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Design-build or engineering, procurement, and construction (EPC) contract is an all-inclusive contract framework, typically used in large-scale and complex projects. It creates a single point of responsibility for all construction risks, requiring the contractor to complete an agreed scope of work by an agreed completion date, in return for an agreed lump-sum contract price. Although EPCs are expensive, they provide certainty for employers, contractors and project finance lenders. However, since the breakout of the COVID-19 pandemic and consequential disruption to the supply chain, there is an increasing use of collaborative form of construction contracts, such as Early Contractor Involvement (ECI), and Integrated Project Delivery (IPD). EPC Model In an EPC contract, the owner's obligations are relatively limited to (a) obtaining certain approvals; (b) provide access to site and rights of way; (c) make available gas, water, electricity (although it is also common for the contractor to procure these consumables); and (d) payment obligations. An EPC contract is usually on a turnkey basis, which is fundamental to ensure completion. It rests on the contractor to do all the works, even where these are not expressly described but nevertheless are necessary or usual. It is therefore important to carefully identify the scope of work and determine any performance requirements an owner may have, specifically in power projects. Typically, such requirements feature in any one of the following two forms:
- Overly prescriptive, requiring the contractor to do “what it was told”. Any deviation under this form is likely to give rise to owner's fault;
- Functional, i.e. delivery of a specific output regardless how it is done/designed. Any deviation under this form is likely to give rise to contractor's fault.
EPC contracts commonly provide a framework for variations and extensions of time (EOT). This framework often includes provisions imposing on a contractor a strict limitation period for submitting a claim for variation or EOT. It is also common under an EPC contract for works to commence even when the design is incomplete or unclear, which is likely to force a number of variations and EOT claims in cases of design creep. Owners have resort to EPC contracts to allocate the risk to the party who is best able to assume and manage the risk, at optimum costs. Typically, that party is the contractor. That being said, not all risks are assumed by the contractor. For instance, site risks are are attributed to the owner in circumstances where the contractor is prevented from performing geotechnical surveys. Pricing model in EPC Contracts EPC contracts are usually on a lump sum “turnkey” basis. A lump sum model shifts most of the cost overrun risks from owner to contractor. Under this model, the benefits of any cost savings fall to the contractor. Payment of the lump sum amount is usually made on a milestone basis which, in turn, is assessed based on the level of completion of the works. Variations are key provisions that may impact the pricing of an EPC contract. They may give rise to extensions of time or increase the contract price.
There are three fundamental problems concerning variations under this form of contract agreement:
- Scope: The issue of variations in scope often lead to adversarial and polarised positions as to whether the varied work is something the contractor was meant to do anyways under the terms of the contract.
- Time: The requirement of timely notices as to variations is often the first port of call for owners to defend their claim. Usually, an owner would seek clarifications as to whether the notice was timely and sufficiently detailed.
- Cost: Pricing a variation can be controversial. In measured works, parties would typically adopt a contractual rate for the same or similar work as the varied work.
As can be seen from the above, an EPC contract contains provisions that are inherently adversarial in nature, cause less collaboration between the parties, can be expensive or underpriced, which give rise to disputes. Collaborative Contracting Model There is no one single form of collaborative construction contracts. ECI and IPD are popular in addition to other forms of collaborative contracting. In an ECI form of contract, the parties work together to identify early on common and uncommon risk issues that may impact the project and best ways to mitigate the same during construction. Discussions may also involve the sequencing of works, whether the programme is fit for purpose, accessibility to the site, or acquiring early consents (i.e. permits). By entering into early discussions on planning, pricing (giving visibility to the owner on how the price is built up), designing effective solutions and mitigating actions, an ECI interjects a collaborative approach that minimize adversarial issues. There are, of course, downsides where the inability to identify risk issues comes as a price for lack of experience in managing similar projects. Also, a contractor's early involvement in the design comes at the risk of excluding or discouraging other contractors in bidding for the project. Collaboration can also be achieved through a series of organising principles, such as reasonable allocation of risks and team integration, on budget and on schedule project completion. Major projects have started adopting collaborative contracting models. However, despite the recent success in collaborative form of contracting, the traditional EPC model remains dominant in sector specific industries, e.g. power plants and energy projects. Irrespective of the form of contracts the parties are adopting, it is important to have well defined contractual terms that identify with sufficient clarity the rights and obligations of each party. More importantly, it is fundamental to have a proactive approach with timely management of risks, with sound budgeting and discipline in execution.