03 Epc Contract Management

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EPC Contracts

Tim Steadman

Contract Management in

International Construction

Beijing, April 28, 2009


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EPC Contracts - 28 April 2009 1

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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ContextBusiness Culture

Most countries embrace market economics (intheory)

In practice there are exceptionshelpful and

otherwise

So relationships are to some extentadversarial/competitive

And negotiations can be complex (especially if

lenders are involved)


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ContextLegal/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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Structurethe Project

Privately procured On balance sheet

Off balance sheet

Publicly procured

May still be accounting considerations, eg in PPP

Combinations

PPP projects

Concessions

Otherseg PPAs


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Typical PPP Structure

PUBLIC ENTITY

CONCESSION

CONTRACT

SPV

SPONSOREQUITY

THIRD PARTY

EQUITY

INVESTORS

DUE DILIGENCE

ADVISER 1

MEZZANINE

FUNDERS

INSURERS

CONSTRUCTION

SENIOR

FUNDERS

(BANK/BOND)

SURPLUS REAL ESTATE

DISPOSAL

DUE DILIGENCE

ADVISER 2

SUBCONTRACTOR 1

DESIGNERS

EQUIPMENT SUPPLY

OPERATION &

MAINTENANC

E

DEVELOPER

DUE DILIGENCE

ADVISER 3

INVESTORS

SUBCONTRACTOR 2

SUBCONTRACTOR 3

BONDS &

GUARANTEE

S

SURETIES &

GUARANTORS


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Structurethe Main Construction Contract(s)

EPC/design and build Owner designed

EPCM/CM

Other variants


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KEY

Traditional

OWNER

CONTRACTOR

SUB-CONTRACTORS

ARCHITECT/ENGINEER

=Appointments

= Sub-Contracts

= Building Contract

EPC Structure


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Where does EPC fit in?

Construction

Management

Owner

assumes

risk

Contractor

retains risk

Traditional Design &Build LSTK/EPC

R I S K S P E C T R U M

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.

LSTKLump Sum Turnkey

EPCEngineering Procurement and Construction

EPC Structure (contd)


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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 conditionsrecent history

Wide choice of standard contracts (eg FIDIC

Silver and Yellow)

Commonly used in infrastructure, thermal power

and downstream petchem


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KEY

Traditional

OWNER

CONTRACTOR

SUB-CONTRACTORS

ARCHITECT/ENGINEER

=Appointments

= Sub-Contracts

= Building Contract

Owner Design


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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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OWNER

TC

PROFESSIONAL TEAM

ARCHITECTSTRUCTURAL ENGINEER

M&E ENGINEER

QUANTITY SURVEYOR

CDM CO-ORDINATOR

CONSTRUCTION MANAGER

TC = TRADE CONTRACTOR

= Trade Contract

=Appointments

= CMA

KEY

EPCM/CM

TC TC TC TC TC TC TC TC


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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

Timingtwo-stage contracting Market driven and mixed feedback

Conversion mechanism

Scopeis FEED included?

Can be attractive for contractors

Pricingtarget cost/GMP

Usually a consequence rather than a choice

Exampleseg 2012

Link to philosophy


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EPC Contracts - 28 April 200920

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 draftsowner 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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Intellectual property Ownership by contractor

Assigned or licensed to owner?

Scope of license

Indemnities for infringementcapped or not?


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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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SubcontractingApproval

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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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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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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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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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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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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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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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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Force Majeure

Open or closed clause?

Territorial limits?

Exclusions

Consequences


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Clifford Chance, 10 Upper Bank Street, Canary Wharf, London, E14 5JJ, UK

Clifford Chance LLP 2007

Clifford Chance Limited Liability Partnership

www.cliffordchance.com

EPC Contracts

Contract Management in

International ConstructionBeijing, April 28, 2009

03 Epc Contract Management

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