The construction industry has a well-established reputation for adversarial contractual relationships between clients and contractors. By comparison, the oil and gas industry is seen as less confrontational.
“The [oil and gas] sector has a relatively good mechanism for change orders,” one dispute lawyer tells MEED. “Clients will quite often cause delays by changing designs, but the variation mechanism tends to happen very early on and moves quite quickly with the client and contractor negotiating. Disputed areas are often pushed to one side, and dealt with later.”
Given the strategic nature of most oil and gas projects to Gulf states, it is often more important for the project to be completed, rather than placed on hold while the lawyers resolve the dispute.
“Claims can build up, and can run into millions of dollars, but more important is that the project be completed,” the lawyer says.
“It would be tempting to say many of the [oil and gas] clients and contractors are both more mature and experienced so they can solve their issues. It is also fair to say that many of these projects are better funded,” he adds.
Construction contracts are geared towards the back-end, so halting progress mid-project is not as easy. Many projects in the region are fast-tracked and proceed to the construction stage before designs are fully complete. This means contractors frequently take on projects that change in scope during the construction period, resulting in claims that clients do not think they should have to pay.
The oil and gas sector has its own cycles, of course. Billions of dollars’ worth of projects have been shelved since global crude oil prices plummeted to less than $30 a barrel in mid-2014. Since they are normally financed by the clients, rather than with debt, oil and gas projects tend to be placed on hold, to be restarted again in a few years’ time, says one contractor.
With prices in October 2018 crossing $80 a barrel, there are signs the industry is beginning to invest again.
“If you don’t finish a job, both parties have a big dispute because you could have procured materials, finishes are manufactured, it has arrived on site and nothing has been paid. The supply chain holds that debt right until the time it is fixed and handed over and more,” the contractor says.
Despite working on projects worth billions of dollars, contractors are often on margins as slim as 5 per cent. “The clients also can’t afford to see the contractors go out of business. They know the margins are thin. There are not enough major contractors, and they are too thinly spread. Takeovers and mergers mean there are fewer and fewer remaining,” says another contractor.
Lower oil prices have increased the pressure on projects, straining relations between the EPC contractors and clients to reduce costs. Most of this has been done by reducing staff, causing longer-term problems as expertise leaves the sector.
Learning from the past
In late 2009, in the midst of the global financial crisis and Dubai’s property market crash, MEED conducted a survey of Dubai’s 25 biggest construction contractors. Among the key findings was a comment that clients were unable or unwilling to pay their bills. While some of the outstanding payments have been resolved either through the courts or through payment following capital increases, nearly a decade later many of these contractor bills remain unpaid.
Yet, law firms are rarely used in the process of creating these new construction contracts. Instead, they are brought in to deal with disputes, which in some cases might be avoided had a better arrangement been created in the beginning. For all parties, the cost of advice in planning stages is a small fraction of that required to deal with two years of dispute. Disputes arise for many reasons, but lawyers note that projects continually make the same mistakes. Project parties do not always adequately understand the contracts that they have agreed to.
To reduce the number of disputes and save the money and time required to deal with them, these areas can be addressed and there needs to be more recognition from project owners that claims are a natural part of a project and that dealing with variations quickly reduces delays, which can have a domino effect if ignored.
This article is extracted from a report produced by MEED and Mashreq entitled Transforming Construction: Lessons from Oil & Gas. Click here to download the report