Engineering and construction projects for oil and gas processing facilities: Contracting, uncertainty and the economics of information

The amount of oil and gas processing capacity required to meet demand during the next 20 years is more than twice the amount realised during the last decades. Engineering and Construction contractors (ECs) play a key role in the development and implementation of Large Engineering and Construction Projects (LECPs) for these facilities. We examine the characteristics of LECPs, demand and supply of the contracting market and the strategies traditionally adopted by owners to contract out the development and implementation of these projects to ECs. We demonstrate that these traditional strategies are not longer effective, in the current 'sellers market', to mitigate the oligopolistic economic inefficiencies. As the 'overheating' of the contracting market is expected to continue for a considerable period of time, alternative contracting strategies are required. Contract theory, particularly the economics of information on LECPs, indicates how alternative contracting strategies can be used to overcome economic inefficiencies. The effective use of these alternative strategies requires increased owner involvement and their effectiveness is contingent upon owner competency and ECs acting as the owner's agent rather than its adversary. This will require an organisational and behavioural change process for both owners and ECs. (c) 2007 Elsevier Ltd. All rights reserved.