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EPC - LSTK Standard Contract Forms


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EPC / LSTK Standard Contract Forms
Project Companies and National Oil Companies (NOC) in the MENA region mostly adopt bespoke contract forms for procuring EPC contracts for the implementation of green field and brown field oil and gas projects. However, the risk allocation in bespoke contract forms is often viewed with suspicion by the contractors who will resort to setting higher contingency factor to overcome the unknown risks resulting in erosion of price competitiveness and sowing the seeds for an adversarial relationship.
One of the primary reasons for costly disputes is the uncertainty of the terms in a contract, and indeed the chances of ambiguity occurring are more in bespoke contract forms.
The continued low oil price has negatively impacted the implementation of oil and gas projects straining the relationship between the contracting parties. To reduce the risk of failed project ventures and costly disputes, it is advisable that the contracting parties consider the use of standard contract forms when appropriate.
• The standard forms of contract are in printed form and published by an authoritative professional body of the industry recognised by both parties.

• Drafted and agreed by recognised bodies representing all cross-sections of the industry, as a result, the risk allocation is more balanced.

• Industry practitioners are comfortable and familiar with the standard forms, usually capable of interpretation by case law.

• Using a standard form avoids the cost and time of individually negotiated contracts and is suitable for wide range of projects.

The attached slides provide inference regarding the requirements of EPC / LSTK contract forms and some of the standard contract forms published by professional bodies with a particular emphasis on Institution of Chemical Engineers (IChemE, UK) forms of contracts for the design, construction and commissioning of performance-based process plants.

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EPC - LSTK Standard Contract Forms

  1. 1. EPC / LSTK Contract  EPC (Engineering-Procurement-Construction);  A form of contracting arrangement in which the EPC Contractor will design the installation, procure the necessary materials and equipment, and carries out construction either through own workforce or by subcontracting part of the work to specialised trade contractors;  EPC / LSTK Contracting is the type of contracting arrangement in which the Contractor agrees to deliver the keys of a commissioned plant to the Project Company / Owner for a fixed price (cost-plus / re-measurable / re-imbursible options also exist) depending on the Scope of Work;  EPC / LSTK Contractor is obliged to: 1. Deliver a complete facility; 2. Deliver the plant or facility for a guaranteed price and date; 3. Guarantee the performance of the plant or facility to the specified level;  EPC Contracts are normally designed to satisfy the Lender’s requirement for bankability;  Common form of contracting arrangement in the hydrocarbon, process, and petrochemical industry;  There are many variants to this arrangement known as EPCC, EPIC, EPSC, EPSCC;
  2. 2. Key Provisions of EPC / LSTK Contract Form  EPC Contractor responsible for engineering, procurement, construction, commissioning and start-up;  Single point of responsibility;  A firm or fixed contract price;  A fixed completion date (Start-up / Turn-over Date);  Front End Engineering & Design (FEED) / “Rely Upon” information;  Performance specifications;  Patent and intellectual property rights;  Design standards and codes;  Hazard & Operability Study (HAZOP) requirements;  Health, safety and environment (HSE) / Waste disposal;  Performance guarantees: • Plant capacity, output, efficiency, safety, reliability etc. • Product quality • Feedstock and utility consumption • Effluent quantity and quality • Environmental compliance  Project planning and scheduling requirements;  Caps on liability;  Ownership of materials;  Security: • Advance payment bond • Performance bond • Retention • Parent company guarantee
  3. 3. Key Provisions of EPC / LSTK Contract Form  Contract price and payment;  Variations: • Company variations • Contractor variations  Liquidated Damages: • Delay Liquidated Damages (DLD’s) • Performance Liquidated Damages (PLD’s)  Defects liability (normally 12 to 24 months);  Latent defects;  Decennial liability;  Force majeure;  Suspension;  Termination;  Inspection and pre-installation tests;  Pre-commissioning / Commissioning;  Performance tests;  Training, As-built, Operating Manual;  Acceptance and Final certificate;  Dispute resolution: • Mediation • Expert determination • Arbitration
  4. 4. EPC / Turnkey Standard Form Contracts  [IChemE] International Form of Contracts Forms of Contracts for the design, construction and commissioning of performance based process plants published by Institution of Chemical Engineers (IChemE), United Kingdom.  [ENAA] Model Form International Contracts Form of Turnkey-Lump sum Contracts published by Engineering Advancement Association of Japan for: • Power Plant Construction • Process Plant Construction [Recommended by World Bank as its preferred design and build contract form.]  [FIDIC] Conditions of Contract for EPC Turnkey Projects (“Silver Book”) Recommended for projects where one entity takes total responsibility for the design and execution of an engineering project. The entity carries out the Engineering, Procurement and Construction; providing a fully- equipped facility, ready for operation (at the “turn of the key”).  [ORGALIME] Turnkey Contract for Industrial Works Turnkey Contract for industrial works published by European Engineering Industries Association.  [LOGIC (Leading Oil and Gas Industry Competitiveness) / CRINE (Cost Reduction in New Era)] The Standard Contracts for UK Offshore Oil and Gas Suite of contracts covering a broad range of operations in the offshore oil and gas industry for topside fabrication and installation / hook-up, marine / subsea construction, offshore installation, offshore pipe laying, IRM using diving support vessels, mobile drilling, well engineering works etc.
  5. 5. IChemE International Contract Forms Lump Sum (Red Book) In return for an agreed firm price, the Contractor provides all that is necessary to ensure that the facility or the finished plant complies with the specifications, achieves the required level of performance and is completed on time. Contractor carries maximum risk. Once the contract becomes effective, the lump sum price is payable regardless of the actual costs incurred by the Contractor. The specification, performance requirements, guarantees, and all other technical and commercial contractual conditions must be agreed in detail before the contract is awarded. Cost Reimbursable (Green Book) In return of goods and services the Purchaser / Employer / Company requires, the Contractor is reimbursed for all costs he incurs including, subject to the contract and provided he exercises normal professional skill, corrective costs arising from the inevitable design and construction errors. The Purchaser / Employer gains the benefits of any engineering, material cost saving, but bears the risk of cost overrun. Target Cost (Burgundy Book) Particular type of cost reimbursable contract in which the Contractor is reimbursed his costs subject to the application of a formula which allows the Contractor to share the savings made (“gain share”) or to contribute towards additional costs incurred (“pain share”). Places more risk on the Contractor than cost reimbursable contract.