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EPC Contracts    Wali Memon
General Overview      Introduction to CC Construction Group      Purpose of presentation      Outline of presentation     ...
Context - Economic      Effect of cycles            Participants            Procurement methods and structures            ...
Context – Business Culture       Most countries embrace market economics (in theory)       In practice there are exception...
Context – Legal/Regulatory       Legal system is part of business culture       The rule of law/contract is important, esp...
Roles      Prime contractor (not always EPC)      Vendor      Technology licensor      Investor      Funder (deliberate or...
Philosophy      As a contractor            Open bidding or sole source?            Immediate profit or market penetration/...
Philosophy (cont’d)       As an owner             Alliance or risk transfer?             Linked to funding method         ...
Structure – the Project       Privately procured             On balance sheet             Off balance sheet       Publicly...
Typical PPP Structure                                                PUBLIC ENTITYSPONSOR EQUITY                          ...
Structure – the Main Construction Contract(s)       EPC/design and build       Owner designed       EPCM/CM       Other va...
EPC Structure          “Traditional”                    OWNER                                  ARCHITECT/ENGINEER         ...
EPC Structure (cont’d)                       Where does EPC fit in?      Owner                                            ...
EPC Key Features     Single point responsibility     Subject to caps and carve-outs     High degree of risk for contractor...
EPC Key Features (cont’d)     Sensitive to market conditions – recent history     Wide choice of standard contracts (eg FI...
Owner Design          “Traditional”                    OWNER                                  ARCHITECT/ENGINEER          ...
Owner Design Key Features       More control for owner       Design and other risks also retained by owner       History o...
EPCM/CM                             OWNER                                             CONSTRUCTION MANAGER           KEY  ...
EPCM/CM Key Features     EPCM contractor is essentially a consultant     Owner bears substantial risk         Interface   ...
Variants        Timing – two-stage contracting              Market driven and mixed feedback              Conversion mecha...
Forms of Contract             a profusion of colour and variety!Wali Memon                                                ...
Forms of Contract       Standard or specially drafted?       Relevance of wider structure       Origin of standard forms  ...
Forms of Contract (cont’d)              To reflect deal specifics or sector practice (examples)              To incorporat...
Key Risks and Contract Terms        Law and language              English language and style commonly used              Pr...
Key Risks and Contract Terms (cont’d)        Quality and scope              “Wrapping” eg of technology or existing works ...
Key Risks and Contract Terms (cont’d)        Intellectual property              Ownership by contractor              Assig...
Key Risks and Contract Terms (cont’d)        Performance Security              Joint liability              Guarantees    ...
Key Risks and Contract Terms (cont’d)        Subcontracting              Approval              Step-in rights        Site ...
Key Risks and Contract Terms (cont’d)     Labour        Local laws        Local preference     Time        Status of progr...
Key Risks and Contract Terms (cont’d)        Completion, commissioning and testing              Sector differences        ...
Key Risks and Contract Terms (cont’d)        Variations              Instructed by the owner              Resulting from c...
Key Risks and Contract Terms (cont’d)              Advance payments              Cashflow neutrality              Payment ...
Key Risks and Contract Terms (cont’d)        Termination              For owner convenience                   Payment of p...
Key Risks and Contract Terms (cont’d)        Risk              Indemnities              Treatment of hazardous sites      ...
Key Risks and Contract Terms (cont’d)        Insurance              Main categories                   CAR/EAR             ...
Key Risks and Contract Terms (cont’d)        Force Majeure              Open or closed clause?              Territorial li...
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EPC Contracts

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Transcript of "EPC Contracts"

  1. 1. EPC Contracts Wali Memon
  2. 2. General Overview Introduction to CC Construction Group Purpose of presentation Outline of presentation Context Roles Philosophy Structure Form Key risks and contract terms1 Wali Memon
  3. 3. Context - Economic Effect of cycles Participants Procurement methods and structures Price Risk allocation Funding sources and methods2 Wali Memon
  4. 4. Context – 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)3 Wali Memon
  5. 5. Context – 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 tactics4 Wali Memon
  6. 6. Roles Prime contractor (not always EPC) Vendor Technology licensor Investor Funder (deliberate or by default)5 Wali Memon
  7. 7. Philosophy As a contractor Open bidding or sole source? Immediate profit or market penetration/profile? Sole or in consortium? Legal and practical consequences of joint liability? Equity or contracting role only?6 Wali Memon
  8. 8. Philosophy (cont’d) As an owner Alliance or risk transfer? Linked to funding method Some sectoral patterns Also varies between public and private sector Philosophy is influential only if shared within supply chain7 Wali Memon
  9. 9. Structure – the Project Privately procured On balance sheet Off balance sheet Publicly procured May still be accounting considerations, eg in PPP Combinations PPP projects Concessions Others – eg PPAs8 Wali Memon
  10. 10. Typical PPP Structure PUBLIC ENTITYSPONSOR EQUITY CONCESSION INSURERS CONTRACTTHIRD PARTY EQUITY SPV SURPLUS REAL ESTATE INVESTORS DISPOSAL INVESTORSMEZZANINE FUNDERS OPERATION & DEVELOPER CONSTRUCTION MAINTENANC E SENIOR BONDS & FUNDERS SUBCONTRACTOR 1 GUARANTEE EQUIPMENT SUPPLY(BANK/BOND) SUBCONTRACTOR 3 S DESIGNERS DUE DILIGENCE SURETIES &DUE DILIGENCE GUARANTORS ADVISER 3 ADVISER 1 SUBCONTRACTOR 2 DUE DILIGENCE ADVISER 2 9 Wali Memon
  11. 11. Structure – the Main Construction Contract(s) EPC/design and build Owner designed EPCM/CM Other variants10 Wali Memon
  12. 12. EPC Structure “Traditional” OWNER ARCHITECT/ENGINEER CONTRACTOR KEY = Building Contract SUB-CONTRACTORS = Sub-Contracts = Appointments Wali Memon 11
  13. 13. EPC Structure (cont’d) Where does EPC fit in? Owner RISK SPECTRUM Contractor assumes retains risk riskConstruction Design &Management Traditional LSTK/ Build EPCExcept as otherwise stated in the Contract:a) the Contractor shall be deemed to have obtained all necessary information as to risks, contingencies and other circumstances which may influence or affect the Works;b) by signing the Contract, the Contractor accepts total responsibility for having foreseen all difficulties and costs of successfully completing the Works; andc) the Contract Price shall not be adjusted to take account of any unforeseen difficulties or costs. LSTK – Lump Sum Turnkey Wali Memon EPC – Engineering Procurement and Construction 12
  14. 14. EPC Key Features Single point responsibility Subject to caps and carve-outs High degree of risk for contractor Also high (but not absolute) degree of contractor control Priced accordingly The preferred structure for project finance/PPP transactions Linkage to shareholder support13 Wali Memon
  15. 15. EPC Key Features (cont’d) Sensitive to market conditions – recent history Wide choice of standard contracts (eg FIDIC Silver and Yellow) Commonly used in infrastructure, thermal power and downstream petchem14 Wali Memon
  16. 16. Owner Design “Traditional” OWNER ARCHITECT/ENGINEER CONTRACTOR KEY = Building Contract SUB-CONTRACTORS = Sub-Contracts = Appointments Wali Memon 15
  17. 17. Owner Design Key Features More control for owner Design and other risks also retained by owner History of disputes Use has declined in recent decades but still used in, eg, public civil works and technology projects Incompatible with project finance approach16 Wali Memon
  18. 18. EPCM/CM OWNER CONSTRUCTION MANAGER KEY PROFESSIONAL TEAM = Trade Contract •ARCHITECT = CMA •STRUCTURAL ENGINEER = Appointments •M&E ENGINEER •QUANTITY SURVEYOR •CDM CO-ORDINATORTC TC TC TC TC TC TC TC TC TC = TRADE CONTRACTOR Wali Memon 17
  19. 19. EPCM/CM Key Features EPCM contractor is essentially a consultant Owner bears substantial risk Interface Recourse/leverage Can produce the lowest cost and fastest completion But is heavily dependent on specialist skills, experience and resources Can be disastrous if those are not present – examples Widely used in upstream oil and gas, renewables and some real estate markets18 Wali Memon
  20. 20. Variants Timing – two-stage contracting Market driven and mixed feedback Conversion mechanism Scope – is FEED included? Can be attractive for contractors Pricing – target cost/GMP Usually a consequence rather than a choice Examples – eg 2012 Link to philosophy19 Wali Memon
  21. 21. Forms of Contract a profusion of colour and variety!Wali Memon 20
  22. 22. Forms of Contract Standard or specially drafted? Relevance of wider structure Origin of standard forms Example of FIDIC Other standard forms, eg NEC, AIA, ENAA, EIC Why amend a “proven” form? To correct perceived anomalies or bias (examples)21 Wali Memon
  23. 23. Forms of Contract (cont’d) To reflect deal specifics or sector practice (examples) To incorporate material from other contracts (eg in PPP) To reflect requirements of funding (which may be owner or contractor sourced) For legal reasons (examples) Who drafts – owner or contractor?22 Wali Memon
  24. 24. Key Risks and Contract Terms Law and language English language and style commonly used Precedence and integration of documents Distinguish language of contract and of communications Common law preferred but less strongly these days Impact of local law in any event Wide choice of methods and places for dispute resolution23 Wali Memon
  25. 25. Key Risks and Contract Terms (cont’d) Quality and scope “Wrapping” eg of technology or existing works or design Fitness for purpose and reasonable skill and care Insurance and risk retention implications Compliance with laws and consents Special importance of environmental requirements Pass-down from other project documents24 Wali Memon
  26. 26. Key Risks and Contract Terms (cont’d) Intellectual property Ownership by contractor Assigned or licensed to owner? Scope of license Indemnities for infringement – capped or not?25 Wali Memon
  27. 27. Key Risks and Contract Terms (cont’d) Performance Security Joint liability Guarantees Bonds Types and purposes Issues with on-demand bonds Credit issues in current market Retention funds26 Wali Memon
  28. 28. Key Risks and Contract Terms (cont’d) Subcontracting Approval Step-in rights Site conditions Can threaten viability of project/parties Mitigants An open-minded approach Government support Surveys and staging Flexibility in design27 Wali Memon
  29. 29. Key Risks and Contract Terms (cont’d) Labour Local laws Local preference Time Status of programme Remedies for delay Liquidated damages (“LDs”) for delay Enforceability issues with delay LDs Acceleration Milestones Look-forward default Calculation and capping of LDS28 Wali Memon
  30. 30. Key Risks and Contract Terms (cont’d) Completion, commissioning and testing Sector differences Performance LDs and make-good Defects liability Typical periods “Evergreen” clauses Latent and patent defects Remedies under the general law29 Wali Memon
  31. 31. Key Risks and Contract Terms (cont’d) Variations Instructed by the owner Resulting from changes in law or standards Examples of risk allocation Price and payment Lump sum or other? Currency issues Input cost fluctuation Milestones or measurement? Offsite materials30 Wali Memon
  32. 32. Key Risks and Contract Terms (cont’d) Advance payments Cashflow neutrality Payment security for contractor Set-off and correction ECA requirements Remedies for non-payment Role of lender’s engineer31 Wali Memon
  33. 33. Key Risks and Contract Terms (cont’d) Termination For owner convenience Payment of profit For force majeure For owner default Typical grounds Remedies For contractor default Typical grounds Remedies (to include rejection?)32 Wali Memon
  34. 34. Key Risks and Contract Terms (cont’d) Risk Indemnities Treatment of hazardous sites Care of the works Excepted risks Link to insurance Liability Liability cap Exclusion of “consequential loss” Exceptions33 Wali Memon
  35. 35. Key Risks and Contract Terms (cont’d) Insurance Main categories CAR/EAR TPL/PL PII Plant and vehicles DSA/ALOP Latent defects Operational insurance Who arranges cover? Other contract terms34 Wali Memon
  36. 36. Key Risks and Contract Terms (cont’d) Force Majeure Open or closed clause? Territorial limits? Exclusions Consequences35 Wali Memon
  37. 37. Questions

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