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 owner’s 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 (cont’d)
 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 (cont’d)
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 (cont’d)
 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 (cont’d)
 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 (cont’d)
 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 (cont’d)
 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 (cont’d)
 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 (cont’d)
 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 (cont’d)
 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 (cont’d)
 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 (cont’d)
 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 (cont’d)
 Advance payments
 Cashflow neutrality
 Payment security for contractor
 Set-off and correction
 ECA requirements
 Remedies for non-payment
 Role of lender’s engineer

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Key Risks and Contract Terms (cont’d)
 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 (cont’d)
 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 (cont’d)
 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 (cont’d)
 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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