All About Engineering, Procurement and Construction ('EPC') Contracts (2023)

index

1. 1. Analysis and comparison of the main characteristics of different EPC contracts.
   2. Characteristics of a good contract
   3. Basic principles for designing the scope of the contract
   4. project scope
   5. subcontracting
   6. Change in part of the contract
   7. Price list in the contract
   8. Schedule
   9. payment terms
   10. Limitation of Liability
   11. Severability Clause
   12. Applicable law
   13. dispute resolution
   14. Employer Obligations
   15. titles
   16. safe
   17. care facilities
   18. negligence
   19. force majeure
   20. war bluffs
   21. time span
   22. Suspension
   23. Termination at the discretion of the employer
   24. Termination due to default by the contractor
   25. assignment
   26. Interpretation and classification of the contract
   27. Corruption Prevention
   28. Confidential information
   29. Mitigation/management of risks associated with EPC contracts
   30. The contract also refers to many of the employer's internal procedures.

1. Analysis and comparison of the main characteristics of different EPC contracts.

Engineering, procurement and construction ('CEP’) is a particular form of contractual arrangement, widely used in many countries, where the EPC contractor is responsible for all activities from planning, procurement, construction, commissioning and delivery of the project to the end user or owner.

A seguir estão as principais disposições/características gerais/termos contratuais dos contratos de construção EPC na Índia que geralmente devem ser incluídos em qualquer contrato:

2. Characteristics of a good contract

Based on practical experience with different situations that arise during contract execution and on the theoretical basis of the requirements of a good contract, the following should be considered as essential characteristics of a good contract for the successful completion of a project:

1. 1. shelf life
   2. True reflection of the deal
   3. clear scope
   4. clear and consistent
      1. Must contain all essential clauses
      2. Must have detailed settings
      3. Must be consistent across structures
   5. fair and just
      1. The risk must be assigned to the party that can best control, bear and manage it.
   6. Complete and flexible
      1. Contract to cover most needs and be easily adaptable to requirements.
   7. Acknowledgment – ​​identification of the contract with the customer.
   8. The contract must be accepted by all, verified and free of ambiguous clauses.
   9. Resource to resolve disputes.
   10. Clear banking, payment and insurance regulations.
   11. Offer a fair offer.
   12. Be written in plain language.

3. Principles for designing the scope of the contract

1. 1. 1. The contract should be drawn up with the business to be acquired in mind.
      2. The scope of the contract must be unambiguous.
      3. The scope of the contract must be carefully drawn up, including all references and schedules of all major activities to be performed by the parties.
      4. If two or more contractors are involved in the project, the division of scope must be clearly defined in the scope matrix with specific activities in terms of quantities with no overlaps or gaps. You must always indicate the points of departure/area of ​​validity.
      5. The scope of the contract must not be overly complex or technical.

4. Project scope

The scope of the project must be specific and clear in the contract, including but not limited to the following:

1. 1. 1. 1. Design and engineering scope.
         2. Scope of delivery of all equipment, machines, materials, tools, devices, construction parts, spare parts, spare parts for commissioning, etc. that must be provided for project completion.
         3. Scope of all services and ancillary costs, transport, storage, port handling, customs clearance, processing, insurance, testing, construction, pre-commissioning, commissioning, liability for defects, training, monitoring, dismantling, demolition of systems, devices and buildings , etc. 🇧🇷
         4. Any scope activities unique to a specific project must be clearly articulated.

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5. Subcontracting

For large projects, EPC contract parties may subcontract part or all of the contract work to:

1. For a smooth workflow.
2. For the indirect transfer of the corresponding risk.

However, the employer must never allow the entire scope to be subcontracted.

6. Amendment of part of the contract

Change orders on large projects are required for the following reasons:

1. 1. To reduce ambiguity in project scope that may have arisen in the original contract.
   2. In case of additional claims by the employer arising from the project for various reasons.
   3. In case of technology change related to procedures and equipment.
   4. For any subsequent requirements/improvements related to the existing project.
   5. Dealing with situations that were not foreseeable at the time the employer awarded the contract to the contractor.
      1. In accordance with the general practice and provision of the contract, the Employer is entitled to propose and subsequently require changes, modifications, additions or deletions of the Premises to the Contractor from time to time during the performance of the Contract, provided that such changes fall within the general scope of the Facilities and are work-related and practicable. The foregoing implies that the Employer has the right to issue the Change Order, provided that the Change Order (EU) part of the project, (ii) complements the project and (iii) is mutually agreed by the parties.
      2. The parties, i.e. H. Employer and Contractor must agree to the amended price and time by referring to the Amendment Order. If the Contractor and the Employer cannot agree on price and timing in the Change Order, the Employer will generally instruct the Contractor to proceed with the terms set out in the Change Order, but may refer the matter to dispute resolution, i.e. . H. To arbitrate, escalation/reconciliation.
      3. It is best that the terms of amendment requests are mutually agreed upon by both contracting parties. Please note that verbal consent to revised terms in encumbrance orders cannot be legally enforced. Acceptance requires written form.
      4. In effect, a change order is a mini-contract with its own scope, specifications, completion schedule, and price. It can be concluded that such change orders are usually a source of conflict and disputes between employers and contractors.

7. Price list in the contract

A detailed price list must be submitted for all items to be supplied under the contract. The price list must be provided for all items to be supplied by each party, including but not limited to the following:

1. Native and imported inputs, technological structures, manufactured building structures, steel and all items that are part of the scope of work.
2. Civil works and supplies.
3. Storage, handling, installation, commissioning and performance assurance.
4. Services, transport, sea freight.
5. Customs clearance and inspection.
6. technology and design.
7. All elements/activities that are part of the EPC project.
8. All items that are unique and specific to a given project, be it supply, assembly and services.

All reasonable taxes and fees (including statutory taxes) that may be incurred must be specifically stated in the price list. The contract must also contain provisions on price adjustments due to fluctuations in price indices.

8. Schedule

In EPC treaties, in general, time is of the essence, so the provision of time is of paramount importance. Must include:

1. Time must be the essence of the contract.
2. Compensation must be paid if the deadlines specified in the contract are violated.
3. Provision for extension of term subject to the application of contractual penalties in case of delay attributable to one of the contracting parties.

While the contract provides the schedule for overall project completion, the contract should include the part-time schedule for various engineering, procurement, and commissioning activities for clarity and contractor commitment. There must be a clause for scientific monitoring of the progress of the project in accordance with these subplans.

The contract schedule is used objectively to achieve:

1. Assists in planning, scheduling, monitoring and controlling project activities.
2. It helps in the organization and fruitful management of resources.
3. Assists in anticipatory actions to plan and accelerate the delayed project.
4. It helps to track the progress of the project and project activities.

A project has different types of project schedules that are used by contractors and employers for different purposes.

1. 1. Cronograma L1:

      The L1 schedule summarizes the project schedule and is also called the project schedule (“PN"). It highlights key project timelines, milestones, and important deliverables.

   2. L2 time:

      The L2 schedule is also known as the summary master schedule (“SMS"). This is for overall project control and is treated as an important schedule to monitor the project. L2 is the master plan and very important to show all the important activities on a critical path. Any delay in the project is reflected in the schedule Revised L2, which determines the extent of project delay The L2 schedule is usually part of the contract or is agreed upon and signed by all parties involved in the project shortly after the contract is signed and before work begins.

   3. L3 Zeitplan:

      This schedule shows the built-in critical path method (cena do crime) Project overview. Many contractors follow this schedule to monitor and control the project.

      The contractor uses it for engineering, procurement, construction, and commissioning purposes. This schedule also defines the overall critical path for the project.

   4. Time L4:

      This schedule is also known as the project work schedule, where each schedule is expanded and followed. This also indicates the short-term "work ahead" situation on the project.

   5. Time L5:

      It is a short-term schedule for a specific area with detailed activities that need to be coordinated on a daily basis.

      Provision of use software for monitoring project deadlines:

      There are numerous software programs available on the market to monitor the project schedule. However, Primavera and MS Project are often used for project planning.

9. Payment Terms

The contract regulates payment terms in detail, including but not limited to the following:

1. Provisions for down payments, down payments, and milestone payments on the project.
2. Provisions for time and amount/percentage of payment to be made contingent on completion of certain activities/achievement of milestones.
3. Provisions on Payment Procedures and Protocols.
4. Applicable tax collection provisions.

Subcontractors often have back-to-back payment arrangements. The pay cycle for subcontractors is much longer than for contractors who make payments upon receipt from the employer. Typically, payments to subcontractors follow the pay-on-pay basis.

9.1 Withholding money:

Retain money is the amount of money withheld by the employer from checking accounts and will not be released until contractors have fulfilled certain obligations to the employer's satisfaction in accordance with the terms of the contract. Cash retention is a type of security requirement made by employers against any type of default by contractors.

The percentage of contractors' money retained by the employer and the terms of its release are also specified in the contract in very clear terms that can vary from contract to contract. However, some of these provisions have been explained in the paragraphs below to explain the payment terms of the contract.

9.2 Price Change

Provisions for paying price changes according to the formula are provided in the contract. It is worth noting that price changes apply from a specific date specified in the contract and are calculated according to the formula specified in the contract. All terms of price changes based on the RBI index are recorded in the contract.

Some contracts also provide for the payment of a bonus if the project is completed before the stipulated deadline, while others may provide for an advance payment. The procedure for mobilizing the advance is also mentioned in the contract.

EPC turnkey contracts are generally fixed price contracts. Changes to the scope of the contract, including price changes, require the written consent of all contracting parties.

Payments to the contractor are regulated according to approved billing plans for different categories, such as supplies, assemblies, services, etc. As a rule, in the case of turnkey EPC contracts, the customer makes advance payments to contractors, which are settled after successful commissioning.

A typical example of the payment amount as a percentage of the accepted contract value in turnkey EPC project for various activities is given below.It is worth noting that this is a typical example of a contract where various payment specifications have been specified, which may not apply to other contracts where the methodology and amount of payments may be quite different. However, this example shows and explains how different payments are considered as a single payment in a contract.

1. 1. Advances to a contractor:
      • 1. Advance = 5.0% of the contract value as an amount against approval of the design and construction drawings specified by the customer in the project contract.
      • 2. Prepayment = 5.0% of the contract value as an amount against specific orders as specified by the employer in the project contract.
   2. payments on account:
      • 5% of the billing amount for design and engineering approved by the employer.
      • 5% of the invoice value for deliveries on site.
      • 5% of the invoice amount when assembly and other project activities are completed and certified by the employer.
   3. Withholding Payments:
      • Typically, 12.5% ​​of the amount per billing plan line is retained, released in the form of milestone payments as per the contract. These milestone payments are only made when the employer is fully satisfied with the achievement and achievement of milestones in accordance with the detailed criteria set out in the contract.
   4. Milestone payments:
      Each turnkey EPC project has four milestones according to the contract:
      • Pre-Commissioning/PAC (Preliminary Acceptance Certificate)
      • Installation
      • performance garantida
      • Final Commitment

      Milestone payments are subject to the Employer's certification that the PAC/Commissioning/Performance Assurance/Final Inspection has been performed in accordance with the contract and to the Employer's satisfaction.

   5. PAC payment:
      • 5% of the contract value will be paid upon successful completion of pre-acceptance after assembly and testing of all project equipment. For this payment, all devices must have been delivered, assembled and an individual test and, if necessary, integration of the devices must have been successfully carried out. Payment is subject to the issuance of the PAC.
   6. Commission payment:
      • 5% of the order value is paid by the customer to the contractor upon successful completion of project commissioning in accordance with the technical conditions and workload specified in the contract. Payment is subject to the issuance of the commissioning certificate by the employer. Commissioning is also the phase where the project is contractually handed over to the client and ownership passes from the contractor to the client.
   7. Payment of performance guarantee:
      • 5% of the order amount will be paid by the customer to the contractor upon successful completion of the performance guarantee in accordance with the fulfillment of the conditions and technical parameters specified in the contract within six months from the order date. Prerequisite for payment is the issue of a PG certificate by the employer. This is also the phase in which the performance of the equipment and process engineering is demonstrated and verified by the contractor to the customer. In case of non-compliance with the PG parameters, the contractor has several commercial agreement options to be accepted by the employer, including non-payment of the PG target as a penalty.
   8. Final acceptance payment:
      • 5% of the order value will be paid by the customer to the contractor upon successful completion of the warranty period of one year from commissioning or 18 months from PAC, whichever comes first. This also includes the successful elimination of construction, material quality and assembly defects attributable to the contractor to the customer's satisfaction. This payment will be released only after all responsibilities, including technical, scope, legal compliance with labor laws of the contractor's subcontractors to the employer, as specified in the contract, are fulfilled. Payment is subject to the FAC issued by the employer.
   9. Payment to subcontractors:
      • With regard to payment to subcontractors by the Contractor, the concept of “payment on payment” will be followed.
   10. Type of payment:
       • Payment is made by the employer by transferring the amount via electronic transfer to the contractor's bank account. However, payments are made to foreign suppliers and contractorsonLetter of credit after the supplier has fulfilled the conditions of the L/C and provided the necessary documents/certificates according to the conditions of the L/C and the contract.
   11. For foreign payments against L/C:
       The following documents are required:
       • A clean bill of lading
       • Commercial invoice
       • Certificate of the country of origin, authenticated by the Chamber of Commerce of that country
       • detailed packing list
       • Certification that materials are suitable for air/sea/road shipment and are securely packaged
       • Inspection/Quality Certificate for delivery
       • Relevant drawings and catalog of the imported item
       • Warranty/Guarantee/Quality Test Certificate from Item Manufacturer/Supplier
       • Proof of delivery insurance
       • Proof of shipment issued by the employer
       • Certification by the supplier that the shipment is not on the “Negative List” prohibited from importing in accordance with the applicable Foreign Trade Policy of the Government of India
       • Certificate from the supplier of the wood used that meets international packaging standards
       • Evidence of submission of a non-negotiable document to the relevant employer executive.

10. Limitation of Liability

EPC contracts may also limit the contractor's liability by stipulating in the contract that the contractor will not be liable to the employer for any indirect or consequential damage or lossnamely.loss of use, loss of production or loss of profit or interest or other loss.

11. Severability Clause

The EPC contract also provides for a termination clause – meaning that if any term or condition of the contract is prohibited, invalid or unenforceable, that term/condition will not affect the validity or enforceability of any other term/condition of the contract.

12. Applicable Law

The EPC contract states that said contract is governed by specific law or general law of the country.

13. Dispute Resolution

The dispute resolution procedure is also expressly mentioned in the contract. A corresponding arbitration clause is provided in the contract for the resolution of disputes.

14. Employer Obligations

The contract also sets out the employer's responsibilities, which may include:

1. 1. Responsibility for transferring legal and physical ownership of the project site to the contractor on the contract effective date.
   2. Assist the contractor in obtaining the state/central government licenses and regulatory authorizations required for project work under the contract.
   3. Supply of raw materials and inputs for the pre-commissioning and commissioning of the project with properly trained personnel for the successful operation and maintenance of the plants.
   4. Continue to operate the assets after commissioning and facilitate performance assurance testing in accordance with detailed contract provisions.
   5. Timely payment in accordance with the payment terms specified in the contract.

15. Securities

In a typical EPC contract, the following types of guarantees may be provided:

1. 1. Until the end of the liability period for defects, which may be extended for objective reasons, a bank guarantee of good performance will be provided in the indicated amount.
   2. The bank guarantee for commissioning is provided for a certain amount, which is valid until the project commissioning date.
   3. Bank guarantee for final acceptance of the specified amount to be provided.

16. Insurance

In a typical EPC contract, the provision of comprehensive marine insurance with assembly is maintained at 115% of contract rates, with the employer as the primary beneficiary. The comprehensive policy covers almost all domestic cargo insurance, third party liability and motor vehicle third party liability insurance risks.

17. Service facilities

The EPC contract may contain the provision of "care facilities" so that the contractor is responsible for the care and custody of the facilities until the delivery of the project.

18. Negligence

A negligence clause is also included in an EPC contract. It is a very powerful tool in the hands of an employer to use in case of negligence by the contractor on the project.

If it is found that the contractor has neglected to carry out the installations, the employer may rescind or rescind the contract, with the contractor being fully liable for damages suffered by the employer.

19. Force Majeure

A delay or non-performance by either party due to force majeure shall not constitute default or breach of contract. The contract generally provides that the parties will propose an amicable solution if the performance of the contract is materially affected by force majeure for a period greater than 90 days during the term of the impeded, aggravated or delayed contract.

20. Risks of War

Notwithstanding any provision contained in the Contract, the Contractor shall have no liability for or in relation to:

1. 1. Destruction or damage to the property of the employer or third parties.
   2. injury or death.

21. Term Extension

An employer may consider extending the term for many legitimate reasons, including the following situations:

1. 1. Change in scope of facilities.
   2. occurrence of force majeure.
   3. Employer suspension order.
   4. Failure of the employer to fulfill the employer's obligations stipulated in the contract.
   5. If the contractor claims an extension of the term based on the justification for the extension, the employer accepts.
   6. Legislative change affecting project delays.
   7. Suspension and subsequent reinstatement of the contract by the employer.
   8. Any reason not foreseeable at the time of awarding the contract, but accepted by the employer as a legitimate reason for extending the contract.

22. Suspension

The employer can suspend the contract for a short period of time, but the contractor has the right to resume work within a certain period of time after such suspension. If the employer does not allow the resumption, the contractor can terminate the contract.

If the employer resumes the contract after suspension, the contractor is entitled to an extension of the suspended time and additional prices for the suspended time in accordance with mutually agreed terms.

23. Termination at Employer's Choice

The customer may terminate the contract by terminating it and must then pay the contractor the price due at the time of termination for the parts of the plant that the contractor has performed.

24. Termination due to Contractor's Default

The following are typical provisions of a contract terminating the contract in case of default by the contractor:

The Contractor may, without prejudice to any other rights or remedies it may have, terminate the Contract by giving notice:

1. If the contractor goes bankrupt/insolvent; or
2. If the contractor transfers the order to a third party.

The employer will notify the contractor of the late payment and request that the following situations be remedied. He may terminate the contract if the contractor continues to fail to:

1. If the contractor terminated or terminated the contract
2. If the contractor has not started work on the facility on certain days or has suspended work
3. If the contractor persistently fails to fulfill the contract
4. If the contractor does not have sufficient resources to perform the contract.

If the contract is terminated under the above conditions, the customer may perform the contract at the risk and expense of the contractor. The Contractor is entitled to pay the price of the part of the facilities that was being implemented at the time of termination.

25th order

The contracting party may not assign the order to third parties without the prior written consent of the customer.

26. Interpretation and Priority of the Contract

In case of contradiction between the provisions of the General Terms and Conditions (GTC) and the Special Terms and Conditions (SCB), the provisions of the AVB shall prevail. Furthermore, if any of these documents form part of the contract, the interpretation of the contract according to the order of precedence of the documents must be followed as follows:

1. 1. Conclusion of the contract and annexes
   2. Special contractual conditions with their annexes
   3. General terms and conditions with their appendices
   4. Technical specifications in the contract
   5. General technical specifications provided for in the contract
   6. Security Code for Contractors
   7. Any other contract document

27. Prevention of corruption

It is included in the contract that the contractor will not engage in corrupt practices, otherwise the employer may disqualify the contractor in question from bidding in accordance with the policy. He can prohibit commercial operations and demand adequate compensation according to the contract.

28. Confidential Information

The contract contains a clause that the employer and the contractor will keep the data shared by one party with the other confidential and not disclose it to third parties without written consent.

Contractors also require the same level of confidentiality compliance as subcontractors.

The employer only uses the data/information for the operation and maintenance (O&M) of the facilities. The contractor will also use the information/data for project planning and construction.

29. Mitigation/Management of Risks Associated with EPC Contracts

1. 1. Risks in a project and how to manage risks in large projects:Risks associated with a project can be scope, cost, schedule, and quantity. It is important that planning and sub-planning be prepared to mitigate risk in these areas. Excel spreadsheets/templates are available for risk management. The steps for this are:
      1. Identify the risks
      2. Assess the likelihood of risks and impacts
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      3. Communicate risks to affected people to mitigate risks
      4. Take precautions for the person in question
   2. Damage payment:
      1. Risk transfer provisions
      2. Provisions for compensation
      3. Who compensates whom and how much
      4. Confirm time for legal and commercial compensation
      5. additional insurance
   3. "Riskless contract" is a misnomer. However, it is important to manage risks in order to exclude, share, limit or emphasize the preventive measures to be taken. Care must be taken to ensure that risk is properly allocated to the appropriate party so that risks are managed smoothly, thereby minimizing loss or damage. This typically requires an in-depth initial risk analysis, development of a risk management plan, and careful negotiation of appropriate agreements by contractors. The following is a (non-exhaustive) list of steps to take to reduce or manage the risks:
      1. The contractors work in a consortium and also commission subcontractors. Therefore, contractors must be held responsible for the part of the work they carry out, but the consortium members must not be jointly and severally liable.
      2. EPC contracts should specify responsibility for sourcing critical materials and supplies, as material shortages or substandard materials would directly affect construction cost and time.
      3. The employer monitors compliance with the construction plan and activates early warning mechanisms. Overtime fines to be paid by EPC contractors to the employer. Cost overruns are borne by the employer only if the event causing the delay was caused by the employer and other specific events are beyond the control of the EPC contractors. Contractors should ensure that such provisions are included in contracts so that the employer can be held responsible for project delays attributable to them.
      4. In case of non-compliance with performance standards and technical specifications, the burden of damages shall be assigned to the contractor or contractors for operation and management.
      5. Force majeure includes events beyond the control of the parties involved, so their management requires considerable attention. Force majeure events can increase costs and delay project activities. In order to ensure that the EPC contract adequately covers measures to deal with this risk, it is necessary that the following measures are included in the contract:
         • To what extent are the parties released from fulfilling their obligations under the contract?
         • Which party is responsible for determining the damage?
         • Who is responsible for restoring the system or correcting system malfunctions resulting from the force majeure event?
         • Who bears the cost of such recovery and rectification?
      6. In international EPC contracts, there is generally a risk of new or amended laws and regulations and/or a risk of changes in the judicial or administrative interpretation of the law. These risks are normally considered to be outside the contractor's control and therefore are assigned to the employer through a contract change clause.
      7. It is advisable to include sensible clauses that distribute risks more fairly among stakeholders. The risks must be distributed to those who are in a position to act so that work is not stopped for too long.

30. The contract is also related to many of the employer's internal procedures

Some very detailed EPC contracts list the following procedures:

1. 1. security procedures
   2. drawing permissions
   3. Approval of the Quality Assurance Plan
   4. production inspection
   5. shipping release
   6. Payment approval procedures and procedures for moving forward with financial projects/agreements
   7. Withholding applicable taxes and fees due to misinterpretation of contractual tax provisions. Clarity should be created on how taxes and fees will be handled in the event of a change in tax laws.
   8. other factors.
      There are many work practices that are not part of contracts but are practiced in employers' organizations for their internal work that can be enforced on contractors. Typically, contractors should have the right to refuse such a procedure, which means additional work and costs for contractors. However, it should not be in the general interest of contractors to refuse to comply with any employer's requirements, which may be outside the scope of contractual obligations, leading to potential conflicts with the employer on these issues.

Example :Each organization practices its procedures regarding the inspection of newly purchased material upon receipt of suppliers at its factories. These methods are sometimes very complicated and time consuming. Although such procedures are not part of the contract and contractors are unaware of them, they must be accepted by contractors upon receipt of materials on the employer's premises.