of Process Licensing Agreement
PMC Contract: There is a common strategy where a Project Management Consultant administers the Contract with execution Contractor on behalf of the Company. This type of Contract may or may not cover the preceding FEED phase, where this Consultant develops the FEED and then handles tendering and administer the execution Contract. The basis of costing for these types of contracts is manhours, apart from some trips to different places for activities like Factory Acceptance Tests (FAT), cost of reviews, specialized contracts, statutory approval coordination costs, etc.
This article is intended to provide insight into contracting strategies and processes in projects, especially in oil & gas sector. Though it may be highly useful to a newcomer into this field, nevertheless, it would be useful for anyone in the field of Oil & Gas Projects. It is worth mentioning that a good number of personnel in the Oil & Gas Project may not have a good insight into the contracting strategies and process, where this article would be useful.
In coming articles, the author would discuss stages gate processes, turnover process and other subjects.
Queries, comments and feedback are welcomed. You can reach out to the author on his email: [email protected].