Contract Clauses In The EPC Contract: A Case Study Of The Dinh Vu Polyester Project, Hai Phong, Vietnam

The Vietnamese Textile and Garment (T&G) industry consists of around 2.000 enterprises (25 State owned enterprises, 1.500 private enterprises and 450 reign direct investment enterprises) with over 2 million employees involved. Vietnam is ranking the 10th largest textile and apparel export countries in the world. Currently in Vietnam there are only two foreign companies producing PES fiber and filament yarn ‚ namely Formosa and Hualon company. Vietnam Textile industry has to import most PES fiber and filament yarn from abroad.

In order to minimize the interfaces and risks between the separated contractors and the Owner during executing a polyester project, Owners normally prefer to award and sign an EPC contract with an EPC contractor. However, this project delivery method will take a lot of time to make bidding, clarification, explanation and get the mutually agreement on the contract clauses between the contractor and the Owner. The following problems are normally involved with the EPC contract clauses:

1. Take time to make the bidding, clarification and finalization before contract signing;
2. Wrong understanding and interpreting of stipulated clauses in the contract;
3. Conflict between contractor and the Owner during project execution.

An EPC contract is generally applied for developing a polyester project, in case of problems or disputes during the project execution, these problems and disputes shall be resolved in accordance with stipulated clauses in the signed contract. Mr. Vu Dinh Duy made a research which focused on the following issues related to EPC contract:
1. to study EPC contract process and management from literature review;
2. to study the contract clauses in EPC polyester project;
3. to study the implementations of the contract clauses and their performance with reference to project advantages and problems.

Conclusion

EPC Contract, (known as the “Lump-sum Turnkey Contract”, “package deal”, or Engineering, Procurement, Construction and Commissioning Contract) places the duty to design, procure, construct and commissioning solely on the Contractor. The term “Lump-sum Turnkey” tends to mean the most extreme form of placing design, procurement, construction and commission responsibility on the contractor, such that after completion the Owner need only turn the key to commence operation of the Plant or Constructed facilities.

The use of EPC Contract results in a considerable reduction of intervention by the Owner in design, procurement, construction and commissioning process throughout the Project. The role of the Owner will consist primarily of contract administration, such as supervision, review and/or approval of critical works of detailed designs, procurement of long-lead items etc.

Lump-sum pricing method is often used for EPC Contract and enables the use of fixed payment by stages of completion. Lump-sum pricing and fixed installment payments provide the Owner with greater certainty in overall cost as well as in the timing of payment.

Advantages and Disadvantages of EPC Contract:

Advantages:

The EPC Contract makes contractor entirely responsible for the whole project regarding detailed design, procurement, construction and commissioning. The Owner receives a completed project in accordance with his performance specification.

The Owner does not need to worry about co-coordinating contractors effectively and avoids claims resulting from lack of interface definition.

In addition, single-point responsibility can also reduce the opportunity for claims by the contract. The Contractor must deliver the works that are fully operational to the specifications of the Owner; any defect or default is necessarily his responsibility except where the contract provides otherwise. Everything relating to the works can, thus, be concentrated in a single point of responsibility – the contractor.

With lump-sum pricing method, this system reduces front-loading by the contractor and encourages rapid completion. Also, it facilitates financing, as lender will have greater certainty of financial exposure and the timing of draw-downs.

The control given to the contractor should facilitate implementation of new and better approaches to design, developed through his experience and expertise. The contractor will have an intensive to implement such time saving changes under the turnkey structure.

Since the designer, purchaser, constructor work as a team, they are more likely to identify critical flaws in the design at an earlier stage, ensuring avoidance or mitigation of the flaw when such action is more effective. This team approach will help avoid many design, procurement, construction, commissioning risks which a separate designer, purchaser, constructor would not be able to identify, The joining of the design, procurement, construction and commissioning task under on contractor may also reduce the number of disputes which arise between the contractor and Owner.

Disadvantages:

Loss of control. The overall supervision role of the Owner is absent from the EPC Contract. The EPC model generally contemplates less day-to-day intervention. Under the EPC contract, it may be more difficult for the Owner to exercise his variation power properly. He may be distanced from the design, procurement, construction activities, reducing his understanding of the process used and his ability to verify for a variation and whether a variation proposed will affect the performance of the finished works.

The contractor will want to execute the works within the parameters of the Owner’s requirements for the least cost possible. The contractor in a EPC contract may be tempted to under-design the project in order to cut his costs and save on time.

Cost of risks. Under the EPC contract the Owner benefits from an increased amount of the risk of the project being placed on the contractor. However, depending upon market forces, a contractor will attempt to increase the contract price in accordance with the increase in risk. Where there is little competition, the Owner may have to assume the cost of the increased risk placed on the contractor. Thus the Owner may end up paying a higher overall price for the project due to the degree of risk that is placed on the contractor and the need for the contractor to price such risk.

So that, EPC contracts nowadays become popular in construction projects, especially in oil and gas sector. However, together with the advantages, EPC contract also exposes its disadvantages and is quite complicated in terms of legal issues, therefore the Owner and the EPC Contractor shall have enough experiences and knowledge to understand lump sum contract characteristics from the perspectives of both the contractor and the Owner in order to avoid their faults and mitigate the risks during contract execution.

The EPC contract also come many new risks that are often severe, due to the complex nature and high cost frequently associated with this type of project. Understanding the risks and some of the other unique characteristics of EPC contracting is critical to a successful project where both the owner and the contractor obtain the high rewards for the risk.

His thesis abstract is copied and posted.

Absract

The Vietnamese Textile and Garment (T&G) industry consists of around 2.000 enterprises (25 State owned enterprises, 1.500 private enterprises and 450 reign direct investment enterprises) with over 2 million employees involved. Vietnam is ranking the 10th largest textile and apparel export countries in the world. The industry generates an economy contribution of 8% to country’s GDP. The T&G industry is employing 12% of national industrial workforce, holding the second position in export turnover and making the contribution of 14% to country‘s export turnover. Average growth rate from 2002 - 2007 is about 18% per year.

Therefore, valuable arguments for the implementation of a Polyester fiber project:
 Saving of foreign currency due to substitution of imported Polyester staple fiber and filament;
 Creation of new employment for qualified labor;
 Further strengthening of the textile industry in Vietnam as a second largest export earner after crude oil;
 Establishment of the whole polyester esterification, polycondensation, spinning and fiber drawing process through introduction and transfer of state-of-the-art technology;
 First step in the Vietnamese synthetic fiber industry to extend the business into the upstream petrochemical industry, e.g. production of PTA;
 Stable and long term local supply of staple fiber to the domestic downstream textile industry including the improvement of quality due to close cooperation between domestic companies.

Normally, for building a polyester plant the Owner will sign an EPC (Engineering, Procurement and Construction included pre – Commissioning and Commissioning and training) contract with an EPC contractor. In the petrochemical and polyester industry, there is not any EPC Contractor in Vietnam who can execute a full EPC project, therefore the EPC contractor is selected and awarded by the international bidding. The major factors for executing an EPC project are the contract clauses which are normally stipulated too generally with unclearly understanding and interpreting when having disputes between the contractor and the owner. Therefore, studying the method to develop the effective clauses in the EPC contract is necessary to simplify and make involved parties to understand and interpret clearly during the contract negotiation prior to the EPC contract signing and commencement. The understandable and applicable contract clauses properly will help an EPC project to be executed smoothly and effectively.

The sensitive clauses in the EPC contract are also needed to focus in order to minimize the conflicts and risks between the EPC contractor and the Owner. This study will also discuss on point of view and how to managing the EPC contract of Dinh Vu Polyester project and focus on the following issues related to EPC contract:
i. To study EPC contract process and management from literature review;
ii. To study the contract clauses in EPC polyester project;
iii. To study the actual Dinh Vu polyester project Contract implementation.