A contract, by definition, is a commitment between two parties, Purchaser and Contractor, which defines the relation between them for:

• Delivery of goods and/or services.
• Acceptance criteria for delivered goods and services.
• Time schedule for completion of delivery.
• Contract priceand procedure for paymentsagainst delivery.

Contracting Strategy

In a complex process plant (“Project”) a Contractor may agree to take responsibility for completion of work through any one of the following arrangements:

• Lump sum turnkey contract (EPC contract): In this type of the contract, both parties precisely define the scope and terms of the contract, and the risks which are to be transferred to the Contractor. In such Project, financing agencies are one of the main stakeholders and lay down stiff conditions.Extensive administration efforts are required by the Contractor at its home office to ensure completion within specified time and budget.
• Cost plus fixed fee (EPCM contract): In this type of contract, contractor’s services are paid based on a fixed price and all goods and services are purchased at the cost of the Purchaser. In EPCM contract most risks are with the Purchaser.
• Reimbursable cost contract: All work is paid based on the actual value of work.
• Combination of above.

For EPC contractbid submission, theContractormust make himself fully familiar with all aspects of the project so that the scope of work is correctly interpretated and priced.Similarly,the Purchaser must ensure that the scope of work has been defined as per Project requirement. Development of a good EPC contract requires sufficient understanding of fundamentals of contract conditions so that the financial benefits estimated at the start of the project are realized by both parties.

EPC contract is a preferred mode of execution for Projects since it is designed to transfer most of the risks to the Contractorwho may be in a better position to manage the risks associated with the Project. In EPC Contract, the contractor readily takes over following risks for a price:

• Technology guarantees.
• Performance standard-quality and quantity supported by 7-day and/or 30-day performance test.
• Fixed completion cost.
• Completion schedule supported by delay liquidated damages (DLD).
• Limited possibility of claiming additional cost and/or extension of time.

Project Manager

For execution of EPC contract, the Contractor notifies the name of the Project Manager to the Purchaser and thereafter all coordination on the Project between the Purchaser and the Contractor is through the Project Manager. The Project Manager has overall responsibility of completion of Project in accordance with the terms of the Contract. In addition, the Project Manager is also responsible to ensure contractor’s profitability. The Project Manager is supported by specialist departments namely Project office, Engineering, Procurement and Construction. Safety, Health, Environment and Quality (SHEQ) is responsible for these functions in accordance with Quality Policy of the Contractor.

To oversee the work performed by engineering and procurement disciplines, Project Manager has at its disposal a coordination group which includes, amongst others, project engineering manager and project procurement manager. These managers coordinate the work with specialist departments to ensure that all work performed is in accordance with the Contract and is respecting the time schedule. The coordination group available with the Project Manager also includes project engineer(s), contract administrator, planner, and cost controller. While the importance of planner and cost controller is well understood, this paper describes the importance of project engineer(s) and contract administrator in completion of the Contract. It is emphasised that the role of project engineer(s) and contract administrator is complimentary and interchangeable, to a great extent.

Project Coordination

As stated earlier this part will only describe the work which can be assigned to project engineer(s) and contract administrator to obtain rich dividend to the Project.

Post award contract review.

After award of EPC contract a detailed contract review should be made to permit understanding of important provision of the Contract. Some of the clauses which should be well understood are project interfaces, permits to be maintained by each party, time schedule, Purchaser supplied items, nominated suppliers of technology and equipment, change order procedure, contract coordination procedure, contract execution plan, defect liability, site operating procedure and procedure for Taking-over of the facility by the Purchaser and limitation imposed through financing plan of the Purchaser. During this review, it is important to note time bar clauses which will prevent any recourse to Purchaser for increased cost and prolongation.

The above list may also include limitations due to insufficiency of design and geotechnical data provided by the Purchaser and relied upon by the Contractor.

The critical items noted during the review should be listed and graded on a scale of 1 to 10, 1 represents the least important and 10 representing high importance. This list should be exposed to all persons associated with the Project and an action plan for high importance items should be presented and agreed.

Document approval by Purchaser.

The Contract may provide for approval of drawings and documents by Purchaser. This is an important requirement and should be well understood by engineers and should be incorporated in the time schedule. Acontrol sheet for document approval will include list of deliverables, person responsible for each deliverable, whether document needs Purchaser approval or review only, date of submission and date of approval.

Even though, the preparation of design and drawings does not depend upon the approval of the Purchaser, the requirement can create some out of sequence wok causing disruption. The documents prepared by Contractor are based on the most economical designs and materials within the operability and quality criteria stated in the Contract while the review made by the Purchaser is based on Good Industry Practice or based on recognised international practice.If Good Industry Practice is not defined in the Contract, it may lead to disagreement between the parties. The Purchaser may also ask for clarifications of design and may point out deficiencies in design. After the feedback is received from the Purchaser, all comments received should be grouped in three categories (a) acceptable, (b) grey area and (c) extra work and managed accordingly.

To ensure timely completion of this activity, it is advisable to sort out all comments from Purchaser through one or more dedicated meetings between the specialist from both sides. Record of such meeting should be prepared by project engineer and where any extra work is generated the same should be properly covered to keep the issue open for further negotiation otherwise it may be lost due to time bar clauses. The approval of document by Purchaser are known to cause major disruption and disagreement between the parties.

Change order management.

All contracts provide that the Purchaser has a right to order change to the work and the Contractor would comply with the request in a timely manner. The Contractor may not agree to work on the change request if it impacts time schedule or the change request is not directly connected with the contract scope.It is the duty of the contract administrator to provide for a detailed procedure for change order and so that the team members can provide the required input. A typical change order requires evaluation of the change with cost/benefit analysis and upon approval provide for change to the Project plan.

The procedure should also be applied for all the changes which may result due to Purchaser’s indirect actionswhich may be classified as deemed changes. For deemed changes, a timely notice should be sent to the Purchaser for resolution of cost and time impact. This requires great skill on behalf of the contract administratoras there is a possibility of impact on relations between the parties.

Liquidated damages

The delay liquidated damages clause in the Contract is usually a simple clause asking the Contractor to pay for damages for non-fulfilment of timely completion guarantee.The only way to overcome this provision is to provide timely notice of excusable delays with documentary evidence so that the same is taken into consideration by the Purchaser at the appropriate time. The performance liquidated damages are related to non-fulfilment of capacity,consumption, and quality guarantees.

Failure to achieve some of the time and performance related guarantees may compel the Purchaser to declare that the facilities built are inordinately delayed or are not fit for the purpose and therefore the Contractor is required to renegotiate the Contract. In some cases, particularly Project which is one of its types, the Contract may require dismantling of the facilities at the cost of the Contractor and refund of all payments received against the Contract.The lack of performance of a contractor in such cases can impact future business.

Defect liability.

Contract may provide for rectification or replacement of any material or workmanship found to be defective during engineering, construction, commissioning, and operation. Defect liability period may extend up to 12 months from handing over of the Project to the Purchaser. In EPC contract,this is a major source of dispute between the parties. Considering that the resolving such issues may be time consuming, project engineer(s) should develop a system for record keeping of defect notes received and their resolution. This activity may require significant engineering hours and therefore should be budgeted accordingly. 

Dispute resolution.

EPC contract price is based on agreed specifications and therefore the Contractor assumes that it is free to choose most economical design and material. As opposed to this, the Purchaser requires the Contractor to follow current practices as applied in the similar industry. Due to the conflicting approaches, the Contractor may experience request for design changes and defect notes, which may or may not be extra work. In addition, differing site conditions, limitation in right of way, delayed payments, ambiguity in contract provisions, etc may cause disruption or delay to the progress and extra work which may be claimable from the Purchaser.

While preparing any claim, it must be understood that the burden of the proof rests with the claimant. The Contractor should not expect to recover excusable delays ifthe time was lost due to reasons under Contractor’s controlclassifiedas concurrent delays.

The time delay calculation will require network analysis to prove the actual event which delayed the project and the subsequent activities which were affected.The time schedule as attached to the Contract can be used as baseline schedule as this shows as planned work by Contractor. The analysis requires timely compilation of data with relative documentary support.Therefore, a successful claim requires good record keeping, regular schedule analysis, timely intimation of existence of a claim and efforts made to recover time.

Project close-out.

After the Contract is completed, the Contractor should prepare for contract close-out. The close-out commences with confirmation that all contract documents are final, all defect notes have been resolved, all material and spares have been supplied, and the Purchaser has accepted the facilities and released final take over certificate. This will enable the Purchaser to release final payment and the bank guarantees. The next part of the close-out requires settlement of payments and bank guarantees with the vendors and subcontractor and receipt of “no claim certificate” from each of them. The final phase consists of close-out of permits and payment of taxes.

An important aspect of close-out process is preparation of a close-out report which should includeProject scope as originally perceived and as actually executed, description of major changes, analysis of events which affected performance and corrective actions taken. The report should also cover Lessons Learned. The data such as engineering hours, construction hours, quantity of work completed, major construction equipment used, progress of work against payments received and made, will make such a report complete. After the close-out report has been completed, all Project documents should be archived.