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TitleContratos EPC y EPCM
TagsConstruction Management Insurance General Contractor Indemnity Professional Liability Insurance
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Total Pages18
Document Text Contents
Page 1

Article

Worlds Apart: EPC and EPCM Contracts:
Risk issues and allocation

By Phil Loots and Nick Henchie
November 2007

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Worlds Apart: EPC and EPCM
Contracts:
Risk issues and allocation
By Phil Loots� and Nick Henchie2

Introduction

For many years now it seems that the most desired way for an Owner to procure a major

construction project, particularly one being project financed, was via a fixed price, lump

sum turnkey route; the so called engineering, procurement and construction contract

(“EPC contract”). By this route, funders and Owners expect to get the degree of certainty

as to time and costs that they require. Such has been the popularity of this method of

procurement that organisations such as FIDIC responded to the need for appropriate

standard forms that more closely reflected market conditions by, for example, the

introduction of its Conditions of Contract for EPC/Turnkey Contracts (the Silver

Book).� Orgalime� and ICC� followed suit to join other standard forms produced by

organisations such as ENAA�, ICE7 and ECC�. Most recently, FIDIC has responded to

the requirements of the major development banks by introducing the MDB Harmonised

contract which contains certain amendments agreed with the multi – lateral funding

agencies to FIDIC’s Red Book.�

However, whilst it must always be appreciated that the lump sum EPC option usually

remains the most desired procurement route for Owners and funders, in response

to market conditions EPC contractors are increasingly proffering and, on occasion,

demanding, alternatives. In recent years there has been an increase in cost reimbursable

contracts (usually with a target price pain/gain share mechanism built in).�0 More

recently, there has been a significant increase in the EPCM contract procurement route

for international infrastructure and major construction works. Although historically

� Phil Loots is Group General Counsel of Clough Limited (Australia).
2 Nick Henchie is a partner in the International Construction and Engineering group of Mayer Brown.
� See, for example, Nick Henchie “FIDIC Conditions of Contract for EPC Projects – The Silver Book, Problems in

Store?” [200�] ICLR and AH Gaede, “An Unfortunate Shift from FIDIC’s Tradition of Being Even Handed and
Focussing on the Best Interests of the Project” [2000] ICLR �77.

� Following the publication of the new suite of FIDIC contracts in ����, in particular FIDIC’s Silver Book, the Legal
Committee of Orgalime decided to draft a new turnkey contract for industrial works, which could be used as an
alternative to FIDIC’s Silver Book, but which provided for a fairer allocation of risk between the parties – Nick
Henchie reviewed the differences between these two contracts in “The Orgalime Turnkey Contract for Industrial
Works - An Alternative to FIDIC’s Silver Book?” [ 200�] ICLR at page �7.

� The ICC Turnkey Task Force is currently drafting a turnkey contract which can be used as an alternative to FIDIC’s
Silver Book.

� The ENAA have various model forms of contract for use on Power Plant Construction, Process Plant Construction
and Industrial Plant.

� For example, the ICE Conditions of Contract �th Edition has been drafted by clients, consultants and contractors to
provide a simple and standardised contract specifically tailored for civil engineering projects.

� Engineer Construction Contract �rd Edition which has already been used extensively on major infrastructure
projects in the UK including Heathrow Terminal �.

� A modified form of the FIDIC Conditions of Contract for Construction, 1st Edition 1���, in which the General
Conditions contain the standard wording which previously had been incorporated by MDBs in the Particular
Conditions for MDB financed contracts.

�0 See, for example, the ECC form of Contract, Option C used extensively on the Channel Tunnel Rail Link project in
the UK.

Page 9



Under the EPCM model, the EPCM contractor will usually be responsible for the

preparation of the FEED and the complete detailed engineering in accordance

with normal industry and good engineering practices, which will be needed by the

companies to be entrusted with the construction work.

Sometimes the EPCM contractor will merely complete the basic engineering

package provided by the Owner but, whatever route is used, it is crucial from the

Owner’s perspective that the EPCM contractor is responsible for ensuring that

the completed plant design will meet the required process performance. Thus, it

is important that the EPCM Contractor co-ordinates his efforts with those of the

other parties involved to ensure that the engineering and design of the project is

procedures and safety guidelines.

It is normal, therefore, for the EPCM Contractor to have overall responsibility

for establishing and maintaining both the design and construction interfaces

their work is performed to the required level and quality, and to a schedule which

is compatible with the requirements of the overall project schedule. The EPCM

contractor will usually be responsible for overall co-ordination of the design and

construction process although often the EPCM contractor will also appoint a lead

contractor amongst the various trade contractors that will take some responsibility

for on site construction co-ordination – even though the EPCM contractor will of

course have a heavy site presence with its own construction management team.

(b) Procurement

A key part of the EPCM contractor’s role is to advise the Owner on the strategy for

the construction and procurement of equipment and materials and then assist the

Owner in implementing that strategy. Ideally, and usually, the Owner has an idea

of its procurement strategy at the outset even before the EPCM contractor has been

FEED has been produced and construction activities are due to commence.

Where, however, the contract does not convert to an EPC contract at conclusion of

the FEED stage, the EPCM contractor will need to assist the Owner in letting the

major works packages to various trade contractors, advising on the terms of those

packages, and putting the contracts in place. As with any project, the timing of

the letting of the packages is a crucial factor in the success of the project – letting a

lead to a series of cost reimbursable trade packages or risks of large variation claims

on lump sum packages - letting the packages too late runs the risk of failing to meet

the overall project schedule.

Further, during the FEED stage, the EPCM Contractor will usually advise the

Owner that for the project schedule to have a chance of being met, long lead items of

equipment must be ordered ahead of the appointment of the contractors and often

ahead of the detailed engineering being completed, which itself creates risks.

Page 10



The EPCM contractor will be responsible for the preparation of comprehensive

invitations to tender and then for awarding of contracts for delivery and construction

services to be rendered by third parties. A well drafted EPCM contract would require

that, for the protection of the Owner and to ensure competitive pricing, the number

of suppliers invited to quote shall be such that at least a minimum of three fully

responsible quotations are obtained.

The EPCM contractor will then be required to carry out a careful analysis of the

offers received and to make a recommendation of the technical and economic

advantages and disadvantages involved in each offer, and proposals for the awarding

of contracts, with reasons, for the Owner’s approval.

The EPCM contractor will then prepare the commercial and technical agreements.

The terms and conditions of such agreements must be agreed with the Owner in

advance but it is usually for the EPCM contractor to prepare the standard contract

documents and to ensure that these are suitable for the type of procurement being

used.

Ideally, from the Owner’s perspective, a series of lump sum contracts will then be

put in place by the EPCM contractor, on the Owner’s behalf. These contracts will be

direct agreements between the Owner and the trade contractors. It is crucial that

the terms of these contracts are properly co-ordinated with one another and protect

the Owner’s interests. The Owner may face claims during the currency of the works

that it wishes to pass on to either the EPCM contractor or to the defaulting trade

contractor responsible – the contracts must be drafted in such a way that this is

made possible.

When projects go wrong, inevitably one of the accusations levelled by Owners at

EPCM contractors is a failure to obtain competitive bids, a lack of transparency in

the tender process and even the wrong selection of contractors.

(c) Construction Management

The EPCM Contractor will be responsible for the overall management and

supervision of all construction activities. This will entail managing, supervising and

co-ordinating all of the construction contractors to ensure that the work is carried

out in a safe manner and in compliance with the demands of the project schedule, to

a quality which meets the standards required by the project.

This will include organisation and supervision of the safety management on the

construction site and comprehensive quality assurance, the securing of evidence for

any defective third party services, including the consequences arising there from,

the establishment of facts in the event of default and defective services, including

complete documentation, so that the Owner is protected against claims from trade

contractors.

Page 17

��

the Owner obtains a project of the required standard. This usually requires more than

simply stipulating performance criteria in relation to the output of the plant, and will

include design-life and maintenance issues.

Equally, from the EPC contractor's perspective, recurring problem areas in EPC contracts

FEED itself. The EPC contractor is usually required to satisfy itself as to the accuracy

of basic engineering and/or FEED, or is deemed to have done so even where the bid

sectors often requires the EPC contractor to accept this risk. Indeed, even in some of the

standard forms this is the case.20

From the Owner’s point of view, resolving liability for and the consequences of basic

contractor. The contractor which accepts such a risk without having carried out a thorough

evaluation of the basic engineering and FEED does so at its peril and is unlikely to have

recourse against the perpetrator of the errors. It could be a costly miscalculation.

The solution for the Owner in bridging the interfaces if the EPC contractor is not willing

to assume responsibility for the basic engineering and/or FEED or it is considered

unlikely at project inception that any EPC contractor would take such a risk is to consider

alternative contract strategies including EPCM which has the potential for providing

seamless and continuous responsibility for the engineering. But these issues need

to be thought through at conception of the contract strategy taking into account the

construction, the well advised Owner ought to be far more pro-active in its management

of the project.

available to it to monitor and check the performance of the EPCM contractor during the

wants in terms of performance, operability, maintenance and whole of life cost and by

passing as much of the risk as possible in relation to the cost of construction, time for

completion and quality of the construction work to the trade contractors by effective

trade contracts.

The selection of the appropriate pricing structure in combination with the above will

reduce the Owner’s risk.

The low EPC lump sum price is not always what it appears to be, particularly where

(as is often the case) the winning contractor has “skinnied the bid” in order to win the

Phil Loots and Nick Henchie

Nick Henchie

Mayer Brown International LLP.

20
responsible for errors in the Employer’s Requirements (which often comprises a basic engineering package).

Page 18

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November 2007

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