The Good, The Bad and the Undeliverable: LSTK EPC Contracting

The Good, The Bad and the Undeliverable
LSTK EPC Contracting – Success Guaranteed, Right?

People and Contracts

Engineering construction projects are delivered by people – not contracts. Disputes are caused by people – not the events and circumstances that routinely occur on projects. Of course, in both scenarios the contract is important. However, selecting the appropriate contracting arrangement that is conducive to the project circumstances and the role that the contracting parties each want to play in the delivery of the project is key.

The good news is that today there are a range of contracts available covering the spectrum from LSTK EPC to multi-party collaborative incentive-based arrangements, from which to select the one that is most appropriate for the specific project circumstances. There are also a range of useful and effective tools available to assist in the management and delivery of projects.

Popularity and Success of LSTK EPC Contracting

Lump Sum Turn-Key Engineering, Procurement and Construction (LSTK EPC) contracts started to become popular with owners in the 1980s and over the years have become the contracting arrangement of choice for very many owners and their financiers on engineering construction projects globally in the belief that the majority (or all) of the risk has been transferred to the contractor.

Based on personal experience as a project director and which I share with other project directors and project managers from both sides of the contracting spectrum, mega projects (>USD 1bn) using LSTK EPC contracts on engineering construction projects can be a very good arrangement for both contracting parties to enjoy project success: on-time delivery, within budget and start-up as planned.

However, there are basic rules that both parties must adhere to. The technology must be tried and tested, the scope has to be well-defined and supported by reliable scope defining documents to avoid or at least minimise change during project execution, the delivery time must be realistic and the work well-planned. The contract price and conditions need to reflect the commercial risk taken by the contractor, and having transferred the risk it is mandatory for the owner to allow the contractor to manage it. So far, so good.

LSTK EPC Contracting – Not a Great Track Record Globally

However, now for the bad news! Statistically, only 1 in 4 mega projects globally are delivered successfully. Many have been contracted on a LSTK EPC basis. So why are 3 out of 4 projects unsuccessful, meaning significant delays, substantial cost overruns and facilities not becoming operational as planned?

It is quite simple – the contracting parties not adhering to the basic rules. Lowest price, shortest delivery time without the corresponding work processes needed to meet the commitments coupled with over-optimistic performance and delivery capabilities, unreliable design bases leading to multiple and continuous changes, unnecessarily onerous contract conditions unfavourable to contractors that shackle their ability to manage the risk effectively, and owners not meeting their obligations under the contract and unnecessarily involving themselves in the project delivery management, collectively make for a predestined outcome leading to project failure and bad experiences for both parties. There can be little surprise that disputes in the conventional global industrial plant sector are on the rise, as well as energy transition projects.

Response to Global Warming – Energy Transition Projects

Despite the fact-free assertions of self-serving, short-termism, populist politicians and their acolytes cheer-led by the incumbent of 1600 Pennsylvania Avenue, the transition from fossil fuel based industrial development and production to ‘green’ technologies is well underway globally and set to continue unabated at pace. The pragmatic recognises that, of necessity, fossil fuels and ‘green’ technologies will have to unavoidably ‘rub-along’ together for some time. However, ‘green’ technology development is driven by the many and growing number of organisations committed to creativity, innovation and invention, whose ‘mother’ is necessity. Thus, the rate of change from fossil fuels to ‘green’ technologies will be determined largely by the growing need for them and the determination of those organisations involved to drive successful change.

There is considerable discussion about the cost of ‘green’ technologies and energy transition but very little about the value of these. The cost of anything depends upon whether one is buying or selling and is therefore a management issue, whereas value is about what can be created by endeavour and is not confined to monetary consideration. Therefore, we must ask what is the real value to people and societies worldwide of ‘green’ technologies? I suggest that the list will be long and certainly more persuasive than mere cost considerations.

The Challenges for Engineering Construction

The task of and responsibility for delivering conventional industrial facilities and energy transition projects falls to the global engineering construction industry that has the expertise, experience and capability required.

However, given the volume of the prospective workload, and the current shortage of sufficiently experienced project professionals across all functions and disciplines, at least two basic things must happen. Project sponsors and developers must prioritise and commit to essential projects and put non-essential projects ‘on the back burner’ and avoid speculative exercises in project development that have little chance of being realised.

For energy transition projects, governments can provide assistance by avoiding setting unachievable ‘green’ targets and giving support to projects that can deliver real value in the decarbonisation process. The key message is – create circumstances so that key resources can be utilised effectively and efficiently and avoid wastage so that crucial projects can be delivered to agreed goals.

The same resource shortage applies to the craft people required to do the work. While, for example in the UK, considerable effort and investment is being made to recruit and train people, which can only be applauded, the reality is that although training is important, work experience is essential to develop skill sets not only at the work level but also for supervisors, foreman and chargehand levels who are key to assuring safety, quality and productivity at the work face. This takes time.

Prior to November 2024 the world was experiencing significant change and no less so in the global engineering construction industry. The effects of climate change and geo-political conflicts, inflation, oil price fluctuation, stubbornly high interest rates, supply chain shortages and interruptions to shipping routes all of which created greater uncertainty and risk than had previously been encountered since the financial crisis in 2008, the oil price collapse in 2013 / 2014 and COVID-19 between 2020 and 2022.

Energy transition projects suffer from the same global challenges. However, these projects have additional and specific issues. Much of the technology, except for solar, nuclear and wind, is either new, evolving or not previously used at scale. Often there are many more stakeholders involved and a greater number of interfaces to manage. Many owners and investors are new to the engineering construction industry and are not familiar with the development, delivery and contracting processes. The ‘bankability’ and hence financial closure and project commitment often remains very uncertain until a ’go’ or ‘no go’ decision is made. Many current and previous wind farm and solar plant projects have been contracted on LSTK EPC contracts several of which have suffered the same failings as those experienced on conventional fossil fuel projects.

The change of government in the USA in January 2025 and the ensuing presidential dictates, especially the attack on ‘green’ technologies and the tariffs regime, simply exacerbate the uncertainty and risk ‘off-the-scale’. At the present time there is no knowing when the uncertainty and risk will be abated.

Project Delivery and Contracting in an Uncertain and Risk Intense World

Given the challenges facing the global engineering construction industry, owners / investors, contractors and the supply chain together with the services sector that supports the industry, must now consider how conventional fossil fuel and energy transition projects are to be performed and contracted to assure delivery is ‘on-time’, within budget and plants begin operating as required and planned so that value is maximised.

The fundamental issue is consideration of the multi-layered risks and which party(ies) should take these.

“…No construction project is free of risk. Risk can be managed, minimised, shared, transferred or accepted. It cannot be ignored…”

Sir Michael Lathem, Constructing the team, 1994.

In this context, are the risks to be taken and manged by the contractor and its supply chain or are they ‘project risks’ that remain with the owner / investor and which will inevitably be a trade-off between the return on the investment and the assessed risk liability?

The fundamental question is – who is best able to manage which risks? There is no immediate and obvious answer, because ‘it depends’. However, if conventional fossil fuel and energy transition projects are to be delivered successfully for the contracting parties, then it is imperative that the allocation and management of risk is addressed at the outset and before bids and contracts are considered so that the parties can address and agree upon the appropriate contracting and project delivery model. This would provide the opportunity to consider several options and then agree upon the one that is most likely to work for the contracting parties to achieve successful project outcomes.

The common practice thus far of many owner / investors of pursuing contracting and project delivery arrangements on the basis of LSTK EPC contracts at lowest price, shortest schedule, maximum risk transfer to the contractor and on the most onerous conditions for the contractor, is very likely to result in the project being undeliverable for the price, time and start-up requirements – everybody being a loser.

Enlightened organisations are already challenging the “conventional” by thinking and acting differently in terms of contracting and project delivery models. This shift in approach needs to become mainstream, if projects are to be delivered on time, within budget and become operational in line with the business case that justified the investment. As famously attributed to Einstein – repeatedly doing the same thing and expecting different results is insanity. Radical change is necessary to drive success – nobody wants to be a loser!

Useful Links

Construction Playbook The Construction Playbook – GOV.UK
Value Toolkit Value Toolkit – Constructing Excellence
Gold Standard Constructing the Gold Standard Verification Scheme – Constructing Excellence

ECITB Project Collaboration Toolkit:
Project Collaboration Toolkit
Implementing the ECITB Project Collaboration Toolkit