Construction Webinar A comparison of EPC and EPCM contracting and the key risk mitigation measures 28 January 2016
Overview Different procurement methods Engineer, Procure and Construct (EPC) Engineering, Procurement and Construction Management (EPCM) Design & Build Construct Only Considerations - EPC (or turnkey ) and EPCM compared Risk mitigation in EPC and EPCM 1 / L_LIVE_APAC1:4938702v1
EPC and EPCM contracts Where do they fit in the risk continuum? Relative risk Owner EPCM Contracting Contractor Construct Only Design & Build EPC / Turnkey Contracts 2 / L_LIVE_APAC1:4938702v1
Typical EPC structure FEED Contractor Owner EPC Contractor Subcontractor Subcontractor Subcontractor 3 / L_LIVE_APAC1:4938702v1
Split EPC structure Project Company Turbine Supply Balance of Plant Electrical Works Civil Works SCADA Systems 4 / L_LIVE_APAC1:4938702v1
Construct only Project Company Turbine Supply Electrical Works Civil Works SCADA Systems 5 / L_LIVE_APAC1:4938702v1
Typical EPCM structure FEED Contractor Owner EPCM Contractor Trade contractor Trade contractor Trade contractor 6 / L_LIVE_APAC1:4938702v1
EPCM Case study: Wind Farm Project Sponsor Project Management Services Quantity Surveyor Site Investigation Wind Turbines Electrical Balance of Plant Civil Balance of Plant Reactive Power Compensation 400kV Transformers UXO Specialists Grid Connection Electrical Quality Assurance Met Masts Contestable Export Cable CDM-C Communications Environmental Management Ext Switchgear Housings 7 / L_LIVE_APAC1:4938702v1
Which method? Factors to consider Time Financing Cost Factors Remedies Quality / Control Market access 8 / L_LIVE_APAC1:4938702v1
Security Trust Deed SECURITY TRUSTEE Sponsor Support Security ECA ECA LENDERS ECA Guarantee Insurance ECA Loans SUPPLIER(S) Supply Agreement(s) OFF-TAKER PURCHASER Sales Agreement SPONSORS SHAREHOLDERS Shareholders Agreement LENDERS Commercial Loans PROJECT COMPANY Concession Agreement HOST GOVERNMENT HEDGING BANK Hedging Agreements Construction Contract Operation & Maintenance Agreement Lease BONDHOLDERS Bond Financing Agreement EPC CONTRACTOR OPERATOR LANDOWNER Greater risk to Project Company increased sponsor support requirements 9 / L_LIVE_APAC1:4938702v1
Bankability What is bankable, from the perspective of a lender? Is the project structure robust enough to secure full repayment of principal, interest and fees (through project delivery or legal recourse)? Commercial counterparties with the ability, incentive and legal obligation to perform General preference for a single point of responsibility over multiple points of responsibility (i.e. ability to identify and attribute blame to the responsible party) Ability to seek recourse from responsible parties NB: bankability is an overall judgement taken by bankers based on an analysis of all relevant aspects of a project; it is not an issue by issue process run by lawyers 10 / L_LIVE_APAC1:4938702v1
Risk mitigation in EPC Two-stage contracting and long-lead procurement Selecting and apportioning specific risks e.g. change of law, force majeure, foreign exchange/currency, design, ground conditions Reputable and credit worthy contractor (or parent) Gain share/bonus Bonuses for completing the project early or exceeding performance targets Insurance 11 / L_LIVE_APAC1:4938702v1
Risk mitigation in EPCM Selection of EPCM Contractor and suppliers/trade contractors (track record, experience etc.) Full-time team working for Owner to monitor and manage the execution of the project and identify risks early Incentivisation (gainshare/painshare) EPCM Contractor accepts risk and rewards on project outcomes Not a full risk transfer but creates a financial incentive for Contractor to manage risk Obligations on contractors to cooperate and mitigate Consolidated dispute resolution Insurance 12 / L_LIVE_APAC1:4938702v1
Risk Management: Case Study Major Projects - EPCM Managing Cost Overruns Disputes Management Changing Procurement Strategy Managing Contractors, Programme & Cost 13 / L_LIVE_APAC1:4938702v1
Questions? Bree Miechel Of Counsel, Singapore T +65 6831 5627 E bree.miechel@simmons-simmons.com Bree is a specialist major projects lawyer. She has particular expertise in project delivery method selection and risk allocation, and drafting and negotiating procurement arrangements as well as the full suite of project documentation including concession and offtake agreements, consortium agreements/jvas and supply agreements. Navneet Juty Partner, London T +44 20 7825 3984 E navneet.juty@simmons-simmons.com Nav is a partner in our Engineering and Construction team. Please join us for our next webinar in our series on Dispute Avoidance: Navigating Complex Infrastructure Projects. To register please contact Alexandria Gould. She provides full service expertise from procurement through to delivery and dispute resolution. In particular, she has extensive experience of providing advice on risk management during project delivery, including identification and management of potential liability issues. 14 / L_LIVE_APAC1:4938702v1
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