Bill Barton is the director of Barton Legal
Fixed price engineering, procurement and construction (EPC) contracts offer? This issue has been the subject of much international debate and discussion for some time, most recently within the International Construction Projects group at the International Bar Association 2023 conference in Paris last month.
The group concluded that, for the customer to achieve single-point accountability, price and schedule certainty, lower costs, innovation, and conflict avoidance that are considered benefits of fixed-price EPC, several specific factors must be established. These include careful planning and preparation, the advice of experienced counsel, the input of relevant and expert consultants, and reasonable contractual amendments that are applicable and appropriate to the specific project.
“The reality is that too often the price is a down payment because the contract contains many clauses”
Without these conditions, a fixed price EPC cannot deliver the expected results, and there is often a clash between expectation and reality.
The issue of control
With fixed-price EPC, the client starts from a position of wanting the contractor to be responsible for everything from coordination to integration, and to ensure that the design and specifications match exactly, with the ‘administration at least.
Unfortunately, the reality is that the design step means that the customer can lose significant control (more than they realize) and the process is no longer transparent. Because of the way a standard EPC contract is drawn up, it is difficult and potentially expensive for the client to step in without giving the contractor more time and money.
Matters are complicated by the blurring of responsibility, as the contractor now has “control” along with the risk of subcontractors, consultants, operation and maintenance, government and regulatory authorities, and materials and labor. The reality is, however, that despite this control, it is highly unlikely that, if there is a problem, such liability will automatically be accepted without these relationships being tested and without the exercise of some formal dispute resolution process .
Speed and transparency
Clients boast that the fixed price will also result in faster project delivery. This is because as soon as the design is complete the contractor can be appointed and work can begin, thereby overlapping critical phases. The remaining design elements can be completed and agreed between the parties and advanced works.
Again, the reality is somewhat different because the willingness to “start” is often associated with a price and schedule that is agreed upon and/or fixed against an incomplete design. Accordingly, the price and schedule are at best inaccurate and at worst subject to immediate change.
The continuous development of any design and/or scope of work means that there is not the transparency that the client assumed existed. Instead, they face greater risk. If you don’t know what you are building and how, every part of the contract chain that is unknown and not agreed upon is under pressure. It is therefore not at all surprising that disputes follow.
Increased collaboration and innovation?
Of course, some clients might feel that the fixed price will encourage closer collaboration on the part of the contractor between the design team and specialist contractors, creating efficiencies and time and cost savings, and this is potentially a win-win. innovation
However, this way of thinking simply overlooks the more likely scenario that the contractor will seek the lowest cost of compliance, with a design and specification based on tried and tested approaches, materials and methods, and with anything containing uncertainty or risk uncontrolled removed. Ultimately, the contractor has no incentive to innovate and does not want to be “on the cutting edge,” which is almost certainly riskier.
Certainty about the cost
Then there is the question of price certainty. After all, the price is fixed! This should be enhanced by pre-completion of the design, the interface of the contractor and its construction team and consultants, and the transfer of risk away from the client. The contractor would have bid and been awarded the contract, so surely the price should have been reviewed, challenged and tested?
However, the reality is that too often the price is a down payment because the contract contains many clauses, such as change orders/variations, instructions, price escalation clauses and unforeseen ground conditions, which allow the contractor to claim more time and/or money. Therefore, the price will automatically allow for risks that have a varying degree of probability, which does not prevent new claims from being made.
Elimination of risk
With all this in mind, it might seem that fixed price EPC contracts are no longer viable. But fixed-price EPC contracts remain popular. In fact, they are arguably the most common approach for international projects of all sizes. However, the truth is that they are also the reason why the parties subsequently incur significant legal and other costs in their finalization and resolution.
The larger the project, the more complex its parts, the greater the degree of planning and preparation required. Disputes will always occur as long as people, time, weather, materials and external risks (geopolitical war, climate change) exist.
Despite these risks, there are projects that are completed on time and within budget, with a high level of satisfaction from all parties. They are unusual for the simple reason that many parties do not invest the necessary time and effort in the beginning to achieve this result.
These risks could simply be eliminated at the outset and the scope of disputes reduced, with appropriate preparation and input from the earliest stage.
