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Contract Management in

International Construction

EPC Contracts

Tim Steadman

Beijing, April 28, 2009


General Overview
Introduction to CC Construction Group
Purpose of presentation
Outline of presentation
Context
Roles
Philosophy
Structure
Form
Key risks and contract terms

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Context - Economic
Effect of cycles
Participants
Procurement methods and structures
Price
Risk allocation
Funding sources and methods

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Context Business Culture
Most countries embrace market economics (in
theory)
In practice there are exceptions helpful and
otherwise
So relationships are to some extent
adversarial/competitive
And negotiations can be complex (especially if
lenders are involved)

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Context Legal/Regulatory
Legal system is part of business culture
The rule of law/contract is important, especially in
project financed deals
Civil and common law systems differ in form and
substance
Impact of procurement rules
On owners behaviour
On bidding tactics

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Roles
Prime contractor (not always EPC)
Vendor
Technology licensor
Investor
Funder (deliberate or by default)

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Philosophy
As a contractor
Open bidding or sole source?
Immediate profit or market penetration/profile?
Sole or in consortium?
Legal and practical consequences of joint liability?
Equity or contracting role only?

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Philosophy (contd)
As an owner
Alliance or risk transfer?
Linked to funding method
Some sectoral patterns
Also varies between public and private sector
Philosophy is influential only if shared within
supply chain

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Structure the Project
Privately procured
On balance sheet
Off balance sheet
Publicly procured
May still be accounting considerations, eg in PPP
Combinations
PPP projects
Concessions
Others eg PPAs

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Typical PPP Structure
PUBLIC ENTITY
SPONSOR
EQUITY

CONCESSION INSURERS
CONTRACT

THIRD PARTY
EQUITY SPV
SURPLUS REAL ESTATE
INVESTORS DISPOSAL
INVESTORS

MEZZANINE
FUNDERS OPERATION & DEVELOPER
CONSTRUCTION
MAINTENANC
E
SENIOR BONDS &
FUNDERS SUBCONTRACTOR 1 GUARANTEE
EQUIPMENT SUPPLY
(BANK/BOND) SUBCONTRACTOR 3 S

DESIGNERS

DUE DILIGENCE SURETIES &


DUE DILIGENCE GUARANTORS
ADVISER 3
ADVISER 1
SUBCONTRACTOR 2
DUE DILIGENCE
ADVISER 2

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Structure the Main Construction Contract(s)
EPC/design and build
Owner designed
EPCM/CM
Other variants

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EPC Structure
Traditional
OWNER

ARCHITECT/ENGINEER

CONTRACTOR KEY

= Building Contract
SUB-CONTRACTORS = Sub-Contracts
= Appointments
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EPC Structure (contd)
Where does EPC fit in?
Owner RISK SPECTRUM
Contractor
assumes retains risk
risk

Construction Design &


Management Traditional
Build
LSTK/
EPC
Except as otherwise stated in the Contract:
a) the Contractor shall be deemed to have obtained all necessary information as to risks, contingencies and other
circumstances which may influence or affect the Works;
b) by signing the Contract, the Contractor accepts total responsibility for having foreseen all difficulties and costs of
successfully completing the Works; and
c) the Contract Price shall not be adjusted to take account of any unforeseen difficulties or costs.

LSTK Lump Sum Turnkey


EPC Engineering Procurement and Construction

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EPC Key Features
Single point responsibility
Subject to caps and carve-outs
High degree of risk for contractor
Also high (but not absolute) degree of contractor
control
Priced accordingly
The preferred structure for project finance/PPP
transactions
Linkage to shareholder support

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EPC Key Features (contd)
Sensitive to market conditions recent history
Wide choice of standard contracts (eg FIDIC
Silver and Yellow)
Commonly used in infrastructure, thermal power
and downstream petchem

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Owner Design
Traditional
OWNER

ARCHITECT/ENGINEER

CONTRACTOR

KEY
= Building Contract
SUB-CONTRACTORS = Sub-Contracts
= Appointments
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Owner Design Key Features
More control for owner
Design and other risks also retained by owner
History of disputes
Use has declined in recent decades but still used
in, eg, public civil works and technology projects
Incompatible with project finance approach

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EPCM/CM

OWNER
CONSTRUCTION MANAGER

KEY PROFESSIONAL TEAM


= Trade Contract ARCHITECT
= CMA STRUCTURAL ENGINEER
= Appointments M&E ENGINEER
QUANTITY SURVEYOR
CDM CO-ORDINATOR

TC TC TC TC TC TC TC TC TC
TC = TRADE CONTRACTOR

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EPCM/CM Key Features
EPCM contractor is essentially a consultant
Owner bears substantial risk
Interface
Recourse/leverage
Can produce the lowest cost and fastest completion
But is heavily dependent on specialist skills,
experience and resources
Can be disastrous if those are not present
examples
Widely used in upstream oil and gas, renewables and
some real estate markets
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Variants
Timing two-stage contracting
Market driven and mixed feedback
Conversion mechanism
Scope is FEED included?
Can be attractive for contractors
Pricing target cost/GMP
Usually a consequence rather than a choice
Examples eg 2012
Link to philosophy

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Forms of Contract

a profusion of colour and variety!

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Forms of Contract
Standard or specially drafted?
Relevance of wider structure
Origin of standard forms
Example of FIDIC
Other standard forms, eg NEC, AIA, ENAA, EIC
Why amend a proven form?
To correct perceived anomalies or bias (examples)

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Forms of Contract (contd)
To reflect deal specifics or sector practice
(examples)
To incorporate material from other contracts (eg in

PPP)
To reflect requirements of funding (which may be

owner or contractor sourced)


For legal reasons (examples)

Who drafts owner or contractor?

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Key Risks and Contract Terms
Law and language
English language and style commonly used
Precedence and integration of documents
Distinguish language of contract and of
communications
Common law preferred but less strongly these days
Impact of local law in any event
Wide choice of methods and places for dispute
resolution

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Key Risks and Contract Terms (contd)
Quality and scope
Wrapping eg of technology or existing works or
design
Fitness for purpose and reasonable skill and care
Insurance and risk retention implications
Compliance with laws and consents
Special importance of environmental requirements
Pass-down from other project documents

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Key Risks and Contract Terms (contd)
Intellectual property
Ownership by contractor
Assigned or licensed to owner?
Scope of license
Indemnities for infringement capped or not?

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Key Risks and Contract Terms (contd)
Performance Security
Joint liability
Guarantees
Bonds
Types and purposes
Issues with on-demand bonds
Credit issues in current market
Retention funds

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Key Risks and Contract Terms (contd)
Subcontracting
Approval
Step-in rights

Site conditions
Can threaten viability of project/parties
Mitigants

An open-minded approach
Government support
Surveys and staging
Flexibility in design

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Key Risks and Contract Terms (contd)
Labour
Local laws
Local preference

Time
Status of programme
Remedies for delay

Liquidated damages (LDs) for delay


Enforceability issues with delay LDs
Acceleration
Milestones
Look-forward default
Calculation and capping of LDS
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Key Risks and Contract Terms (contd)
Completion, commissioning and testing
Sector differences
Performance LDs and make-good

Defects liability
Typical periods
Evergreen clauses

Latent and patent defects

Remedies under the general law

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Key Risks and Contract Terms (contd)
Variations
Instructed by the owner
Resulting from changes in law or standards

Examples of risk allocation


Price and payment
Lump sum or other?
Currency issues

Input cost fluctuation

Milestones or measurement?

Offsite materials

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Key Risks and Contract Terms (contd)
Advance payments
Cashflow neutrality
Payment security for contractor
Set-off and correction
ECA requirements
Remedies for non-payment
Role of lenders engineer

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Key Risks and Contract Terms (contd)
Termination
For owner convenience
Payment of profit
For force majeure
For owner default
Typical grounds
Remedies
For contractor default
Typical grounds
Remedies (to include rejection?)

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Key Risks and Contract Terms (contd)
Risk
Indemnities
Treatment of hazardous sites
Care of the works
Excepted risks
Link to insurance
Liability
Liability cap
Exclusion of consequential loss
Exceptions

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Key Risks and Contract Terms (contd)
Insurance
Main categories
CAR/EAR
TPL/PL
PII
Plant and vehicles
DSA/ALOP
Latent defects
Operational insurance
Who arranges cover?
Other contract terms

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Key Risks and Contract Terms (contd)
Force Majeure
Open or closed clause?
Territorial limits?
Exclusions
Consequences

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Contract Management in
International Construction
Beijing, April 28, 2009

EPC Contracts

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