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By George E. Baram
P.Eng, M.Eng, PMP, CCE
Fellow AACE International
The high risk exposure during the post contract award phase (execution phase) of EPC
(Engineer, Procure and Construct) Turnkeys or DB (Design Build) projects requires
proper early considerations by project managers to comply with contractual obligations,
expressed and implied, where the project manager assume the leadership and
responsibility in fulfilling them.
Compliance with such contractual issues is the foundation for project success. It sets the
project properly on the right path, excel the relationship with the client, protect the
interest of the project and contribute effectively in avoiding and/or resolving disputes.
Many articles related to Contract and Risk Management are focused on exploring risk
elements at the pre-contract award phase of EPC projects dealing mainly with financial,
insurance, technical and political risks. This article will highlight various contractual post-
award risks and discusses the needs for early and effective response and obligations to
prepare for and be handled during the execution phase.
The focus in this article is on selected number of critical contractual clauses, issues and
challenges as required and experienced by most EPC agreements and often
encountered by project managers throughout the progress of the project.
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Article EPC PM Roles and Resp By George E. Baram
EPC contracting as part of a full fledge concession agreement, which may
involve BOT (Build Operate Transfer), BOOT (Build Own Operate Transfer) and
other forms.
Finally, EPC Contracts, for large projects may involve the contractors with some of his
own equity in the project and get into some financial arrangements with lenders. In such
cases, the financial institute or lenders would like to assess the risk factors involved in
the project both technical and commercial. The most common concerns for these
financial institutes, in general are to avoid any new technology (or keep limited
technology), ensure fixed time and fixed cost of the project, ensure performance
guarantees, ensure the existence of LDs (for delays and performance) and limited
liability in the contract.
A typical EPC Structure along with the relevant agreements among the different
stakeholders is illustrated in figure 1 below:
Client
Financial Institutes
Sponsors (Lenders)
Agreement
Concession, JV, BOT, BOOT
Financing and
Equity Support
Project Company Security Agreements
Agreement(s)
EPC O&M
Suppliers Other
Contractor Contractor
Design Agreement
Supplies Agreements
Construction
O&M Operation and Maintenance
Agreement
PPA Power Purchase Agreement
JV Joint Venture Agreement
Typical General Contractual Structure involving EPC BOT Build Operate Transfer
BOOT Build Own Operate Transfer
Agreement
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Article EPC PM Roles and Resp By George E. Baram
The EPC Dilemma
What differentiates the above branches within the same EPC family is the fine print in
the contract as related to different clauses and more specifically a number of risk
shifting clauses possibly embedded in the contract related to: a) design requirements b)
design approvals and clients involvements (i.e. possible interference) c) design and
performance guarantees d) methods of payment and e) clarity in assigning client v.
contractors responsibilities.
The most common understanding of an EPC contracts especially from the contractors
point of view is that it is a fixed money contract or it is our money and we have the
full freedom to run the project the way we find it fit and profitable to us as long as we
comply with the clients requirements.
While there is nothing wrong with the above statement, one should go one further step
and evaluate the full freedom the contractor thinks he has based on the clients
requirements and contractual agreement.
As being said, the devil is in the detail one should not be mislead by the title of a
contract, or agreement headlines, instead it is the contracts fine print clauses
where the real definition and its consequences lie.
The following excerpt from a book entitled Construction Contracting fifth edition,
Richard H. Clough [4] describes the importance of reading the full contract, and
assessing the risk ahead in getting into an EPC contract.
All construction contract documents are construed together for purposes of contract
interpretation, giving meaning and effect to each part because it is presumed that
everything in the contract was inserted deliberately and for a purpose. In general the
intention of the contracting parties is determined from the final contract executed by
them, rather than from preliminary negotiations and agreements. Contracts are
interpreted strictly and to the letter where possible and feasible under the law. It is
presumed that those who enter into contracts know what they want, say what they mean,
and understand what they have said. It is an accepted rule of law that a person has a
duty to read and understand a contract before executing it, and failure to do so is no
excuse for not rendering proper performance.
The following table #1 below illustrates a number of well agreed upon advantages and
disadvantages as fairly well publicized, for the last decade, by all kind of practitioners
(including contractors, lawyers, owners, etc.)
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Article EPC PM Roles and Resp By George E. Baram
Table 1 Risk Shifting Responsibility for Owner v. Contractor in EPC Contracts
Advantage Disadvantage
Risk Shifting Element in EPC Contract (Rewards) (Risk) Ref
The above table suggests clear apportionment of responsibilities between the two
parties to the EPC contract, However, practically it is difficult to draw the line on these
items even in most well matured contracts such as FIDIC [6] (Orange and Silver books)
and other government contracts including some International.
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Design Changes as opposed to Scope changes: A key issue to be watched and
evaluated carefully is distinguishing between Scope Change as a request (by
either party) to change, add or delete certain elements of the project, without any
effects on the design as a whole versus a Design Change as introduced by the
client/consultant with direct considerable effect on the way the design is to be
carried out, hence indirectly triggering changes to the requirements. Such
detection, especially if made early in the design stage, will make a huge difference
in the bottom line to the contactor affecting the time and cost of the project.
Schedule interference and input including approvals by the client and his
Consultant: Would the clients actively involves in the schedule and provide
different approach, sequences and priorities? What would be the ramifications of
such involvements, especially if his approval is required?
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Article EPC PM Roles and Resp By George E. Baram
The above is a summarized list of some generally encountered disputable items that
ought to be closely watched and acted upon. The real two questions to be answered
are:
1) By having the client actively involved in approving the design and the schedule
with extensive comments and suggestions, i.e. interfering with the EPC
contractor, isnt he practically taking responsibility of such design and any
performance problem or schedule delay would have to be considered under his
responsibility, at lease partially?
The answer to this question lies in most EPC contacts where it is spelled out that
any information or comments given by the owner/consultant is for guidance only
and do not relieve the contractor from his responsibilities.
2) How much of the above issues are known and/or anticipated by the EPC
Contractor at the early development & bidding stages and how much risk would
he be willing to take?
The following Figure #2 illustrates the EPC process, in general and it shows where
usually the EPC contractors should focus their attention during the different life cycle of
the project.
Figure 2 The EPC Process and potential interferences between EPC Contractor and
Client/Consultants.
Clients Requirements
Incorporating the Design vs. Scope Changes
Design into BID EPC Contractor Prepare Design Approvals
Documents cost estimate based on Schedule Approvals
the Incomplete design
Suppliers./Fabricators approvals
Owners Feedstock and Storage
Owners supplied equipment
Spare Parts Issues
The design is Partially prepared by
the consultant and transferred to Interference during
the EPC Contactor commissioning and testing phase
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Article EPC PM Roles and Resp By George E. Baram
Contractual Obligations Execution of the EPC Contracts
The bottom line is that the Project Manager (PM) has inherited the contract as is and
he/she will live with it for the rest of the project? This is more so when the PM is an
outsider, i.e. he/she got into the project after the contract was awarded and was not part
of the proposal development team. The transition process and the familiarity with the
contract and the new corporate system and the project team may become very critical at
the early stages.
Usually contracts are explicitly define: 1) the scope of the work, 2) the quality required 3)
the time frame to complete the work and 4) many other contractual, technical and
administrative requirements.
Additionally, It is very important to make sure that the contract explicitly defines the rights
and obligations of all parties to the contract [4], [5] included in the a) General conditions,
b) Special Conditions c) Exculpatory Clauses and d) other contractual documents.
After establishing Who, What, When at a high level the next step for the Project
Manager to do is to get into the detail and dig-out all risk items from the contracts
documents by:
Project Mangers need to familiarize themselves and develop action lists for these items
to keep their projects under control. The order of the list does not reflect any priority.
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Article EPC PM Roles and Resp By George E. Baram
Key Clause Risks Issues Risk
Shifting
to
Compliance with EPC Contractor to provide Bid and Performance EPC
Insurance and bonds (Bank guarantees) in the range of 5% Contr.
bonding requirements 15% in additions to insurance Usually difficult
to obtain on EPCs and requires financial
backups
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Article EPC PM Roles and Resp By George E. Baram
Conditions for payment release.
Dispute resolution What would the governing law be, the law of the EPC
clauses country or an international arbitration? Contr.
What is the suggested dispute resolution
process in the contract? Is the contractor
required to continue executing the work while
dispute is pending in process?
The above is summarized checklist to be backed up, for each item, with proper action
list to be maintained by the PM, detailing all needed tasks and resources to steer and/or
mitigate any item.
Actions to follow - The needs for effective and early start and
establishing the communication links
As shown above, large EPC undertakings are usually handled by multiple parties
experienced in their fields, more so when the undertaking is an international project,
where local firms and employment are contractually required.
Building an early line of communications is among the most important early tasks a
project manager need to do. Based on the contractual arrangement among the parties
(designer, supplier(s), fabricators, contractors and other consultants) a communication
network among these players and stakeholders should be well defined and detailed.
Matrix of responsibilities should be prepared reflecting the Scope Of Work (SOW) at a
given level of the Work Breakdown Structure (WBS).
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Such early communication network along with the responsibility matrix will form a
framework or a checkpoint(s) to be measured against periodically, especially if it is
combined with a timeline schedule (to establish deadlines and milestones) at a high
level.
Action List for weekly monitoring to be developed by the Project Manager from the above
in addition to other contractual requirements. Such action list can be used for both
external compliance (submittals, deliverables, and clients requirements) and internal to
follow-up and control at the project discipline level.
Typical EPC players and stakeholders on large projects, where good communication
network is required include:
o Owner/Developer
o Equity Owners
o Lenders
o Debt Guarantors
o Engineers/Designers
o Contractors General and/or Primes
o Subcontractors
o Suppliers and Fabricators of major equipment
o Advisors and consultants: financial, technical and legal
o Government Authorities
A short Action List suggested in the following sections can be the used as a framework
at the management/functional levels to control and steer the project in the desired
direction.
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11. Early coordination meetings (communication, understanding and co-operations) -
partnering
12. Health, Safety and security: Procedure to be followed, plan and program, any
concern about major safety issues especially on International projects
13. closures of negotiations with subs and suppliers
14. Licensing compliance
After establishing the required framework with action lists and checkpoints at the early
stages, PM will move into maintaining his plans and actions on a regular basis and get
his/her team leaders involved in contributing to the plan. This includes all internal and
external interfaces among all players.
The team leaders who usually contribute to steer the plans and take actions toward the
above-mentioned items, including close monitoring of the risk shifting clauses as
addressed above, are typically:
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RFI, RFQ and quotations, Deliveries, Construction Material: to comply with
contractual obligation and manufacturing. Verify with the QC and QA
Local issues: Customs, transportations
Handling the above number of tasks, on a daily basis, requires full dedication,
commitment and communication skills by all project team members under the Project
Manager leadership.
As one of the many definitions of a Project Manager, the following extracted from the
PMI (Roles and Responsibilities of the Project Manager) [1]:
To define what a project manager is one must first determine the functions that a project
manager is expected to perform during the course of a project. These functions are:
planning and scheduling, performance analysis, progress reporting, maintaining
client/consultant relations, project trend analysis, cost trend analysis, logistics
management, cost control, organization and manpower planning, maintaining the
technical/business interface, contract administration, controlling material and manpower,
estimating and procedure writing and administration. Some other functions of the project
manager include being a good communicator who works well with others, a qualified
negotiator, and a good sales person This list is by far not inclusive,
A shorter version to categorize the above is by defining the basic four functions [1], [2]
which a project manager should perform: Planning, Organizing, Leading and Controlling.
And in terms of roles to fulfill, Project managers should: be the Integrator, the
communicator, the team leader, the decision maker and the climate creator or builder.
The required management tools needed to perform the PM duty can be summarized by
the ability of the PM to effectively apply his/her delegation, communication and
leadership skills.
Conclusion:
The nature of EPC Turnkey and DB projects requires close oversight [3] by project and
top management during both pre and post contract award phases of projects. Although,
considerable attention and evaluation are given by top management during the pre-
award phase in terms of Go/No-Go decision, which mainly to protect the interest of the
organization as a whole, very little considerations are given to the post-award phase
leaving it to the discretion of the project manager who usually, has a lot on his/her plate
at the time.
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This article discusses briefly the definitions and nature of EPC/Turnkey projects, its risks
and rewards as encountered by the parties to the contract. More so, some conflicting
issues resulting from complex arrangement and where the contractor, as a risk taker
should draw the line and decide on the calculated risk to take.
Post award risk and commitments as enforced by the contractual arrangement in terms
of articles and clauses in the contract are highlighted for the most frequently
encountered and important clauses. Tackling each clause and issue individually and in
detail is a subject to full a fledge workshop.
Identifying risk elements do not make them less risky or less costly, however, it is up to
the upper management to decide how to mitigate such elements.
The project manager roles and obligations on a typical EPC, Turnkey or DB project
covers many technical and managerial areas of knowledge and expertise. Some
suggested tools to be implemented early in the project with items related to the above
risk taking clauses are addressed.
References:
1. Adams J. R., Campbell B. W., Roles and Responsibilities of The Project Manager
PMI publications 1990
2. Baar James E. Interactive Planning Project Planning: A Great Communicator
AACEI transaction 2002
3. Baram, George E. Project Management Oversight Effective Risk Management
Tool for EPC/Design-Build Projects. Transactions AACE International Orlando 1993
4. Clough Richard H. Construction Contracting, Book, Wiley 1996
5. Lane.R. J The Basic Ingredients for Project Success Construction Briefings,
Federal Publications, October 1996
6. FIDIC (International Federation of Consulting Engineers) Design-Build and Turnkey
Contract 1995 (Orange Book), and EPC/Turnkey Contract 1999 (Silver Book).
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Article EPC PM Roles and Resp By George E. Baram