SOME THOUGHTS ON SUCCEEDING IN EPC PROJECTS · PDF filepaper incorporates the views of a number of experienced project or contract ... (2003) and the ICC Model Turnkey Contract for

SOME THOUGHTS ON SUCCEEDING IN EPC PROJECTS

JAMES PICKAVANCE 1

INTRODUCTION

Notwithstanding the possibly unexpected and turbulent course of politics in the past 12 months, 2 the growth of the global construction industry continues more or less unabated. In 2015, the United Nations Conference on Trade and Development (“UNCTAD”) observed that the amount of foreign investment for the construction of greenfi eld projects in developing economies had jumped from US$22 billion in 2013 to US$42 billion in 2014, with year-on-year increases experienced particularly in the least-developed economies (562% increase from 2013 to 2014), East and South-East Asia (116%), West Asia (136%) and developed economies (55%). 3 The majority of the major investment is focused on either energy or large infrastructure projects. 4

Many, if not most of these projects are undertaken pursuant to EPC procurement route, 5 principally because the employer, sometimes a state entity, does not have the skills, resource or fi nancing to be able to offer much more than the details of the output of what it wants built. Generally speaking, a project let through an EPC route involves the contractor taking most of the responsibility for the design and construction of the work. The

1 James is a partner in the litigation division at Eversheds LLP in London, specialising in construction and engineering. He leads Eversheds’ global construction international arbitration practice and is author of A Practical Guide to Construction Adjudication , a book published by Wiley Blackwell in December 2015. He wishes to thank Pam Kahlon, an associate in the London construction and engineering practice and also the contributors listed at footnote 9 for their invaluable insight. The author, the contributors and their respective organisations accept no liability howsoever or whatsoever for the content or the views expressed in this paper.

2 Referring to Brexit in the UK, Russia’s nuclear war test with 40 million citizens, the latest US elections, a well-known US political correspondent remarked that the last 12 months felt like “… the precipice of an era of regression. What concerns me is that people are polarising and that promulgates an attitude that leads nations to polarise and when that gets out of hand it’s time to crawl under a rock, because nowadays everyone’s got bigger sticks and stones to play with.”

3 UNCTAD, World Investment Report 2015: Reforming International Investment Governance, 2015, pages 14, 40, 53 and 72.

4 See e.g., UNCTAD, ASEAN Investment Report 2015 – Infrastructure Investment and Connectivity; PwC, Capital Project and Infrastructure Spending: Outlook to 2025, 2015; FDI Intelligence, The fDi Report 2014 – Global Greenfi eld Investment Trends, Financial Times Ltd, 2014; Turner & Townsend, International Construction Market Survey 2015 – Global Rebalancing: A Changing Landscape.

5 EPC procurement models are generally sector, fi nance, or capability driven. They include EPC (Engineer, Procure, Construct), EPCC (Engineer, Procure, Construct and Commission), EPCM (Engineer, Procure, Contract, Maintain), BOO (Build, Own, Operate), BOOT (Build, Own, Operate, Transfer) and DBFO (Design, Build, Finance, Operate). The choice of model essentially comes down to the control and the risk that the employer wishes to assume.

© Informa UK plc 2017. No copying or sharing of this document is permitted. This article first appeared in the International Construction Law Review, Part 1 January 2017, [2017] ICLR 36

Pt 1] Some Thoughts on Succeeding in EPC Projects 37

employer will outline, sometimes in very high level terms, what it wants the asset to achieve in terms of output performance, when it wants the asset to be operational, and how much it is prepared to pay. The contractor is then responsible for completing the detailed design and for procuring, carrying out and completing the works. EPC contracts are used for an array of projects including mineral exploitation, energy generation, industrial manufacturing, water treatment, waste processing and rail infrastructure. A typical EPC project consists of fi ve phases of work:

1. Conceptual phase. Otherwise known as the feasibility study, this is the phase where the employer develops the functional, practical and performance parameters of the asset, the initial design calculations are drafted, the fi nancial input required is evaluated and the regulatory requirements to be fulfi lled are determined. It is at this stage that the employer will make a decision as to whether the project is viable.

2. Concept design. The preliminary designs (the plans and drawings) for the construction of the asset are developed, project or other debt fi nance is secured (if required) and the draft EPC contract and technical package are prepared for tender by the employer’s advisers.

3. Contracting. Potential contractors that have been identifi ed as suitable bidders submit their tenders and the successful tenderer or a short list of tenderers negotiate, fi nalise and execute the EPC contract with the employer.

4. Procurement and Construction. The contractor undertakes the detailed engineering, procurement and construction, testing and pre-commissioning and completes the initial operational activities of the asset. Often it is at this point that the employer and the operator (which may be the EPC contractor) become directly involved in the running of the plant in preparation for the fi nal phase.

5. Close out. This phase includes the commissioning of the asset to ensure it meets the stipulated performance and output requirements. It typically entails a structured, precise regime where fi rst each part of the asset is tested in isolation and then the whole asset is tested for a relatively short period of time to check that the performance criteria are met. Once those tests have been passed, the employer will issue a certifi cate which will trigger the take-over of the plant and the commencement of the next phase of tests, which last longer. Failure at any stage of the process will give rise to a retesting procedure. If following several retests, it transpires that the plant cannot be operated at the specifi ed level, the contractor may have to pay liquidated damages to compensate the employer for shortfall in performance. Further liquidated damages are also payable by the contractor for late completion.


38 The International Construction Law Review [2017

Success on any EPC project is usually measured in terms of time, money and performance. So, if the project completes on or ahead of programme, more or less to budget, the asset performs as it should for its intended life and generates the required level of output, that project is a success. This is sometimes referred to as the golden triangle. However, notwithstanding the pedigree, sophistication and technical prowess of global contractors and consultants, it seems that balancing these factors remains a diffi cult and more often than not elusive challenge. A survey published in 2016 6 suggests that two thirds of engineering and construction companies believe their project governance and controls are either “optimised” or “monitored”. However, a survey of project employers published by the same organisation in 2015 found that over half of respondents suffered one or more underperforming projects in the previous year. For energy and natural resources and public sector respondents the fi gures rise to 71% and 90% respectively. Only 31% of all respondents’ projects came within 10% of budget in the three years between 2012–2015, and just 25% of projects came within 10% of their original deadlines within the same period. 7 If success is measured in terms of time, money and performance, research demonstrates that projects will fail more often then they succeed.

No doubt, the stakeholders in any EPC project will have differing views as to the order of priority of time, money and performance. For example, an employer is likely to want its asset to be constructed for the lowest cost, to a high standard and within the shortest possible timeframe. A lender’s priority is to seek to ensure that the asset is constructed within budget and within the shortest possible time so that the asset can begin to generate income allowing for the debt to be serviced. An EPC contractor’s driver is to ensure that it generates the most profi t from the project and also maintains the integrity of its pricing and programme. By apportioning risk consequence, the EPC contract will precisely defi ne the three corners of the triangle. In relation to time, it will refer to the programme, defi ne a fi xed completion date, the consequences of delay to that date and a mechanism for extending it. In relation to money, it will refer to the price (invariably a lump sum in EPC), the calculation method and timing of payment, the basis of entitlement for additional payment and caps on liability. Finally, in relation to performance, it will specify technical output guarantees, the procedure to verify the output (through testing, commissioning performance tests and retests), damages for under-performance, performance security, and liability for defects. All of these provisions are important in allocating risk consequence and setting the parameters of what is to be achieved, however none of them explain, or indeed directly contribute to whether or not an EPC project succeeds.

6 Building a technology advantage : 2016 Global Construction Survey 2016, KMPG International, 2016. 7 Climbing the curve : 2015 Global Construction Project Owner’s Survey, KMPG International, 2015.



This paper will provide an overview of a dozen issues or factors which, through the experience of the author and the contributors, almost always arise on EPC projects, have a material bearing on the success of an EPC project and tend to lead to disputes if they are not dealt with in the right way. It will do so where necessary by reference to the most commonly adopted standard form of EPC contract, the FIDIC Conditions of Contract for EPC/Turnkey Projects, otherwise known as the Silver Book. 8 In addition, this paper incorporates the views of a number of experienced project or contract managers 9 at international organisations who are regularly involved in EPC projects. The issues to be addressed are as follows:

1. Collaborative concept design. 2. The myth of single point responsibility. 3. The assumed duty. 4. The pitfalls of ground conditions. 5. Rushed execution. 6. Review, comment, approve. 7. Notices and time bars. 8. Constructive variations. 9. Feed quality.

10. Effective administration. 11. Relationships and governance. 12. Resolution through meetings.

1. COLLABORATIVE CONCEPT DESIGN

Concept design work is normally undertaken by a specialist design company or companies engaged by the employer who may well not be the EPC contractor on the project. The amount of design work undertaken depends. Some contracts may limit the employer’s design input to performance specifi cations only, or they may set out a framework within which the EPC contractor’s design must fall. Other projects will involve a specifi c FEED (Front End Engineering Design) stage. Generally, FEED design extends far beyond mere design criteria and involves the production of reasonably detailed design which forms the basis of the tender documentation sent out to contractors, and forms part of the requirements of the contract.

8 The Silver Book is one of a number of standard form contracts used for EPC projects. Others include the ICC Infrastructure Conditions of Contract – Design and Construct version (2011); the ICC Model Turnkey Supply of an Industrial Plant Contract (2003) and the ICC Model Turnkey Contract for Major Projects (2007). However, it is true to say that the vast majority of EPC contracts are bespoke written.

9 Christopher Pedersen, Senior Vice President (Hill International); Paul Mansell, Senior Vice President (Hill International); Steve Van Hefty, Project Engineer (MTS Systems Corporation); Niek Edelhauser, Contract Manager (Mammoet Europe BV); Ian Sinclair, Program Director (AECOM).



A common mistake by employers is that the concept design is completed without the engagement of the EPC contractor. Thus the employer’s design team prepares the design to whatever level of detail is required, but that team is divorced from the contractor’s design team who will be tasked with developing the design to approval for construction stage. A predictable consequence of this approach is that when the contractor develops the design, it may not understand the concept design at all, it may not understand the philosophy of the design, it may not have the capability to develop the design in the way the concept envisages, or it transpires that the concept design will not achieve the performance output contracted for. The concept designer may have failed to consider the macro concept of the asset, or it may have missed a constraint that the contractor later identifi es. Employers should minimise the risk of these possible consequences by encouraging tendering contractors to review the design and provide their input. Tenderers may be resistant to investing in a project to this extent before the contract is awarded to them. However, in the long run contractors build a stronger, on-going relationship with employers by showcasing their knowledge ahead of and during the tender process. In addition, it may be a way in which the employer can fi lter the weaker contractors before or during tender, and test the working relationship between it and the contractor.

Challenges may not only arise from a disconnect between the employer and contractor. There may also be interface issues within the employer’s design team. On large scale EPC projects, it is normal for the concept design to be completed by several different teams, either within the same company or across different companies. Where the design has been prepared and developed by teams in silos, those teams will naturally focus only on its own design and not on the potential constraints in the design being carried out by another team. To resolve this, there needs to be procedures in place and the time available for the design teams to communicate with each other to ensure that the designs, particularly the interfaces between those designs, are unifi ed and integrated. This principle applies as much during the project as it does at concept design stage.

The liability for concept design is often heavily negotiated. Employers will insist on a clause in the contract to the effect that the contractor has considered the concept design and assumes responsibility for it. 10 However, where the employer wants control over the design of the asset, it will either take responsibility for (i) the FEED; or (ii) the design forming part of the Employer’s Requirement; or it will (iii) assume responsibility for “Rely-Upon Information”, which may set out certain parameters upon which the detailed design will be based or contain information about third party input, services or weather conditions. For any project where the contractor

10 See in particular, Sliver Book, clauses 5.1, 5.2 and 5.8.



is not fully responsible for the whole of the concept design, it is crucial is that there is a clear divide of responsibility between what the employer and the contractor is responsible for.

2. SINGLE POINT RESPONSIBILITY

What is often touted as a key benefi t of the EPC procurement route is that it provides a single point of responsibility. However, rarely if ever is the reality so simplistic that everything falls to the contractor. The employer is responsible for providing certain things at certain times to ensure that the works progress unencumbered. Access, planning consent, payment and approvals are all responsibilities placed on the employer and if these things are not provided in the manner and at the time stipulated by the contract, an entitlement to additional time and money will arise and possibly a right to terminate.

Nevertheless, the employer will try to ensure that the responsibility and liability for carrying out the design, construction, testing and commissioning rests with the contractor. This is in contrast with the traditional forms of procurement where the employer will very easily fi nd itself in a position where the contractor blames the designer or one of the engineers for defective design and vice versa and not only is the burden on the employer to demonstrate which of those parties is responsible but it also has to pursue each responsible party to recover the loss suffered.

The trade-off for a contractor being responsible for the design and construction of the project from the employer’s perspective is control over the design, function and performance of the asset. The intention is normally for the employer to have limited rights of intervention and so problems arise, particularly during construction, where those rights are exceeded. In so far as interference causes a change to the scope of works, delay or disruption, it provides the contractor with robust basis for seeking additional time or money and/or defending a claim for liquidated damages from the employer. However, sophisticated contractors recognise the importance of having the employer involved in the project. Where the contract facilitates employer input (which sounds more co-operative than “intervention”) it can allow for open, transparent and intellectual communications between the project teams. The view of some is that true single point responsibility places an over-reliance upon the contractor to maintain the progress of the project. The contract should allow for the employer to attend progress updates with the contractor, sub-contractors and suppliers. If the employer is involved in this way, the parties can have a transparent platform to have open discussions in relation to issues being faced on the project. Furthermore, the contract should facilitate the sharing of project progress schedules and data. The aim of providing for interventions in the contract is to draw attention to the



possibility that such interventions will occur and to allow the EPC contractor to price, programme and resource for those interventions.

3. THE ASSUMED DUTY

EPC contracts provide that the asset the contractor designs and builds must perform a certain function and achieve a specifi ed output or performance. That is invariably accompanied by a further stipulation that the contractor’s duty to achieve that output or performance is absolute or conditional. An absolute obligation may take the form of a fi tness for purpose clause, whereby the contractor warrants to the employer that part or all of the asset as completed will satisfy its intended function or functions. The Silver Book provides that “ when completed, the Works shall be fi t for the purposes for which the Works are intended as defi ned in the Contract .” 11 This wording provides an important constraint on the absolute obligation, in that the works only need to achieve the purpose as defi ned by the contract to be compliant. This is normally a set of carefully crafted performance or output criteria. A conditional obligation may take the form of a reasonable skill and care clause whereby the contractor will exercise reasonable skill and care in relation to whatever it warrants. Three points may be made in this regard:

1. The difference between the two standards is signifi cant. An absolute obligation effectively guarantees that the function, output or performance will be met, whereas a reasonable skill and care obligation means that the contractor has discharged its liability (in respect of the obligation) so long as it exercises the required reasonable skill and care irrespective of whether the function, output or performance is achieved.

2. The standard of duty will always be referred to in the general conditions of contract, but it will also be referred to (most of the time superfl uously) in the technical documentation. The wording must be consistent. So often this does not occur and in the event of a dispute, it is left to a tribunal to ascertain what level of duty should be imposed.

3. Even if the standard is absolute, it may not necessarily be the case that the contractor must achieve the specifi ed output or performance unconditionally. If there is a single well-defi ned output that the absolute obligation can be measured against, then the contractor

11 Clause 4.1, Silver Book. However, it is rarely the case that contracts negotiated by sophisticated parties will refer to fi tness for purpose or intended purpose because (i) professional indemnity insurers will rarely provide insurance for that; and (ii) in any event contractors are not prepared to assume that level of risk. The obligation is usually made out by reference to specifi c output or performance obligations (as in clause 4.1), but without the words “fi tness for purpose”.



is likely to have to meet the absolution obligation, but where there are a number of obligations and requirements and the absolute obligation is not specifi c or it is qualifi ed, it becomes more diffi cult to maintain a position that it should be met. This was the case in MT Højgaard A/S v E.ON Climate and Renewables UK Robin Rigg East Ltd . 12 EON engaged MT to design, fabricate and install 60 wind turbine foundations for the Robin Rigg offshore wind farm in the Solway Firth. Clause 8.1 required that each item of Plant and the Works as a whole shall be “ fi t for its purpose as determined in accordance with the Specifi cation using Good Industry Practice. ” In addition, the works were to be completed in accordance with certain Technical Requirements (a schedule to the Contract) (“TRs”) which provided that the design should meet the international standard for the design of offshore wind turbines (J101) and that: “ The design of the foundations shall ensure a lifetime of 20 years in every respect … ”. Shortly after completion, the grouted connections failed. It came to light that there was a signifi cant error in the J101 and it was later found that the wind turbines at Robin Rigg were defective as a result of this error. The parties agreed that EON would develop a remedial scheme of works, the cost of which amounted to c.€26 million, and thereafter commenced proceedings in order to ascertain who should bear that cost.

The Court of Appeal held that the language used in the TR “ undoubtedly says that the foundation of the design shall ensure a lifetime of 20 years ”. Therefore, at fi rst sight, if incorporated into the Contract, this provision constituted a warranty that the foundations would function for 20 years. However, that was inconsistent with all the other references in the requirements and in the specifi cations, which all referred to a design life of 20 years. Considering the hierarchy of the contract documents, the Court of Appeal determined that the obligations imposed by the contract conditions took precedence. The warranty in clause 8.1 was not an absolute warranty, but was qualifi ed by the phrase “ as determined in accordance with the Specifi cation using Good Industry Practice ”. In other words, the contractor had met its fi tness for purpose obligation because the absolute obligation had been watered down by other provisions. It said if the contract required an absolute warranty of quality, one would expect to fi nd it in clause 8.1, not “ tucked away in the Technical Requirements ”. Furthermore, a “ reasonable person in the position of EON and MT would know that the normal standard required in the construction of offshore wind farms was compliance with J101, which was expected, but not absolutely guaranteed, to produce a design life of 20 years. ” MT was therefore not liable for the costs of the remedial works.

12 (CA) [2015] EWCA Civ 407; [2015] BLR 431 .



4. THE PITFALLS OF GROUND CONDITIONS

Ground conditions are, as the name suggests, the state of the land upon which the asset is being built. The importance of ground conditions will depend on the nature of the asset and the site. In an EPC contract, the ground conditions are typically the responsibility of the contractor such that if it encounters contaminated land, or enhanced ground enabling works are required in order to support the load of whatever is being built, the time and cost risk for that will reside with the contractor. However, the contractor will rarely proceed blindly into a contract without the benefi t of some analysis that demonstrates what impact the ground conditions will have on the design and construction of the asset and how the extent of any enabling works required affects the cost of the project and the time taken to construct it.

On the face of it, clause 4.10 of the Silver Book fi xes the responsibility for ground conditions on the contractor, clause 4.11 precludes any claim for time and money and clause 4.12 states that the contractor has all the information necessary. However, the obligation at clause 4.10 is limited by clause 5.1 in that the employer is responsible for data and information which are stated in the contract as being “immutable” or the employer’s responsibility, or if the data cannot be verifi ed by the contractor. This provision is usually amended to allow for greater clarity as to the line of responsibility between the parties.

Experience shows that regardless of the contract terms, contractors rely on reports prepared on behalf of the employer as part of the feasibility study and do not allow (or are not allowed) suffi cient time, or invest the time, to carry out their own surveys. The author was instructed on a €100 million dispute arising out of the design and construction of a biomass project in Brazil where the contractor relied on a moisture survey carried out on behalf of the employer. It transpired that the survey (i) was carried out during the summer; and (ii) did not take account of the fact that the site of the biomass plant was above an underground river. When the project was under construction, the contractor suffered huge challenges once it realised that it had to construct the asset to protect against the water table which at its highest was only a few inches below ground level. In the arbitration, the contractor tried to argue, unsuccessfully, that the information provided to it during the tender process was “Rely-Upon Information” and in so far as it was inaccurate, that was the employer’s responsibility. It also tried to argue, again unsuccessfully, that the amount of rain that was experienced during the construction process amounted to force majeure. With the benefi t of hindsight, the contractor’s oversight may seem obvious, but time and again contractors face unforeseen problems with ground conditions that they have not factored into their price.



5. RUSHED EXECUTION

Projects can fail before they start because the employer and the contractor have not allowed the required time together to review, comment and develop the contractual technical specifi cation. Restrictions in the parties’ resource may exist as they may be utilised and committed on other “live” projects with less priority given to projects that are not yet on the balance sheet. The employer will be facing pressures upstream from other stakeholders and funders to ‘do the deal’ by a cut-off date, failing which funding and/or key support will be lost. It will therefore apply time pressure on the contractor to sign up to the necessary agreements and try to limit the scale of the review and the amendments to the contract that, with the benefi t of time, a contractor might otherwise undertake. With the proverb “more haste, less speed” in mind, parties to an EPC contract may wish to consider the following points:

1. The contract will comprise a number of documents: general terms and conditions, employer’s requirements and scope of work, design documentation, testing protocol, payment milestones, forms of acceptance certifi cates, security bonds and insurances. The parties must be clear what terms, annexes, schedules and documents form part of the contract, and that there are no inconsistencies within or between each part of the contract and/or the contract documents. The amount of time this takes each party should not be underestimated. So often legal teams negotiate the terms and conditions and the technical teams draft the specifi cations with little time spent evaluating whether the documents, together, function as they should. An approach followed by one contributor’s organisation is to allow time for each of the teams responsible for drafting different parts of the contract to review and comment on other parts of the contract, and to make each team liable in the terms of their agreement for errors, omissions or inconsistencies within or between the documents that it ought reasonably to have identifi ed.

2. The contract should always contain a failsafe in the form of a hierarchy or order of precedence clause in the main terms and conditions which specifi es in the event of any inconsistencies or ambiguity in the contract documents, which part should take priority. The order of priority will vary from contract to contract, but one would normally expect to see the legal terms and conditions taking priority over the technical schedules and the employer’s requirements always taking priority over the contractor’s proposals. 13

3. The contract will normally contain a series of assumptions. The contractor is normally taken to have checked those assumptions and

13 Silver Book, clause 1.5.



will be responsible for them and their accuracy. If the assumptions are not properly evaluated, this will invariably lead to issues during the project that the contractor alone will suffer the consequences of.

4. Provide the EPC contract to appropriately qualifi ed third parties who have not been involved in the contract negotiations and ask those people to critically review the contract. This will include as a minimum a lawyer with experience of the relevant sector of the project and the form of procurement and a consultant with technical expertise in the subject matter of the project. It can be effective if the lawyer is a dispute specialist, because he or she will review the contract with a different perspective to that of a non-contentious lawyer.

6. REVIEW, COMMENT, APPROVE

Part of the construction phase of the project will be the development of the design from the concept to detailed “approved for construction” design drawings. On projects where the employer wishes to satisfy itself that what is being designed meets the technical criteria and employer’s requirements, the design will be subject to the employer’s prior approval. This approval process involves at least two design teams: the contractor’s designers and the employer’s design checking team. A third party design checker may also be involved. The contract will stipulate that designs are to be submitted to the employer for approval and that those designs may be approved or rejected within a specifi c period of time. Where this process is not carefully choreographed in the contract and administered, it is a hotbed for disputes. Despite this, generally contracts do not prescribe, other than in high level terms, how this process is to be undertaken. The Silver Book is a perfect example. It provides that designs identifi ed in the employer’s requirements by the contractor to be submitted for review shall be submitted “accordingly” and the employer has 21 days to respond. The employer may reject the design on the basis that it fails to comply with the contract and if rejected it shall be resubmitted. 14 A few experiences and suggestions:

• Where the employer’s team does not have suffi cient resource, the approval process quickly becomes a bottle neck with designs that are waiting for approval mounting up. Similarly, if the contractor’s design team is only suffi cient in size to deal with the production of the designs and not the redoing of designs following rejection, delays will manifest.

• Programmes usually do not allow time (or suffi cient time) for the redoing of designs. Furthermore, programmes are not updated

14 Silver Book, clause 5.2.



when designs are delayed and do not allow for a staged delivery of designs and approvals. There may be only one or two dates in the programme and so the scale of the review process to be undertaken by the employer’s team is so huge that the employer cannot possibly deal with it in time. A stage delivery approach is much better whereby sections of design are delivered at different times, there is time in the programme for the approval process and redoing of design, and there are staggered dates for approval.

• In the contractor’s case, delay in approvals can be overcome by ensuring there is a provision whereby designs are deemed approved if they have not been commented within the specifi ed period and upon giving a notice of reminder and a further period for comments a response is still not forthcoming. In the employer’s case, delays can be avoided by ensuring the employer has the right to take over a design from the contractor upon giving notice, complete it, and then pass it back to the contractor as if it was the contractor’s own design.

• The criteria for accepting and rejecting designs is usually imprecise and so the contractor fi nds itself in a position whereby it submits a design without any real certainty that it is going to be approved. This problem extends to the comments received from the employer’s team. Often the input from the employer’s design team can lack the necessary clarity to allow the contractor to amend the design to the satisfaction of the employer.

Not only should the contract provide as clear and as detailed a protocol as possible or otherwise provide that such a protocol shall be agreed within, say, 90 days of the commencement date, but also the employer should arrange weekly or daily meetings with both its designers and the contractor’s designers, at which the employer’s designers explain to the contractor’s designers why a design is not approved and what steps are required in order for it to be accepted.

7. NOTICES AND TIME BARS

In all contracts where either party wishes to notify the other of a change, a claim or the achievement of some form of milestone, it will be required to issue a notice. There are a host of clauses in the Silver Book where notifi cations are required. 15 Bespoke contracts are normally the same.

15 Clause 1.8 (Care and Supply of Documents); Clause 1.13 (Compliance with Laws); Clause 2.1 (Right to Access the Site); Clause 2.5 (Employer’s Claims); Clause 3.1 (Employer’s Representative); Clause 3.4 (Determinations); Clause 4.1 (Contractor’s General Obligations); Clause 4.2 (Performance Security); Clause 4.3 (Contractor’s Representative); Clause 4.4 (Subcontractors); Clause 4.16 (Transport of Goods); Clause 4.20 (Employer’s Equipment and Free Issue Material); Clause 4.24 (Fossils); Clause 5.2



The form and content of the notice depends on what is being notifi ed, but in the majority of instances EPC contracts are not that prescriptive. One type of notice that receives more judicial attention than most are notices claiming additional time and money. 16 Whilst it is open for parties to specify in the contract exactly what details must be included in the contractor’s notice, not all EPC contracts do so. The author has advised on EPC contracts where critical path analysis (amongst other demands) is required in the event that an event giving rise to an extension of time occurs. EPC contractors will fi nd such demands challenging. In the absence of requirements set out in the contract, the English courts have generally considered that the contractor is only required to give the best information it is reasonably able to at that time. 17 In Obrascon Huarte , the English Court considered that for clause 20.1:

“… one should construe it as permitting any claim provided that it is made by notice in writing to the Engineer, that the notice describes the event or circumstance relied on and that the notice is intended to notify a claim for extension (or for additional payment or both) under the Contract or in connection with it. It must be recognizable as a ‘claim’.” 18

In addition to the requirements of a notice, EPC contracts should stipulate the period within which the notice must be given. If the notice is not given within that period, some contracts provide that the contractor is no longer entitled the right or relief which might otherwise be available to it. This is called a time bar clause. The Silver Book makes it a clear requirement for the contractor to provide the employer with notice of its claim no later than 28 days after it became aware or should have become aware of the relevant event. The second paragraph of clause 20.1 makes the contractor’s compliance with the 28-day requirement a condition precedent to any

(Contractor’s Documents); Clause 5.4 (Technical Standards); Clause 7.3 (Inspection); Clause 7.4 (Testing); Clause 7.5 (Rejection); Clause 8.1 (Commencement of Works); Clause 8.3 (Programme); Clause 8.4 (Extension of Time); Clause 8.9 (Consequences of Suspension); Clause 8.11 (Prolonged Suspension); Clause 9.1 (Contractor’s Obligations); Clause 9.2 (Delayed Tests); Clause 10.1 (Taking Over of the Works and Sections); Clause 10.3 (Interference with Tests); Clause 11.1 (Completion of Outstanding Work and Remedying Defects); Clause 11.2 (Cost of Remedying Defects); Clause 11.4 (Failure to Remedy Defects); Clause 11.6 (Further Tests); Clause 12.1 (Procedure Tests for after Completion); Clause 12.2 (Delayed Tests); Clause 12.4 (Failure to Pass tests after Completion); Clause 13.1 (Right to vary); Clause 13.7 (Adjustments for Changes in Legislation); Clause 14.6 (Interim Payments); Clause 15.1 (Notice to Correct); Clause 15.2 (Termination by Employer); Clause 16.1 (Contractor’s Entitlement to Suspend Work); Clause 16.2 (Termination by Contractor); Clause 17.4 (Consequences of Employer’s Risks); Clause 18.1 (General Requirements for Insurances); Clause 18.2 (Insurance for Works and Contractor’s Equipment); Clause 19.2 (Notice of Force Majeure); Clause 19.3 (Duty to Minimise Delay); Clause 19.4 (Optional Termination, Payment and Release); Clause 19.7 (Release from Performance under the Law); Clause 20.1 (Contractor’s Claims); Clause 20.2 (Appointment of the Dispute Adjudication Board); Clause 20.4 (Obtaining DAB’s decision).

16 See for instance, Silver Book, clause 8.3. 17 Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd (No 2) [2007] EWHC 447 (TCC);

[2007] BLR 195 ; 111 Con LR 78. 18 Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2014] EWHC 1028 (TCC);

[2014] BLR 484 at para. 313.



entitlement it may have to additional time or money under the contract. 19 Obrascon considered when time will start running for the purposes of the contractor serving its notice under the time bar clause. The court concluded that there must have been awareness of the circumstances, or the means of awareness of the relevant circumstance, before the condition precedent will apply. Furthermore, the time bar clause should not be construed strictly against the contractor in this respect. The burden of proof lies with the employer seeking to argue that a notice had not been given in time.

8. CONSTRUCTIVE VARIATIONS

The contract should always provide for a process pursuant to which both the scope of work and the terms of the agreement between the parties can be varied. The Silver Book contains a reasonably detailed procedure at clause 13 that deals with matters such as the right to vary, the variation procedure, and adjustments fl owing from changes in costs and legislation. The contract will usually provide that no variation to scope or the terms of the contract is permitted unless that variation is agreed in writing and signed by both parties.

One of the most frequent areas of dispute is in relation to informal variations to the scope of works, i.e. when a contractor on instruction from the employer or of its own volition adds or omits work without having obtained a written variation in accordance with the procedure set out in the contract. The informal variation may be fairly apparent, such as a materials or output change, or be done in a subtle way. For instance, design drawings are submitted to the employer for approval. The employer’s engineers review them and mark them up. Those comments might be within the specifi cation, or they might change the scope of work. Where the proper contractual mechanisms for a variation have not been followed, the contractor is entitled to refuse to perform the work. If it does the work however, the usual contention from the contractor is that the employer or engineer told it to do the work, or acquiesced to the work being done, and therefore the work should be treated as a variation for which it is entitled to be paid, notwithstanding the absence of a written variation order.

In English law, whether the contractor is entitled to payment depends fi rst on the particular terms of the contract, and then on whether the employer knew about it or not. If it did not, then it is highly unlikely that the contractor will be able to secure payment and the employer can tell the contractor to remove the additional work, as if it was defective. Even if he takes the benefi t of the work, then the contractor will not be entitled to payment. However, if the employer or engineer did know about it at the

19 This is the position in English law, but the law of some jurisdictions do not support the concept of conditions precedent.



time the additional work was being done, then the contractor will probably be entitled to payment.

9. FUEL

Energy power plants for oil, LPG, gas, coal, biomass and waste to energy are invariably designed and built through an EPC model. The quality, reliability, sustainability and price of the fuel is absolutely critical to achieving the performance output and desired fi nancial return of the asset, and so disputes arise because there are problems of some sort with the fuel. Employers need to satisfy themselves that the project is underpinned by secure fuel supply arrangements. Typically, in power plant projects fi nanced on a limited recourse basis, a long term fuel supply contract will be required to make the project bankable.

Biomass projects offer a particularly interesting challenge in this regard and fuel always seems to feature in some way or another in disputes. Due diligence on the part of the employer, the EPC and O&M contractor in advance of agreeing the terms of the contract is so important. Supply is one of the fi rst issues to consider. Certainly in the UK, there is uncertainty as to long term price trends and the commitment of suppliers to supply fuel over the service life of the asset. Although there is a trade-off of fl exibility, it can be attractive to lock in the suppliers to an indexed price over a long term period to ensure that there is certainty. In the UK, much of the biomass feedstock required to drive large-scale power generation will be imported. This brings into play currency fl uctuations and price escalations based on indices other than the national wholesale power price. Logistics are as important as supply. Who will be responsible for the transport of the fuel, how will the fuel be transported, who will own and maintain the transporters, at what point will title in the fuel pass from the supplier.

Once the type of fuel is determined, specifying exactly what properties the fuel is to have is fundamental. If the fuel is wood chips for instance, the contract should provide that the chips are dry, clean, mechanically robust and to the appropriate fuel grade standard (calorifi c value), with no additives or binding agents. The parties may wish to specify the length and diameter of the chips, maximum water and ash content and weight per kilogram. Problems ensue when the fuel provided does not meet the specifi cation because if any of the parameters of the fuel are not consistent with the specifi cation, the performance output of the plant will alter. So often this is the case during the testing and commissioning phase of the plant. The plant will not achieve the required output and it transpires that the culprit is the fuel. Sometimes the fuel can be improved or the plant can be adjusted to achieve the required output, but in other cases it cannot be and the contractor (usually) will compensate the employer for



the shortfall of the performance by the payment of performance liquidated damages.

Unanticipated interruptions in fuel supply are relatively easy to mitigate by ensuring there is not over reliance on one or a few suppliers, adequate storage capacity at the site of the project and the use of boiler technology that can still achieve the same performance output with different feedstock types.

Clearly, it will be important for the employer to stipulate remedies for breach of the fuel supply agreement. If the portfolio of suppliers is suffi ciently diverse and fl exible, one-off or infrequent breaches of delivery or quality obligations may not be a problem but beyond that, the employer will need to identify a remedy that strikes a balance between obtaining the necessary recourse, the uncertainties in supply and the adverse impact a draconian remedy will have on the supplier’s price for the fuel. Remedies include a downwards price adjustment to refl ect the deterioration in calorifi c value, a rejection right if the fuel cannot be burned, and more robust damages regimes applying to suppliers who default because they are tracking to back out of the deal.

10. EFFECTIVE ADMINISTRATION

The effective monitoring and management of a project is the best means of minimising disputes. Typically, in an EPC project, an engineer or employer’s representative will be appointed by the employer to administer the contract. 20 From experience, there are three key issues which will lead to disputes if they are not controlled or handled in the right way. They are resource, profi ciency and motivation:

1. There are so many aspects to the engineer’s role. These are set out in the EPC contract and in the agreement between the engineer and (typically) the employer. They include administering and issuing instructions, evaluating claims, issuing payment certifi cates, witnessing testing and certifying completion under the contract. So often the employer will not be willing to pay for the right level of resource to ensure that the role of the engineer is executed without causing delay to the project. One experience involved a £2 billion transport infrastructure project in the Middle East. The employer’s team consisted of just fi ve individuals whose responsibility it was to administer the whole project. The employer took the view, wrongly, that since the project was procured through the EPC route, it was the contractor’s responsibility to provide support to the employer’s team and lead the administration of the project. Inevitably the

20 Silver Book, clause 3.



employer’s team was swamped fairly early into the project and whilst the employer realised and rectifi ed its error in judgment, the project suffered.

2. Even if the employer’s team is suffi ciently resourced in numbers, it may not have a suffi cient number of the right skilled people, the effect being that people with the wrong skills will make poor decisions because they are not competent or their focus is elsewhere. For instance, an engineer is generally appointed by the employer for his or her profi ciency in technical issues and will therefore be more drawn to considering issues of quality and performance in isolation of time and money. The engineer may unilaterally instruct a change to the scope of work to upgrade the specifi cation to achieve the greatest performance, without considering fully or at all the cost and time implications. If the engineer later liaises with the employer, the employer rejects the change for cost reasons, and the engineer then withdraws the instruction, the contractor can quickly lose confi dence with the employer’s team. As a minimum, the engineer needs to consist of four teams: programming, cost, technical and relationships, and decisions or instructions from the engineer should usually be made following consultation with, and advice from, those four factions and with the employer.

3. The engineer’s interests may not necessarily align with those of the employer. Consider the situation where an engineer has been appointed by the employer with the engineer’s appointment including a bonus incentive if it manages the project such that the contract sum remains within a specifi ed cap, and the parameters of the contract sum are not clearly defi ned. What if the engineer then instructs changes to complete the project within the project programme which results in extra costs but does not formally approve the variation (which it should) and delays such approval because of the effect on the engineer’s bonus? In this situation, the employer can be left in a position where the project completes within the contract sum and project programme, the employer pays the bonus payment to the engineer not knowing that the contractor has been claiming additional sums pursuant to unapproved variations and then later is left with a claim which has been running for a while, but has not been communicated by the engineer.

11. RELATIONSHIPS AND GOVERNANCE

The reality of the procurement process is that there is often a total disconnection between those that draft the contract and those that deliver the project. The contract is the single most important written document on



a project. Whilst it can be the document which encourages a harmonious working relationship it can also be the root of division and confl ict between the parties.

The contract, in theory, creates a platform of certainty allowing those parties to it to organise and plan. However, so much of the focus in contracts is on risk consequence, or in other words what happens when things go wrong. If one asks lawyers the sorts of issues that tend to be negotiated the most on projects, then the usual sorts of issues arise – limitation issues, price, termination provisions and force majeure. However, if one asks the project team what are the things that are the most important, if they are thinking about success on a project, then the list is very different and would include: reaching and maintaining consensus over the scope, having clarity as to the responsibility of the parties and good communication lines. In other words, in the eyes of the project team what drives success in projects is about relationships and underlying governance, not about the management of risk consequence. When it comes to success, it is people and relationships.

The secret to success is to accept that risks are inevitable, of course provide for the consequences of those risks in the drafting, but also provide a means whereby those risks are minimised or managed. As well as the consequences of risk, the focus should also be on building governance structures within the contract which deal with that environment. Those structures should encourage not only multi-level engagement, not just between two individual client representatives, but between teams and organisations.

Contracts cannot anticipate every risk, although the problem is that the contracts try to anticipate every single risk, such that the contracts run into several volumes, contain thousands of cross references to different parts of the contract and contain nuances in wording which is only in the mind of the lawyer who drafted it and not apparent to the contracting team. What the contract can do is create the framework within which the risks will be managed not only through the apportionment of risk but also from the point of view of building a stable relationship.

12. RESOLUTION THROUGH MEETINGS

Many disputes arise from poor communication between the respective parties’ project teams. Formal claims always have one historic point in the project’s chronology when the issue could, more likely than not, have been resolved amicably through a meeting between the parties. Regular meetings of the respective project teams encourage on-going dialogue, communication and sharing of information. These meetings may be scheduled on a weekly or bi-monthly basis specifi cally with the intention of discussing issues between the parties. These meetings should be scheduled



and diarised from inception and included in the contract programme (i.e. throughout the contracting phase to operation).

The parties should be aware of the structure of these meetings from the outset. In this regard a meetings policy could be drafted and included within the policies schedule of the EPC contract. This could include the format of the meeting, the location and timing of the meeting, the compulsory attendees, the optional attendees, the intervals of when they would be conducted, whether there will be a chair for the meetings, who will take lead from each party on the meeting, a sample agenda which may be used for the meetings, the way in which the minutes shall be documented and the distribution group to whom the minutes and actions would be sent.

The aim of each meeting is to enable the representatives to put forth their views on the status of the project, identify potential issues which may arise and brainstorm to agree a means of dealing with the potential issues before they escalate, and to consider and agree solutions to certain issues which have arisen. The key to the successful execution of such meetings is as much in the preparation for them as it is in the attendance and follow up. Each party should fully prepare ahead of each meeting. This should include reviewing the current status of the project and reporting on it as necessary. Agendas, issues lists and programmes should be circulated in suffi cient time for all parties to consider the documents ahead of the meeting. Programming is crucial in any project. Delays inevitably lead to extra costs. In this regard, the critical path programme should be updated during the course of the project and distributed ahead of the project meetings. These programmes can provide invaluable insight into potential future delays. If such programmes are discussed in project meetings, the parties may be able to have open discussions of how to maintain the milestone dates or if they cannot be maintained, how best to mitigate delays.

At the meeting itself, a detailed record of points discussed should be documented. Often, we see that project meetings have taken place with headline topics discussed such as “planning issue” with a status of whether it is “open”, “closed” or “to action”. This does not provide suffi cient information on the points discussed or resolved. Contemporaneous and well-organised documentation can prove to be one of the important factors in resolving or winning a dispute. It evidences the intentions, thoughts and resolutions of the parties at that particular point in the project. The minutes should provide enough detail so that they can be reviewed in weeks or months (and in some cases years) after the meeting and provide suffi cient detail on what was discussed by the parties.

For complete effective meeting management, both parties’ representatives should sign the minutes to evidence their agreement to the points noted – this should avoid any future dispute as to the nature of what was documented.



A simple pro-active project team meeting held at regular intervals could assist with promoting communication between the project team and be an effective means of minimising and/or managing disputes. However, if there is an issue which cannot be resolved through the on the ground meeting within a specifi ed period, the next level of escalation to consider is a meeting attended by the parties’ senior executives, who are not involved in the day-to-day project. As to which executives should attend, this will depend upon the make-up of the issue or issues being escalated. If the problem relates to a fi nancial issue, then the respective parties’ fi nancial directors should attend who would have the expertise to put forth their view on resolving the issue. If the issue is of a technical nature, then a senior technical engineer should attend the meeting – perhaps the attendance of the fi nancial director may be of assistance if costs associated with the particular technical issue need to be discussed, but if there is no such fi nancial issue, then it would not be necessary for such a director to attend.

The aim of the meeting is to bring together the “decision makers” of the parties who perhaps set the parameters of negotiation for the project team, limiting their scope of resolving a problem. The executive meeting will allow for a greater scope of negotiation and perhaps brainstorming other possible avenues for the parties to consider which may not be readily known or available to the project team (i.e. extra funds which may be available to the parties, application of historic experience from other projects, use of bargaining power where there are links with other projects). Frequently, some disputes turn on the project pressures faced by those who are at the coalface. This can include clashes of personalities in a highly complex project whereby individuals are juggling a number of competing objectives. Even with professional pleasantries, a clash of personalities can inhibit the resolution of disputes at project meetings and only lead to concluding meetings further away from where they started.

An executive meeting does away with the project facing team. It requires the attendance of executives who are likely to be at a distance from the front line allowing them to bring an objective view on the issues between the parties. It would be expected that there would be fresh minds attending to the dispute not infl uenced by the day-to-day issues and personalities. This can bring a refreshing objectivity and a renewed desire to resolve the dispute. However, a possible shortcoming with executive meetings is that the attendees will not be involved with the day-to-day detail and as such, they will have to be informed by the project team. The executives should ensure as far as possible that the project team has delivered the right information and detail to the executives to allow them to assess the issue objectively.



CONCLUSION

EPC or target cost contracting is the principal way in which large complex energy and infrastructure projects are constructed. The majority of those projects are not successful, where success is achieved it is by reference to pre-defi ned time, money and performance targets. This paper draws on the experience of those involved in the doing of projects and resolving their disputes to postulate, by reference to a dozen examples, that success can more readily be met through more focus in the contract on communications, relationships, defi ned procedures and management, as well the identifi cation of risk likelihood and the apportionment of risk consequence.
