Contracts are an important part of getting any large job done with several stake holders. They ensure that both parties have their work and assets legally protected throughout the length of the job.
EPC Contracts are the most common form of contract in Australia. They allow the owner to hand the risk associated with the project to the successful contractor and specialised personnel. This contractor will completely manage the design, procurement and construction of the project to completion. EPC Contracts are a form of ‘turnkey’ (all the owner must do upon completion is turn the key and the system is operational). There are no specific requirements for establishment but the International Federation of Consulting Engineers (FIDIC) has templates which can be used in Australia.
An EPC Contract allows an owner (Principal) to engage with a party that can be a single firm, joint venture or other type of organisation (Contractor). The Contractor will then engage subcontractors under them, and perform the design, construction and procurement services required for the Principals project.
The engineering design will typically be done on a lump sum basis. Construction is also usually paid as a lump sum based on milestones achieved/schedule of rates. The procurement is often lump sum per item though may vary with labour rates changing as task requirements alter.
For both the Principal and Contractors benefits, there must be a clear scope and concept before tender selection. The Principal must be able to evaluate the Contractors progress based on performance and prescriptive specifications. The Principal shall be comfortable with less involvement in the process than in a Construct Only Contract. The performance criteria and expectations of the Contractor are established clearly up front.
Some of the benefits and short-falls of EPC Contracts are outlined below;
Advantages:
- Single point of responsibility for project delivery
- Scope for both design and construction innovation is broadened
- Contract can be awarded on selected factors like price, qualifications, experience and team
- Contractor accepts more risk as they're responsible for the coordination of the design and construction relationship.
- Typically more efficient for time than Construct Only contract as it's one entity
- Contractor is able to make design efficiencies to lower construction costs
Disadvantages:
- Principal loses involvement in the detailed design and methodology process, adding risk
- Hard for Principal to gauge the best price for work done
- Scope changes are expensive once construction is underway
- Life-cycle costs and operational benefits are easily overlooked
- Principal loses the independent designer checking against the Contractor
- Difficult for small Contractors to price well, adding risk
Stages of the Contract
The various stages involved in an EPC contract are as follows:
Stage 1: Tendering and Job Award
Stage 2: Mobilisation and Staffing
Stage 3: Planning
Stage 3: Detailed Design
Stage 4: Procurement and Logistics
Stage 5: Construction
Stage 6: Testing and commissioning
Stage 7: Handover
Stage 8: Maintenance and Defect Liability period
EPC contracts should have provision for the following issues:
1) Commencement and Completion dates
2) Liquidated damages and trigger points
3) Caps on liabilities
4) Indemnities
5) Entitlements to extension of time
6) Insurance
7) Force majeure
8) Intellectual property
9) Interface issues between contractor and operator and in case of split EPC contracts
10) Grid connectivity
11) Warranty and independent certification of key components
12) Environmental considerations
Legal Aspect
‘Australian Contract Law’
Contract Law is the rules that hold people whom form a binding agreement responsible for their promises made in the contract. When there is a dispute with regards to a party’s rights or responsibilities the dispute can be resolved through this means. The decisions made in the event of a dispute are based upon, mainly Common Law, or law establishment by decisions made by judges in similar previous cases. There are, however, an increasing number of statutes, or Law created by the passage of a bill through parliament being created on the matter of contractual obligations for example Competition and Consumer Law Act discussed below.
For more information on Contract Law in Australia, visit: http://www.australiancontractlaw.com/
Competition and Consumer Law Act 2010
This Act aims to “enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection” (Competition and Consumer Law Act 2010). This has been achieved through the establishment of various groups to protect people entering into the energy market. These organisations include;
- The Australian Energy Regulator is the regulator of the all Australian Energy markets and networks.
- The Australian Energy Market Commission is a government organisation that has also established the Retail Energy Rules. These are rules that primarily relate to the sale and supply of energy to small customers. They detail consumer protection measures and model contracts that govern the relationships between consumers, retailers and distributors’ (AEMC, 2015).
See their websites for further details on the specific organisations.
Australian Standards
There are also Australian Standards which may be useful in the formulation of the Contract which are listed below. Australian Standards alone are not legally binding, though if technical aspects are referred to in legal documentation, they become legally binding.
- AS4000-1997: General Conditions of Contract
- AS4305-1996 Minor Works Contract Conditions
- AS4902-2000 (Reference use only): General Conditions of Contract for Design and Construct
- AS4608 Guide to the Prevention, Handling and Resolution of Disputes
- AS/NZS4360 Risk Management
International Federation of Consulting Engineers (FIDIC)
FIDIC is an international organisation with members worldwide, and supports the industry of Consulting Engineers. They provide valuable information on Contracts with expertise in establishing roles and responsibilities of two parties forming a bidding contractual agreement. They also show a clear understanding of the allocation and management of risk in the contract negotiation process.
See the FIDIC website http://fidic.org/ for more details on the organisation and guidance on Contract formulation.
Other Types of Contracts
Work Orders
Work Orders are a type of contract for small construction jobs where the contract mainly comprises of specific conditions of work.
AS4949-2001: Work Order
Supply of Equipment
This type of contract is that where the equipment, related or unrelated to work being conducted, is supplied to the Principal as per standards specified in the contract.
AS4910: General Conditions of Contract for the Supply of Equipment with installation or (AS4911 without installation)
Construct Only
This, as the name suggests is a contract where the Contractor is not responsible for managing the project or procuring products. The other aspects of construction are handled by either another Contractor or the Principal themselves.
EPCM
This is similar to EPC Contracts but the risk allocation and responsibilities is focused more on the Contractor with the additional Manage