Estimated reading time: 5 minutes
When understanding contractor costing in the international power generation industry, it involves preparing an accurate cost estimate for any project. The preparation of this is a complex process as the cost estimate is based on several key factors. For example, it involves the input of architects and engineers to ensure that a project meets financial feasibility and scope requirements, and all the project risks and costs are laid out on a contract. This contract comes in the form of an EPC contract, as it is the most common form of contract for the power industry. Also known as “turnkey agreements”, EPC contractors have adjusted the costings of their offerings to have project budget to deal with these risks should they manifest. As a result, these complexities often result in disputes between parties.
In this article, the term “facility” is a general term for the product being procured by the Owner (i.e. the power plant, process plant, wind farm, factory and the “Owner” and “Contractor” are referred to as the parties to an EPC contract.
Preventing or addressing disputes before formal dispute resolution
One of the first causes of disputes begins with the contract. Contractual inaccuracies are common if they were not written clearly and well, that ensures no misinterpretation by either party. The contract is highly important as it records the rights, obligations, duties and risks either party agrees to.
In order to minimise disputes occurring as a result of incomplete, ambiguous and unclear contracts, parties should consider the following actions during the four phases of the EPC project:
The Owner should consider all the terms, conditions and obligations to support the objective of constructing the facility.
Basic design phase
To minimise disputes, the Owner should liaise with the technical team involved in the preliminary designs to understand all the limitations or any potential setbacks they may face. Involving them in the process ensures that the design can be executed.
This phase involves several key decisions to be made, such as the Owner seeking tenders for the project, selecting its preferred Contractor, documenting the commercial agreement and risk allocation. Hence, the owner should consider the following:
- Identification of several potential contractors
- Tenders are thoroughly evaluated and interrogated to resolve any ambiguities, before selecting the preferred Contractor and commercial terms
- Parties’ intention is documented in the best way to minimise disputes through to completion of the project;
- All parties to the EPC contract understand the terms of the contract
- The accuracy of key information is checked thoroughly including completion dates, performance levels, performance tests, handover dates, scope of the works, level of delay damages, defects rectification period
- A multi-tiered dispute resolution clause is included to provide a mechanism for resolving disputes outside of formal dispute resolution
In this phase, parties involved should carry out the contract as per the contractual requirements and look to resolve any dispute outside of formal dispute resolution methods.
Lastly, the parties should ensure that all post-handover performance testing and defects rectification are completed in compliance with the contract as agreed between the parties. Thoroughly and effectively drafting, negotiating and administering an EPC contract are arguably the best means of minimising future disputes under an EPC project.
Understanding Contractor Costing in the International Power Generation Industry is a 3-day training course, aimed to increase the awareness of the key features and contractual provisions of an EPC contract, have a greater understanding of the dynamic nature of contractual provisions and some of the consequences that arise as a result of them within the commercial world. Delegates will also grasp the fundamentally important aspects of managing and allocating risk in an EPC contract.
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