Engineering Procurement Construction. Dr. Nabil Abbas FIDIC Certified Trainer Fellow of the Chartered Inst. of Arbitrators FCIArb MACostE - AIA

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1 Engineering Procurement Construction Dr. Nabil Abbas FIDIC Certified Trainer Fellow of the Chartered Inst. of Arbitrators FCIArb MACostE - AIA

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3 The Federation Internationale des Ingenieurs Conseils ( FIDIC ) published in August 1999, the first edition of its standard form, Conditions of EPC and Turnkey Projects, commonly referred to as the Silver Book. Publication of the Silver Book followed its earlier distribution of the test edition of this form, following which FIDIC amended certain provisions to take account of the comments received.

4 EPC Standard Forms of Contract The major EPC/EPCM forms of contract are as follows: FIDIC Silver Book Orgalime Turnkey Contract ICC Turnkey Task Force ENAA ICE 7th Edition ECC 3rd Edition MDB Harmonised

5 EPC Contractor The EPC Contractor is considered to be an expert in this form of contracting and this is onerous in international construction projects and must provide: a project that is fit for purpose Engineering and design is to a unique standard not carry out wilful misconduct not be grossly negligent

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8 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)

9 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

10 EPC Structure (cont d) Where does EPC fit in? Owner assumes risk R I S K S P E C T R U M Contractor retains risk Construction Management Traditional Design & Build LSTK/ EPC 10

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12 Benefits of EPC The contractor bears the risk of integrating the performance of all package contractors, including designers The contractor bears supply chain solvency risk The transfer of other construction risks is maximised relative to other procurement methods A high degree of certainty (on paper) can therefore be attained as to cost, time and quality

13 Benefits of EPC Remedies (such as LDs), liability caps and bond amounts are all sized relative to the total cost of the works and thus likely to cover a significant proportion of the owner's losses Administrative burdens on the owner are minimised The documentation is relatively simple and standardised EPC procurement is widely used and understood and is the most "bankable"

14 Disadvantages of EPC Cost contractors will add a substantial risk premium to the price Control the contractor controls the detailed design and construction process Quality the contractor will aim for the minimum compliant standard Bidder resistance EPC has been unpopular among some contractors (though market conditions are rapidly changing)

15 Disadvantages of EPC Duration total construction time may be prolonged by required FEED EPC sequence Capacity/competition few contractors have the balance sheet capacity to accept (and bond) the risk of large projects on an EPC basis Claims contractors are motivated to make claims to alleviate risk transfer Caps EPC risk transfer is in reality limited by express liability limits and by balance sheet and bonding limitations of contractors

16 EPC Challenges Execute EPC mega-projects within budget and on schedule Minimize construction delays due to lagging information, material or equipment. Track progress and maintain contingency plans to stay on schedule. Document project progress in terms of installed quantities.

17 EPC Contract

18 Advantages: More certainty regarding cost and schedule Less owner s staff required Reduce finger pointing Transfer of experience

19 Risks: EPC and Owner do not see the Project exactly from the same point of view: EPC manages margins and contingencies Owner manages the full cost of the operation (Investment + Operation)

20 Risks mitigation: Definition of the scope of supply (clear and frozen) A strong Owner s team is still needed Transfer of responsibilities is a key point

21 Definition of scope of supply: The first target is to have in the EPC contract a clear definition of performances, timing and safety requirements. EPC contractors also have responsibilities regarding operations: Operability and maintainability Operation and maintenance (O&M) costs Preparation and Transfer to Operation Team Warranties and support to Operation Team

22 Conclusion: Key factor 1- Clear definition of scope of supply is essential 2- Even within the EPC framework a strong owner s team is vital Rationale 1- Disputes and/or scope creep are potentially very costly 2- Owner will maintain many responsibilities (e.g. regulatory liaison) 3- Crucial to understand which responsibilities are transferred to the owner and when 3- Failure to have clear ownership of responsibilities at all stages can be costly

23 Typical EPCM Arrangement

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