Speaking at an American Chamber of Commerce in Australia lunch in Perth last week, Gallagher said he believes current contract structures reflect that both contractors and clients don’t understand each other’s requirements – and that’s something he’s determined to change at Santos.

And following the talk other industry experts told ICN sister publication Energy News that changing the contracting structure is really the only way to change the outcomes of these large projects and to create a different risk/reward basis.

That is because the contracting structure gets “locked in” at the beginning and means that the project is forced along a certain path and certain behaviours from each side of the agreement.

In his first public statements about his return to the world of the oil field operator, and possibly his last comments as CEO of Clough, which he rebuilt from an oscillating contractor to an industry leader, Gallagher gave a four-point blueprint that could prove a “game changer” for major projects and turn Santos around in the process.

“When I leave Clough and become an operator again, I believe I will do so with the benefit of insights of how I can better utilise the skills of contractors to deliver value across my operations,” he said.

“I suppose that’s probably bad news for contractors. This will change my behaviour as an operator in a number of ways, and I have to be honest and say that not all contractors are going to like that.

“Firstly, I’ll focus on partnerships, not contracts. Current contracts act, in my view, as a mechanism to ensure compliance in projects under the assumption that problems will occur.”

He believes that more open and collaborative partnerships – where the clients and contractors are incentivised to work through issues, rather than “activate” lawyers – are key to success.

“Second, my contracts will focus on incentivising productivity and performance,” he said.

“These contracts hopefully will align stakeholders around success, while holding contractors accountable for delivering what they promised.

“Finally, I believe better results can be driven by taking a longer-term view to contracting by investing in the development of strategic partnerships with select contractors.

“I believe this approach can deliver better alignment on success and better outcomes for all stakeholders.”

He says contracts are rarely structured to drive productivity, with most instead reflecting a “fear-based” approach where they are designed more to protect the parties’ individual rather than incentivising collaboration.

This has contributed to Australia trending downwards in productivity while countries competing with it for LNG investment like the US and Canada have managed to improve productivity despite falling oil prices.

The difference, he says, is how operators, but particularly contractors, handle the downturn – and this is where contractors will particularly feel the change Gallagher plans to initiate at Santos.

While the size and scale of Australia’s LNG mega-projects required the use of traditional engineering, procurement and construction management contracts, Gallagher believes these merely added an extra layer of management and subsequently costs.

EPC contracts, while often better suited to smaller projects, can also promote “adversarial” behaviours where ambiguities arise, particularly in a lump sum or fixed price environment – which, he says, are based on a furphy anyway.

Gallagher said project parties were often protecting their individual positions rather than collaborating for results under contracts designed to be defensive, which incentivises both contractor and client to avoid loss rather than maximising performance.

“As consequence the contractors will cost in substantial commercial resources to administer the contract to ensure they don’t lose money and manage their perceived risk. In all of this there is little effort on delivering an outstanding project outcome,” Gallagher said.

“I see this as a lost opportunity. As an in industry we need to look at structuring contracts to better client and contractor alignment, while incentivising strong performance.

“Clients and contractors often have diverse views on what constitutes a project’s success, which can cause major disputes.”

He cited recent Australian Construction Association research on mega project delivery that showed various hot spots for stakeholders where they often get it wrong in “challenged projects”

It showed that owners are often subjected to significant political pressure which can lead to long-term failure being discounted in favour of short-term drivers like final investment decision.

“The owners’ delivery team is often handed a poisoned chalice of an undeliverable project and work to achieve an impossible outcome, rather than having ’stop’ as an option,” Gallagher said.

“They tend to focus too much on the technological aspects of complex projects, ignoring the social and political aspects of dealing with diverse stakeholders.”

This can often cause project delays.

“EPCM teams or organisations can often strive for potential over-engineering due to economic drivers, so the EPC or construction contractors must achieve the client’s schedule using engineering designs that have been over-engineered and in which they’ve had no control or input into,” Gallagher said.

“This pressure leads to irrational decisions that can lead to significant cost blow-outs.

“To meet project milestones I’ve seen entire construction teams and equipment mobilised to site without engineering drawings, project plans or systems being finalised. This is like building an aeroplane in the sky, which is a recipe for disaster.

“The value of planning up front to avoid the high cost of construction is a lesson we learned early in our careers, yet we still fail to do it all too regularly.”

Having heard this speech, industry watches will be waiting to see if he brings this change in the EPCM model across to Santos.