Engineering, Procurement and Construction Contracts for Large Scale Projects

252 Pages·2014·1.56 MB·English

Published by:
Engineering, Procurement
and Construction Contracts
for Large Scale Projects
A Practical Guide to EPC Contracting and Claim Management

Engineering, Procurement and Construction Contracts
for Large Scale Projects
A Practical Guide to EPC Contracting and Claim Management
Essen/Germany, 2013
Dear Reader,
Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), on behalf of
Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung (BMZ),
supports a broad range of public and private stakeholders in developing their
capacities for enabling sustainable development. GIZ Mongolia is committed to
contribute to sustainable social and economic development by facilitating fact-
based decision-making as well as smart project planning and project management.
Mongolia experiences impressive growth rates that go hand in hand with enormous
challenges. In order to stimulate labour-intensive value-addition within the country
and to keep up with the demand for improved infrastructure, a significant number
of large-scale projects are under way. Observers expect roughly 200 projects of
different priority to be realized within the coming years. This includes housing
projects, power plants and transmission lines, bridges, roads and railroad lines, a new
capital airport, as well as industrial projects such as iron and copper ore processing
plants, the development of mines, oil refineries, and coal-to-liquid plants.
Through a number of government bonds, state authorities have mobilized billions
of US Dollars for upcoming investments. Yet, the capacities to plan and manage
large-scale projects remain insufficient in relevant institutions. Even in private
sector entities employees struggle to appropriately conduct cost-benefit analyses
or to draft legal provisions for contractors. Especially when foreign companies are
involved in project implementation, such deficiencies have proven to lead to conflict
and less than ideal results.
The Integrated Mineral Resource Initiative, implemented by GIZ Mongolia,
supports its partners in improving project planning and contract management.
“Engineering, Procurement, Construction” (EPC) contracting is an issue of key
importance to public and private stakeholders in Mongolia. In a series of workshops
over the course of 2012/2013 more than 150 decision-makers were trained by GIZ
in cost-benefit analyses, project-planning, EPC contract management, and legal
negotiations.
This guide provides in-depth information on how to negotiate and manage
contracts for large-scale projects. It was written by Mr. Márton Hagner, Head of
General Civil Law and Construction Law at Business Partner E.ON New Build
and Technology GmbH. E.ON is one of Europe’s largest electric utility providers.
Mr. Márton Hagner is one of four trainers that facilitated the EPC workshops in
Mongolia. He visited Mongolia several times and has been in contact with many
Mongolian colleagues working on large-scale projects. Other trainers were Mr.
Norbert Kiene, Mr. Luis Villalobos and Mr. Klaus Bernard, all of them from Linde AG
Germany.
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I would like to thank all four gentlemen for their professional support and the
excellent trainings they conducted in Ulaanbaatar. It is my firm believe that
Mongolian decision-makers in state authorities as well as private companies will
greatly benefit from the very practical information provided in this guide. My
colleagues and I will be happy to further work with our Mongolian partners on
better project planning and project management in this highly dynamic country.
Dr. Dr. h.c. Stefan Hanselmann,
Programme Director, Integrated Mineral Resource Initiative.
Ulaanbaatar, April 2014
Large Scale Infrastructure Projects and EPC Contracts | 5
Acknowledgements
This manual is the result of a series of workshops on EPC
contracting in Ulaanbaatar, Mongolia during 2012.
I would like to thank especially the GIZ and Dr. Stefan
Hanselmann. His idea to further the training sessions by
detailing their content in the framework of a manual, gives
not only detailed drafting examples, but also reflects the
experience made in the execution of EPC projects.
Further, I would like to thank Mr. Jochem Theis, from GIZ, for
his kind support of this book project throughout its execution.
Finally, I have to admit that this manual would not have been
come to existence if it was not for the patience and love of my
wife Gabriela. Thank you!
6 | Large Scale Infrastructure Projects and EPC Contracts
Table of Contents
Acknowledgements 4
Table of Contents 5
List of Abbreviations 16
List of Illustrations 17
A. About this Guideline 19
1 The Addressees 20
2 The Concept 21
3 The Terminology 22
B. Large Scale Infrastructure Projects and EPC Contracts 23
1 The Setting of Large Scale Infrastructure Projects 24
2 Project Life Cycle: From Project Origination to Project Hand-over 26
2.1 Phase I: Project Origination 29
2.2 Phase II: Project Development Phase 30
2.2.1 Project Drivers 30
2.2.2 Site Studies 31
2.2.3 Definition of Technical Plant Features 31
2.2.4 Project Strategy 33
a) Project Driver Analysis 34
b) Scope of Supplies Analysis 34
c) Supplier Market Analysis 34
d) Resource Analysis 36
e) CAPEX Analysis 37
(i) Costs of Supplies: 38
(ii) Costs for Owner’s Engineering 38
(iii) Land Purchase/Lease/Easement 39
(iv) Preparatory Works 39
(v) Studies 39
(vi) Costs for Permits, Authorizations and Fees 39
(vii) Risks 40
(viii) Contingencies 40
f) Recommendations for the Project Strategy 40
2.2.5 Definition of Procurement Strategies 41
2.3 Phase III: Project Tendering Phase 43
2.3.1 Preparations for Tendering 43
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a) The Role of the Procurement Manager 43
b) Kick-off Workshop 43
c) Overview on Recommended Tender Documents 44
(i) Cover Letter and Data Book 46
a. Cover Letter: 46
b. Technical Data Book: 46
(ii) EPC Terms and Conditions DRAFT 46
(iii) Attachments to the EPC Terms and Conditions 46
a. Contract Price 48
b. Employer’s Requirements 48
c. HSE Requirements 48
d. Schedules 49
e. Project Schedule 49
f. Payment Schedule 49
g. Document (Review) Schedule 50
h. Reporting Requirements 50
i. Quality Requirements 50
j. Commissioning Requirements 51
k. Project Documentation Requirements 52
l. Training Requirements 52
m. Maintenance Requirements 52
n. Construction Site Infrastructure Requirements 53
o. Permits and Approvals 53
p. List of Sub-Contractors (also called “sub-providers”) 53
q. List of Spare Parts 53
r. Insurance Requirements 54
s. Change Order Procedure and Other Templates 54
t. Performance Guarantees 56
u. Bill of Articles and Conditions 56
v. Forms and Templates for Securities 56
d) Review of Compiled Tender Documents 57
e) Supplier Pre-qualification and Qualification 57
(i) Essentials for the Pre-qualification of Potential Suppliers 57
(ii) Essentials for the Qualification of Potential Suppliers 57
2.3.2 Invitation to Bid and Bidding Period 58
2.3.3 Bid Evaluation Period 59
2.3.4 Preparation for Negotiations and Negotiation Phase 60
2.3.5 Decision to Award 62
2.4 Phase IV: Project Execution Phase 62
2.4.1 The Claim Manager 63
2.4.2 The Contract Manager 63
2.4.3 Handling of Change Orders 63
2.4.4 Contract Related Communication 64
2.4.5 Check of Incoming Invoices 64
2.4.6 Contractor Evaluation Process 64
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2.5 Phase V: Commercial Operation and Maintenance 65
2.5.1 Commercial Operation 65
a) Commercial Operation Prior to Expiry of the
EPC Defect Liability Period 66
b) Final Acceptance of Works 66
c) Commercial Operation After Expiry of the EPC Defect
Liability Period 66
2.5.2 Maintenance 66
a) Maintenance During EPC Defect Liability Period 67
b) Maintenance After EPC Defect Liability Period 68
2.5.3 Items to Remember 69
a) Document Hand-over to Operations 69
b) Lessons Learned Review 69
C. The Project Tender Process: Tender Preparation 71
1 Compliance with National Public Procurement Law 72
2 Commercial Tender Strategy 73
2.1 Principle Contract Types and Risk Allocation 73
2.2 EPC(M) Contracting 74
2.2.1 EPC Contract Model 74
2.2.2 EPCM Contract Model 75
2.2.3 Standard Contract Forms for EPC 76
a) The FIDIC EPC Contract Forms 76
(i) Silver Book 77
(ii) Yellow Book 77
(iii) The FIDIC Red Book 77
(iv) The FIDIC Green Book 78
(v) The FIDIC White Book 78
(vi) Other FIDIC contracts 78
b) Other Contract Forms Suitable for Industrial Projects 78
(i) ENAA Model Contract 78
(ii) NEC Model Contracts 78
(iii) Orgalime Contract Form 79
2.3 Multi Lot Contracting 79
3 Drafting an EPC Contract for Industrial Projects 80
3.1 The Parties and the Owner’s Engineer 80
3.1.1 The Employer / Owner 80
3.1.2 The Owner’s Engineer 81
a) EPC With Owner’s Engineer 81
b) EPC Without Owner’s Engineer 81
3.1.3 The Contractor 82
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a) Single Entity Contractor 83
b) Consortium 83
3.2 General Clauses 83
3.2.1 Definitions 84
3.2.2 Interpretations 85
a) Subject Matter 85
b) Associated Risks and Interests 85
c) Drafting Example 85
d) Drafting Example Explanation 86
3.2.3 Contract Documents 86
a) Subject Matter 87
b) Associated Risks and Interests 87
c) Drafting Example 87
d) Drafting Example Explanation 88
3.2.4 Conditions Precedent 89
a) Subject Matter 89
b) Associated Risks and Interests 89
c) Drafting Example 89
d) Drafting Example Explanation 90
3.2.5 Notice To Proceed 90
a) Subject Matter 90
b) Associated Risks and Interests 91
c) Drafting Example 91
d) Drafting Example Explanation 92
3.2.6 Commencement and Completion 93
a) Subject Matter 93
b) Associated Risks and Interests 94
c) Drafting Example 94
d) Drafting Example Explanation 94
3.3 Scope of Works 94
a) Subject Matter 94
(i) Determination of Work Result 94
(ii) Reference Point for Determination of Changes 95
(iii) Reference Point for the Consideration 95
b) Associated Risks and Interests 95
c) Drafting Example 96
d) Drafting Example Explanation 97
3.4 Change of Scope (“Variation”) 98
a) Subject Matter 98
b) Associated Risks and Interests 99
c) Drafting Example 100
d) Drafting Example Explanation 102
3.5 Contractor’s Obligations 104
3.5.1 General Obligation to Comply 104
a) Subject Matter 105
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