02/01/1999
Construction problems and solutions
Graham Parker
Intec Engineering
To date, purpose-built floating production, storage, and offloading
vessels (FPSOs) have been constructed in traditional shipbuilding
facilities with existing systems. The construction contracts were
typically administered with the pre-conceived contractual culture of a
shipyard.
The 12 newbuild FPSO contracts for Northwest European waters have been
made by the vessel's owner or speculator, either directly with the
respective shipyard or with the shipyard as a member of a contracting
joint venture. Four are owned by single operators - Gryphon 'A', Kerr
McGee; Captain, Texaco; Anasuria, Shell; and Schiehallion, B.P. - in the
UK Sector, and five in the Norwegian Sector.
The first true monohull FPSO in the North Sea was the Petrojarl 1,
delivered in 1986, and was intended to be a production test vessel with a
small crude oil storage capability. As the Seillean was designed and
built as a single well oil production system (SWOPS), it cannot really
be called an FPSO. The title of second North Sea FPSO therefore falls to
Gryphon 'A', which started out life as a speculative build floating
storage unit. The role changed during its design development into an
FPSO.
The Gryphon 'A' was delivered seven years after Petrojarl 1 and the next
newbuild FPSO delivered for the North Sea was the Captain in 1997,
another four years later.
Of the 12 newbuild FPSOs now installed or under construction for the
North Sea, 10 have been the product of the last four years of FPSO
history and designs are still evolving.
Market environment
Until the beginning of the 1960s, the principals in shipowning companies
would order a new ship by making a telephone call to a shipyard's
managing director. The shipyard's managers would begin to develop the
detailed design and order steel materials without a contract being
discussed - only the price would have been settled. In the 1950s, even
the price would be open to some extent as it would often be "cost plus."
The "cost plus," however, would include a gentleman's "plus" based on
similar, recent or sister ships, and quite easily calculated.
All that would change with the advent of intense worldwide competition
from the developing nations and increased inflation. Between these two
factors, the numbers of countries still capable of major ship
construction has dwindled to a comparative handful mostly in the Far
East.
In today's shipbuilding environment, the contracts for trading vessels
have become a little more specific, but they still convey some of the
mutual goodwill that was fundamental to the old contracts.
The discussions that follow, although targeted at monohull FPSO's, are
equally relevant to the construction of other offshore sector floating
structures built by a shipyard.
It involves a technical solution that solves a commercial problem and
conversely, commercial effort that solves a technical problem. This is
singularly applicable to the design and construction activities for
newbuild FPSO's due to the early historical phase of their development
and the ample opportunities for inspired innovation.
Contracting strategy
Although, in general terms, shipyards seem to prefer fixed, lump-sum
contracts attached to a fully detailed engineering package, this is
usually not equitable with the current fast-track FPSO field development
philosophy. Not being equitable affects both contracting parties.
Delays can be caused by poor or incomplete engineering. This also leads
to contractual confusion or dissension, which may affect the quality of
the engineered vessel. One of the best reasons for the beneficial
inclusion of the shipyard in an alliance partnership is a case where the
workscope is not sufficiently defined at the time of contract. At this
time tolerance and help are needed from the shipyard and contractor, but
instead there is often disruptive and unproductive contractual
wrangling.
If it is determined that all parties would benefit from the shipyard's
inclusion in an alliance or joint venture then further detailed analysis
will be required before the final step is taken.
Contract structure
Eventually a construction contract will be offered to the shipyard for
signature. It is therefore necessary to pre-define the contract
structure and its backing documentation. The Crine Network in the UK has
recently published its model "General Conditions of Contract for
Construction" to provide an industry basis for major construction. The
model contract also has a set of guidance notes to complement its use.
The complete presentation is the product of years of work and
formulation by the Crine Standards Contract Committee comprised of
senior representatives from major operators and the contracting
industry.
The objective of the Model Standard Contract is to significantly reduce
the inefficiencies associated with the repeated drafting and reviewing
of contracts. It is also intended to facilitate a greater sense of
partnership between operators and contractors and will reduce the need
for a full contractual review for each tender.
The Crine Model should form a good basis for conventional contracting
relationships. There may be some advantage to be gained in the future by
the identification of those clauses that would benefit from specific
modification for contracting for the construction of FPSOs and create a
modified FPSO version of the model.
Bid invitations
Most shipyards under consideration for participation in a prospective
project will be easily identified based on their strong profile and
capabilities. In some cases, these features are less apparent. They
include, for example, when the first choices are full to capacity, when
they have changed their market sector interests, or for any reason they
are no longer interested in floating production construction.
The list of invitees should be as large as is sensibly possible within
the project constraints. A typical prequalification questionnaire will
include expression of firm intention to bid request, shipyard facilities
and manning levels, current workload and schedules, relevant experience
in the sector, ownership and corporate relationships, management
systems in existence, quality assurance qualification, safety and
environmental records, industrial relations records, financial
information and accounts.
The prequalification documents will be vetted and evaluated in order to
provide a final list of shipyards to be invited to bid for
recommendation for management approval.
The status of the front end engineering completion will determine the
shape and extent of the formal bid invitation documentation. This can
range from just a collection of functional specifications, the design
basis and the environmental and geotechnical data or be a full-blown
pre-engineering package.
The depth of this engineering will be measured against the speed the
project schedule needs, but all floating production projects will have
some degree of grease applied to the schedule for early commercial
returns. The FPSO vessel design itself will always have the field
development principal critical path straight through it and the front
end engineering activities are the first consideration. Any of this
engineering pushed into the post-award construction schedule will
generally impact the schedule on at least a day-for-day basis.
The bid period will depend on the project schedule, tempered with the
bid content and complexity, but will probably be in the 3-6 weeks range,
with 4 weeks being the likely median requirement. Miscalculating the
bid period will only cause dilution of the quality of the bid in terms
of accuracy and technical content. It can also have a greater negative
impact on the project than almost anything else except the definition of
the scope of work.
In order that supportive and qualitative pricing information responses
are received from the shipyards they should generally be instructed to
complete a price breakdown matrix. This will allow interrogation of
individual line items for credibility and validity by comparison with
each competitor's figures side by side. The value of this form of
evaluation by the comparison of line item breakdown cannot be
overemphasised.
All omissions and deviations from the instructions to tenderers
requirements will need to be identified, interrogated, and closed out by
the bid clarification process. If the shipyards under consideration are
also being considered for fabrication and HUC of the process plant,
then this would also be incorporated into the matrix for comparison.
Apart from consideration of the price breakdown and total cost the
overall evaluation will also consider the following principal aspects of
the individual offers; total lump sum price, towage cost and schedule
impact, site supervision team requirements, averaged rates for
variation, payment schedule and methods, financing arrangements and
benefits, construction schedule, process plant capabilities, quality
assurance assessment, safety record assessment, financial health report,
and simple ranking of all offers.
It is imperative that before any final commercial commitment is given to
a short listed or recommended shipyard a multitude of other relevant
considerations should be evaluated and satisfied. Initially the
following aspects of the management systems should be considered;
project management system, management culture, communication abilities,
business language, document control, QA/QC organisation, procurement and
expediting, certification, scheduling abilities, health and safety,
cost control, and pre-outfitting experience. The following physical
facilities and resources should be evaluated; current and future
workloads, building berths and dry-docks, steelwork prefabrication,
pipework prefabrication, berth craneage, outfitting quay logistics,
undercover storage, engineering manning levels and abilities, steelwork
and outfitting trade levels and experience, electrical and
instrumentation resources and experience, and hook- up and commissioning
resources and experience.
After consideration of all of the foregoing, the bid evaluation
teamleader will conclude the evaluation with a formal bid evaluation and
recommendation report. This will include all records of the bid
clarification negotiations, shipyard assessment visits, and the
normalization factors utilized in arriving at the recommended choice of
shipyard.
Post-bid refinement
The recommendation to proceed with a shipyard and acceptance will
provide an excellent opportunity to fully refine the design, price, and
construction schedule in readiness for final pre-award commitment:
The final pre-award discussions and negotiations include design/cost
optimisation modifications, final agreed scope of work, contract pricing
structure and values, milestone payment values and schedule, rates and
units for variation, contract currency and exchange rates, master
construction schedule, insurances, P.C. guarantee, and performance
bonds.
During this period of refinement and final contract negotiation it is
imperative that any concurrent negotiations between the shipyard and
other potential clients are careful monitored. The opportunity at this
stage for the shipyard to "play-off" one client against another for a
schedule slot in the yard is often too good to miss, particularly in a
strong market situation. The risk to both clients is obvious and
probably schedule critical to all.
Contract payment methods
Until about 40 years ago, all of the world's major shipyards contracted
for vessels on an almost cost-plus basis, but then fixed, lump-sum
contracts, with penalties, became the norm. The days of fixed, lump-sum
contracts may now be over as current contracting strategies reflect some
form of alliancing arrangement with others and/or the owner/operator.
Some of the FPSO developments recently contracted for consist of joint
venture partnerships comprised of contractors whom together will supply
the total field development scope of work, from conception to first oil.
This form of contract can be based on the target price contracting
mechanism which is founded on the principle of shared risk and reward.
Payment of a bonus for early production may also be provided.
The target price itself consists of three main elements; a management
fee which includes fixed profit and overheads for the joint venture, the
estimated cost of the facilities, this would to be charged to the
operator at cost. A contingency provided to compensate the joint venture
for those unforeseen events often experienced in an offshore project.
The above costs will be declared at the pre-contract stage and have been clarified and agreed.
If the project is to be completed below the target price level then the
joint venture partners and the owner would share the savings on an equal
basis and the joint venture would retain the fixed profit and
overheads.
Should the final price exceed the target price then the excess costs
would be shared on an equal basis between the joint venture partners and
the owner. This situation can be limited by a fixed amount, the total
of which is termed the cap price, after which the owner would pay 100%
of the actual costs incurred without limitation.
The amount between the target price and the cap price is set such that
all of the fixed profit and overheads element could be lost by the joint
venture partners. All members of the project, whether joint venture
partners or owner will have an incentive to minimise expenditure,
thereby maximising the cost benefits to all parties. Each partner will
also be responsible for the rectification of his own defective work, at
no cost to the joint venture or owner.
The estimated cost of the project would be based on contract scope of
work, pre-award and intermediate engineering deliverables, design basis
and reports. No change to any of these documents, which diminish the
requirements of the design basis, would be permissible without the
approval of the owner. Similarly, no changes to the contract
documentation which reduce the availability or quality of the facilities
as agreed during the development of the design would be permitted
without approval.
Where such changes are approved, any cost increase associated with
increased scope would be added to the target price and similarly
decreases in scope would be deducted from the target price.
Design development changes which will not effect the target price will
be controlled and approved by the joint venture and finally approved by
the owner. Cost savings derived by efficient design development will
enable the joint venture to earn proportionally more profit under the
target price mechanism, again subject to owner approval.
The fixed overheads and profit for the shipyard's scope within the
overall project should be agreed between the partners before contract
award and built into the target price. The construction cost
compensation for the shipyard as a joint venture partner would be
determined by breaking out the obvious components of the vessel and
topsides in a way that is fair, sensible and can easily be defined and
measured.
An incentive related payment schedule should be developed and agreed and
this should act as a motivation device and reflect the shipyard's
cashflow profile. A typical milestone-related payment schedule for a
target price mechanism construction contract is shown below.
Delivery liabilities
The philosophy for the imposition of liabilities and damages on the
shipyard will be based on the commercial losses that would by incurred
by the owner, and his partners, in the event of delayed delivery.
Although generally the contract will include provisions for termination
after a stipulated delay in the delivery date for provisional acceptance
they would only very rarely be activated.
Recovery of an owner's losses by the shipyard's payment of liquidated
damages is generally of more interest and it also acts as an incentive
to the shipyard merely in its avoidance.
The delayed contract delivery considerations should be contract schedule
inherent delay risks, contract price comfort or risks, delay
repercussions on installation windows, rights of termination clauses,
liquidated damages free period and activation, per diem liquidated
damages value(s), and liquidated damages period and payment limit.
Both parties will have the right under the conditions of contract to
raise a variation order request, which may or may not eventually become
an approved variation order depending on the particular circumstances.
The shipyard shall not implement a proposed variation order until the
owner has approved the order by signature. The only circumstances
whereby a variation order may be implemented by a verbal instruction,
would be in an emergency endangering life or property or where in the
owner's site representative's opinion the safety or integrity of the
project is at risk. Even under these circumstances the owner will be
required to confirm the verbal instructions in writing within, say, two
days.
It is preferable that a very comprehensive list of rates for variation
be incorporated into the contract to ease the calculation and acceptance
of variation costs. These will include for all likely labour,
materials, plant and equipment costs etc. and will aid in the avoidance
of contractual confusion.
Depending on the final form of contract and the type of contracting
relationship intended to operate with the shipyard, the site team need
for local supervision and inspection will vary. This can range from just
a handful of personnel on site to 50 or more as has been seen on some
recent projects.
A likely initial site team build-up for a project with a comfortable
status of engineering at the commencement of the contract would include
at least nine men. If it becomes obvious that further presence is
required on site for supervision and inspection then the team will be
reinforced as necessary, but will increase in any case towards the
mechanical completion and pre-commissioning stages. The size of the team
will also be dependant on the extent of the process plant scope of work
being carried out by the shipyard, if any.
The owner's site representative's role will also vary again depending on
the type of contracting relationship and existence or not of
partnerships and alliance etc. However, it is usually intended that he
will act as the sole point of contract and authority on behalf of those
contractually facing the shipyard or the joint venture on site as their
representative.
Contract schedule
The shipyard will be bound to produce within 30 days of contract award a
master construction schedule consistent with the overall contract
schedule. This will be in bar chart format for the design, procurement,
construction, installation of equipment, testing and delivery of the
vessel and shall identify all interdependencies of the variously related
activities.
Any delays in the early phases of engineering will inevitably delay the
complete project schedule due to the critical path weighting of these
activities. Critical path delays can rarely be recovered due to the
inherent incompressibility of the activities and their subsequent
approval cycles. This is often not recognised early enough, to the
detriment of the project.
Total project reporting will be produced on a weekly and monthly basis.
The method of reporting will generally be by narrative, activity
progress bar chart mark up and globally by percentage progress
completion figures against pre-agreed S-curves.
Even if quite dramatic increases in performance were to create excellent
steelwork and pipework prefabrication progress, the subsequent
activities - painting units, pre-outfitting, and erection of steelwork -
are all sequential activities without float. All of these activities
are also sequential and on the critical path. This is when the real
bottle-necks begin to occur and these are generally irreversible as they
deny the ability to complete and precommission systems with obvious
consequences.
In the demonstrated delay scenario shown above, in order to recover the
schedule by the end of the third quartile in order to meet the original
delivery date, it would require that 55% of the work volume be carried
out in six months instead of the planned 35%.
One of the most remarkable facts about the average FPSO construction
schedule is that the last 1% of schedule progress volume can only be
achieved in the last two months and which is 8% of the total schedule
period.
The only way to achieve successful construction planning in a shipyard
culture is to create a belief in planning at all levels but this has to
be bought by spending on effective planning systems or overspending on
labour. It is important that when the construction schedule states that
"Unit 330 will move from the fabrication shop to the slipway on the
Friday of Week 22," that it does. This is not just to satisfy the
schedule, but so the workforce, supervision and management can depend on
it happening.
Contract success should be relatively straightforward to achieve as it
is only dependent on four main factors which are well understood by
conventional European offshore fabricators. If they weren't understood
then they couldn't even get into the business and they certainly
couldn't stay in it without them - they are good engineering
capabilities, good fabrication quality systems, reliable schedule
achievement, and effective hook-up and commissioning.
However, with a few exceptions, the construction activities of all of
the Northwest European FPSOs have met with schedule, quality and cost
overrun problems of varying degrees and mixes, most of which we are all
aware of. Some have been absorbed and mitigated into the overall project
development and some have not. Some have been commercial and technical
disasters of frightening proportions even to "well-padded" operators.
The rumors and estimated figures have even shown themselves to be well
shy of reality when the facts finally leak out.
Author
Graham Parker is Manager of Floating Production
Systems at Intec Engineering in Houston. He is a fellow of the Royal
Institution of Naval Architects and a Chartered Engineer.
Newbuild FPSOs: What can go wrong - Offshore
