Feed Oil and Gas projects and operations upstream and all value chain

EPC Contracts
EPC Contracts
Tim Steadman
Contract Management in
International Construction
Beijing, April 28, 2009

EPC Contracts - 28 April 2009
2
General Overview
General Overview
 Introduction to CC Construction Group
 Purpose of presentation
 Outline of presentation
 Context
 Roles
 Philosophy
 Structure
 Form
 Key risks and contract terms

3
Context - Economic
Context - Economic
 Effect of cycles
 Participants
 Procurement methods and structures
 Price
 Risk allocation
 Funding sources and methods

4
Context – Business Culture
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)

5
Context – Legal/Regulatory
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

6
Roles
Roles
 Prime contractor (not always EPC)
 Vendor
 Technology licensor
 Investor
 Funder (deliberate or by default)

7
Philosophy
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?

8
Philosophy (cont’d)
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

9
Structure – the Project
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

10
Typical PPP Structure
Typical PPP Structure
PUBLIC ENTITY
CONCESSION
CONTRACT
SPV
SPONSOR
EQUITY
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

11
Structure – the Main Construction Contract(s)
Structure – the Main Construction Contract(s)
 EPC/design and build
 Owner designed
 EPCM/CM
 Other variants

12
KEY
“
“Traditional”
Traditional”
OWNER
CONTRACTOR
SUB-CONTRACTORS
ARCHITECT/ENGINEER
= Appointments
= Sub-Contracts
= Building Contract
EPC Structure
EPC Structure

13
Where does EPC fit in?
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.
LSTK – Lump Sum Turnkey
EPC – Engineering Procurement and Construction
EPC Structure (cont’d)

14
EPC Key Features
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

15
EPC Key Features (cont’d)
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

16
KEY
“
“Traditional”
Traditional”
OWNER
CONTRACTOR
SUB-CONTRACTORS
ARCHITECT/ENGINEER
= Appointments
= Sub-Contracts
= Building Contract
Owner Design
Owner Design

17
Owner Design Key Features
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

18
OWNER
TC
PROFESSIONAL TEAM
•ARCHITECT
•STRUCTURAL ENGINEER
•M&E ENGINEER
•QUANTITY SURVEYOR
•CDM CO-ORDINATOR
CONSTRUCTION MANAGER
TC = TRADE CONTRACTOR
= Trade Contract
= Appointments
= CMA
KEY
EPCM/CM
EPCM/CM
TC TC TC TC TC TC TC TC

19
EPCM/CM Key Features
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

20
Variants
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

21
Forms of Contract
Forms of Contract
 a profusion of colour and variety!

22
Forms of Contract
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)

23
Forms of Contract (cont’d)
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?

24
Key Risks and Contract Terms
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

25
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

26
 Intellectual property
 Ownership by contractor
 Assigned or licensed to owner?
 Scope of license
 Indemnities for infringement – capped or not?

27
 Performance Security
 Joint liability
 Guarantees
 Bonds
 Types and purposes
 Issues with on-demand bonds
 Credit issues in current market
 Retention funds

 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
28

29
 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

30
 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

31
 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

32
 Advance payments
 Cashflow neutrality
 Payment security for contractor
 Set-off and correction
 ECA requirements
 Remedies for non-payment
 Role of lender’s engineer

33
 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?)

34
 Risk
 Indemnities
 Treatment of hazardous sites
 Care of the works
 Excepted risks
 Link to insurance
 Liability
 Liability cap
 Exclusion of “consequential loss”
 Exceptions

35
 Insurance
 Main categories
 CAR/EAR
 TPL/PL
 PII
 Plant and vehicles
 DSA/ALOP
 Latent defects
 Operational insurance
 Who arranges cover?
 Other contract terms

36
 Force Majeure
 Open or closed clause?
 Territorial limits?
 Exclusions
 Consequences

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
EPC Contracts

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