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Massive EPC projects trigger focus on capital efficiency
Beirut, February 5, 2013
EPC projects in the GCC are forecasted to increase in size and complexity, and project owners are now enhancing their own capabilities to execute their rapidly growing and expensive portfolios in a capitally efficient manner, outlined experts from Deloitte, leading professional services firm, at a recent seminar in Dubai.
The seminar entitled ‘The Future of EPC’, hosted by Deloitte Middle East and Freshfields Bruckhaus Deringer, brought the changing landscape of the engineering, procurement and construction (EPC) environment under the spotlight.
Experts from the construction industry provided perspectives from the largest project owners and international contractors in the region, and recommendations for industry participants on what they can do to plan for success at the seminar.
“Driven by continued global dependence on energy, and coupled with substantial needs in the region for world-class infrastructure and industry, the forecasted vast construction spend will create increasing demands on both project owners and contractors as they deliver these projects over the next five years,” said Rizwan Shah, managing director, Corporate Finance, and leader of Deloitte’s Capital Projects Advisory services practice for the Middle East.
Contractors are likewise seeking ways to grow their businesses while safeguarding their interests from technical, commercial and legal perspectives, from initiation to close-out. Achieving all three perspectives will mandate new requirements of contractors that are entrusted to deliver these large capital projects.
“With planned spend in the region of 100 billion dollars each for the Saudi Arabia, UAE and Qatar markets, the EPC landscape is shifting. Now is the time for owners and contractors to understand what is achievable - with respect to their current capabilities - as we barrel towards an embedded culture of capital efficiency, transparency, accountability and continuous improvement,” said Shah.
Project owners looking to overhaul current project management
At the seminar, Deloitte experts highlighted the implications of advancements of EPC in the region, sharing that many large capital projects are exceeding budgets and surpassing deadlines. As a result, project owners are looking to “overhaul” their current project management and delivery structures to improve their delivery performance. This could impact:
• How projects are selected and endorsed, including making use of a comprehensive business case that considers all of the projects requirements, from inception and design through to commissioning and operation.
• Setting up projects for success by providing integrated and collaborative platforms with their contractors with the hopes of reviewing and analyzing electronic data as they transition from a reactive to a more proactive operating model.
• Their resourcing requirements that are needed to monitor an increasing number of projects procured through a variety of delivery strategies and contract types.
• Their selection of contracting strategies that suit the available details of project scope, specifications and risk structuring, while providing their contractors with appropriate incentives to perform.
• Investing in systems to assist in tracking and managing the projects’ status and performance baselines throughout the lifecycle of the project.
“We are seeing many new trends emerging in the approach taken to contract regulations, particularly in respect to EPC. These trends are being driven by the on-going international effects resultant from the global economic crisis,” said Erin Miller Rankin, head of Construction, Freshfields Bruckhaus Deringer for the Mena region.
“Recent regional interest and international transparency reporting regimes apply very broadly to opportunities in the Middle East. Consequently, much greater attention is being paid to contractual risk allocation, using increasingly detailed and sophisticated contractual provisions to define that allocation. There is also an increased interest around maintaining closer oversight on materialization of risks and their consequences during the project delivery process.”
The future for EPC contractors
Contractors are likewise seeking ways to grow their businesses while safeguarding their interests from technical, commercial and legal perspectives according to Deloitte experts in construction. These considerations going forward may include:
• Managing transparency that can be availed by project owners regarding contractor’s margins, which may guide informed clients while preventing some contractors from ‘buying work’ at low margins to maintain their short-term operational capability.
• Updating the systems and processes used for accounting project costs, to provide the required levels of transparency for working in a cost-plus environment. This could have a major impact on how indirect costs (shared across multiple projects) are recorded, and result in a shift from a historical “operations centric” approach to project delivery, to a “project centric” approach.
• Additional investment in training and development of human resource capability and skills, to ensure the required skills are available and consistent across all projects.
• Fully maximizing net margins through capitally efficient operations by capitalizing on the massive amount of planned spend maximizing gross margins.
• Increasing competitor pressure and identifying additional areas to drive value throughout the construction value and supply chain.
As the EPC landscape in the GCC changes, Deloitte experts indicate that project owners and contractors are enhancing their project management and performance capabilities and will move towards an embedded culture of capital efficiency, transparency and accountability. – TradeArabia News Service