Labour of loss

US group CB&I (Chicago Bridge & Iron Co.) expects to be hit by pre-tax charges of around $317 million (£150m) for cost overruns on the South Hook and Isle of Grain LNG projects in the UK. The two LNG terminals will account for nearly 35% of natural gas supply to the UK when fully operational.

The bulk of the extra costs has been encountered on the South Hook project at Milford Haven in west Wales, where the company has had to fork out almost $200 million on extra subcontractor costs alone.

CB&I blamed the cost overruns on continued poor productivity, weather delays, and the need to supplement critical subcontractor areas, with president and CEO Philip Asherman singling out labour as “the main underlying problem.”

The South Hook project was awarded to CB&I in November 2004 and it won the Isle of Grain contract in March 2005. Both projects are scheduled for their first gas supply early in the fourth quarter of 2008.

“In order to meet the project objectives, it became clear in the second quarter [of 2008] that we would have to compensate for inadequate subcontractor performance and an increasingly difficult trade union environment,” explained the CB&I leader. “These are not inconsequential subcontractors; They are major subcontractors in the UK,” he added.

Asherman highlighted how UK labour regulations and trade union rules had posed many challenges for the company, unlike those experienced on its other projects around the world.

“You are constrained in terms of bringing anyone else in from outside of the UK, even [from] other EU countries. That’s been a difficult challenge for us, as well as the subcontractors.” The situation, he continued, “is unlike that in most countries where we could supplement the workforce with our own labour or labour from elsewhere. You can’t do that in the UK.”

The problems on the two projects have led CB&I to amend its standard contract terms and conditions to include clauses that protect it from cost escalation and the weather delays it faced on the UK projects.

“We now hire a far greater percentage of direct labour to maintain better control over performance and rely less heavily on subcontractors,” explained Asherman. “We split the subcontractor work into smaller segments to ensure better definition and control, and to limit the scope of any single subcontractor. We also use pre-insulated pipe on these projects to minimise on-site work hours.”

Subcontractor costs account for about 60% of the total contract on the South Hook project, but only about 37% of the costs for CB&I’s Golden Pass, Texas project, 36% of an LNG scheme in Chile and 20% for a Peru LNG project, said the CB&I boss. He went on to note that hourly rates are a little over $4 an hour in Peru compared to a UK rate of around $40 per hour.

On South Hook, the $195 million overrun related to subcontractor issues, said CB&I, which expected subcontracting costs to represent around 80% of its spending over the next few months.

According to Asherman, a key target had been to have critical piping installation and testing completed early in the second quarter of this year. However, he said, issues with the piping subcontractor led CB&I to bring in additional piping subcontractors, as well as the follow-on insulation and electrical subcontractors.

To add to the company’s woes with subcontractors, there was six inches more rain and wind gusts of 20 miles per hour over average, which exceeded construction equipment tolerances for operations during the period. A total of 34 working days were lost in the quarter, while still incurring labour costs.

By mid-summer, South Hook had about 2,200 workers on site, though the number was forecast to decline rapidly to about 550 workers by the first quarter of 2009.

“South Hook is clearly the predominant issue here financially, but both projects share common issues and schedule challenges in the upcoming months,” commented Asherman. “These projects are unique in terms of the adverse effect of the extraordinary impact from both labour and weather conditions particular to this location.”

With regard to the Isle of Grain project, CB&I has raised its forecast of additional costs for completing the project by $63 million, due again to UK labour shortages and productivity problems.

CB&I supplemented labour on two major subcontracts at a cost of about $37 million. Another $25 million related to direct hire construction, the group’s own project team-related facilities and equipment rental, while materials accounted for the remaining $1 million.

The Isle of Grain project was about 95% complete, said Asherman. “We’ve gained momentum with additional subcontractors. Staffing is currently around 550 workers and is forecast to gradually decline to less than 50 in the fourth quarter.”



PANE: Rules are the issue


According to capital funding specialist Greville Warwick, the Process Engineering Plant Cost Indices (p77) provide a ‘well-researched set of data that is starkly indicative of the higher cost of projects in the UK,’ compared with other EU countries, including, Holland, France and Germany. In many cases, he says, these countries do not have the severe bureaucratic involvement that is now evident in many areas of the UK.

“In the UK the thing that pops up time and time again is regulation. Every rule is diamond-plated to the extent that construction sites here have rules like at a girls’ school,” said Warwick. “If you are going to dig a hole you can’t legislate for every eventuality. The UK approach to regulation creates a lot of opportunities for workers to put pressure on employers.”