Contracting Strategies for Large Energy Projects
Introduction
Large energy projects, such as we know in oil & gas, Petrochemical, and renewable require significant investments. Highly complex due to long execution timelines and large supply chain with as much as 250 stakeholders.
Selecting the right contracting strategy is one of the most critical decisions in the early project planning. As the chosen contracting model will determine how the project risk, responsibility, and reward are shared between the owners in the Joint-Ventures and contractors. An unsuited contracting strategy can result in cost overruns, schedule delays, and disputes, while at the opposite a well-aligned approach can enhance collaboration, ensure cost control, and deliver the project on time and within budget.
Common Contracting Models
Lump Sum Turn Key (LSTK)
The most widely used models in large energy projects is the Lump Sum Turnkey (LSTK) contract.
Under this agreement, the contractor of the EPC contract delivers the project for a fixed price agreed with the Owners. The contractor is thus assuming full responsibility for engineering, procurement, and construction.
This approach offers strong cost certainty for the Operators and a single point of accountability, making it attractive when the project scope is well-defined. However, the fixed price often includes risk contingencies which for contractors can weight as much as 20% of the total price they offer. This risk management for the contractor increases costs, and changes to the scope may lead to significant price adjustments. Additionally, contractors may be tempted to cut costs to protect their margins, which can impact quality.
For Lum Sum Turnkey contract, the contractor is the final decision maker about the selection of suppliers of equipement and service. For the supply chain, it is important to have close participate with the contractor in the engineering and design phase to make sure to get the order.
Reimbursable
Reimbursable contracts, often used in USA for exampe, offer greater flexibility.
The owner pays the contractor’s actual costs of the project plus an agreed fee, often a percentage of the total project cost. The reimbursable model is well-suited for projects with uncertain scopes or evolving designs.
It also promotes transparency between Operator and contractors, as costs are clearly tracked and reported, and can enable early project start before full design completion. The trade-off is reduced cost certainty, and without strong management oversight, expenses can escalate quickly. Owners also need to be more actively involved in managing the work, requiring a higher level of in-house expertise.
While Lum Sum Turnkey have the reputation to be cheaper contract, on the recent years many example of Reimbursable project execution have proven a well managed execution can lead to cheaper and faster project delivery.
For the supply chain, a reimbursable contract means a high involvement of the operators, thus making them part of the decision for the suppliers selection process.
EPC versus EPCM
A key distinction in contracting often lies between EPC (Engineering, Procurement, and Construction) and EPCM (Engineering, Procurement, and Construction Management) models.
In an EPC arrangement, the contractor delivers a fully completed facility under a single contract, which is ideal for projects with a clearly defined scope and a need for strict performance guarantees.
EPCM, by contrast, involves the contractor managing the engineering, procurement, and construction process while the owner holds the trade contracts. In an EPCM contract, the contractor does not build the project directly. Instead, they act as the Operator project manager to manage the engineering, procurement, and construction process. The EPCM contractor coordinates design, orders equipment and materials, and oversees construction activities, but the operator holds the contracts with individual suppliers, fabricators, and construction companies.
This allows more flexibility and control but transfers more risk and coordination responsibility to the owner. Generally, EPC is preferred when deadlines are strict and owner resources are limited, whereas EPCM works well for complex projects requiring active owner involvement.
Alliance and Partnership models
Alliance and Partnering models adopt a different philosophy, with the owner and contractors working together as an integrated team. Those type of contracting are rarely adopted and are mostly reserved to small syze projects.
Risks and rewards are shared, and all parties have aligned incentives to achieve cost savings and performance improvements. These models can create a highly collaborative environment that encourages problem-solving and innovation. However, they require clear governance structures, mutual trust, and cultural compatibility to succeed, which can be challenging to establish and maintain.
Modularisation
Another growing approach, particularly for offshore oil & gas and LNG developments, is the modularisation contract.
This contracting strategy involves fabricating large modules of the facility in controlled offsite environments before transporting them to the project site for assembly. Like a Lego game, the construction seems like assembling serie of technology bricks.
Modularisation can reduce onsite construction time, improve safety, and enhance quality due to the controlled fabrication process in easy environment. However, it comes with challenges such as higher logistics costs and the need for precise coordination between design, fabrication, and installation teams as it can suffer from uncompatibilities at the last minute.
Modularisation comes handy in projects where the design can be standardized from previous experiences.
Factors Influencing Contracting Strategy Choice
Selecting the most appropriate contracting strategy depends on several key factors.
First the operator’s risk appetite plays a central role in determining whether to transfer more responsibility to the contractor or retain greater control. The second factor is the project complexity; as more complex or technically challenging projects often require experienced and extented engineering team for a flexible and collaborative project management.
The third factor is the local conditions and project environment which can guide the decision of contracting method toward a specific contractor because of availability, regulatory requirements or country location. Each of these factors must be weighed carefully to ensure the chosen strategy supports the project’s success.
In www.projectsmartexplorer.com you can find all the details of this contracting strategy for each project, in order to Gain control of Energy Projects.
Conclusion
There is no universal contracting model that suits every large energy project.
The right strategy must align with the project’s technical scope, commercial objectives, risk profile, and market realities. Well-chosen Contracting Strategies for Large Energy Projects are more than just a legal agreement, it is the foundation for a succesfull collaboration, performance, and project delivery. By carefully balancing cost, schedule, quality, and flexibility, operators can position their projects for long-term success.
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