1. From your experience, which aspects of EPC contracts are neglected too often in the Oil and Gas sector?
Given the level of sophistication in the EPC agreements used in the industry today, and considering that you usually have four sets of attorneys – contractor’s in-house and outside counsel along with owner’s in-house and outside counsel – it’s hard to say that there are any aspects of EPC contracts that are neglected. This is particularly true on the larger scale projects involving the major owners and contractors in the Oil and Gas sector.
There is usually a spirited debate between the owner and contractor on the applicability or adequacy of these provisions, but that is more a matter of drafting rather than areas that have been neglected. On smaller scale projects involving smaller scale owners and contractors you do at times see gaps in the agreements, and these usually involve issues such as dispute resolution provisions, change orders, the provisions around the suspension or termination of the agreement, and specific criteria around just what constitutes completion of the work. I have found that many of these agreements with smaller scale owners or contractors are drafted for “smooth sailing”. As long as the project runs perfectly the agreement would be just fine, but I’ve yet to see that perfectly run project during my career.
2. What contracting techniques help secure EPC project execution?
I have seen many different techniques incorporated into project agreements to help secure the execution of the project, and most of those fall into two clear categories – incentives and disincentives. Most people in the industry are familiar with the primary vehicles in these two categories. The disincentives are normally in the form of liquidated damages for failure to complete the project on time or for failure of the project to meet the agreed upon performance guarantees.
The concept behind the disincentives is that with a large enough liquidated damage potentially lurking at the end of the project, the contractor will be motivated to perform in a timely fashion and build a project that meets the performance guarantees or it is faced with a financial penalty for its failure to do so. The incentives are normally in the form of early completion bonuses for finishing the project ahead of schedule or for the project substantially exceeding the performance guarantees. Again, it is a financial incentive to the contractor that the owner believes is sufficiently large to motivate the contractor to work quickly and to build a project that exceeds the performance guarantees.
3. There are some disadvantages to using an EPC contract (increased price, limited ability to intervene, finding a good contractor can be hard…). But what advantages are there?
There are a number of advantages to an owner in using the EPC method to construct a project. One of the primary advantages from an owner’s perspective is something that one of my early mentors in the industry called the “one finger” advantage. What that means is that on an EPC construction project, the owner only has to point one finger at the responsible party, which in this case is the EPC contractor.
In the traditional design-bid-build approach or in some of the other hybrid approaches to construction, should there be an issue on the project the first step in the process for the owner generally isn’t figuring out how to fix the problem, but rather who is actually responsible for the problem. The contractor blames the engineer, the engineer blames the equipment supplier, and the equipment supplier blames the specifications supplied by the owner. Everybody is pointing at everybody else and the focus becomes identifying the guilty party rather than fixing the issue. With the EPC contracting structure, there is normally no question as to the responsible party, so the focus is on fixing the issue. The other big advantage that I have seen to the owner in using the EPC structure instead of a more traditional design-bid-build approach is that the EPC method can actually result in a lower total cost at the end of the project. Once you add up all the costs an owner incurs in a traditional design-bid-build project, the risks the owner takes by standing in the gaps between the designer and the contractor, and the reduced time it takes to get an EPC project completed, the owner should see a costs savings with regard to the whole of the project.
4. What was the biggest delay in a project that you can remember? What was the penalty?
The biggest delay on a project that I have been involved with was a delay of over a year in finally reaching completion of the project, and with that delay came a penalty that ended up hitting the maximum damages cap for delay in the form of liquidated damages well into the range of the millions of dollars. It was not a good situation for either party, but the contractor simply could not get the project over the line and it cost him dearly. I know of other projects with longer delays and likely larger penalties, but that one was the largest one in which I’d ever personally been involved.