Contract Clauses In EPC Thermal Power Projects: A Case Study Of Hai Phong Thermal Power Project

Demand of electrical energy in the world is increasing very fast with the development of economic and population growth in the global. In Vietnam, there are 27 Thermal power plants (TPP). The overall project duration for developing a thermal power factory is normally take 2 to 3 years depending on the size of facilities to be built.

Developing the facilities for a thermal power field such as platform, Thermal power Companies (hereinafter referred as the Project Company) normally sign an EPC (Engineering, Procurement and Construction) contract with the EPC contractor. For this field of industry, there are not so many EPC Contractors in the Asian South East countries who can execute a full EPC project, therefore the EPC contractor is normally selected and awarded thru the international bidding tender. 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 project company. 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.

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

i. Take time to make the clarification and finalization before contract signing;
ii. Wrong understanding and interpreting of stipulated clauses in the contract;
iii. Conflict between contractor and the project company during project execution.

An EPC contract is generally applied for developing the thermal power project, in case of problems or disputes happen during the project execution, then these problems and disputes shall be resolved in accordance with stipulated clauses in the signed contract. Mr. Bui Tien Dung made a study which focused 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 thermal power project;
iii. To study the implementations of the contract clauses and their performance with reference to project advantages and problems.

Conclusions

Results from this report discussed and focused on some clauses applied for an EPC contract for developing a thermal power project as well as other EPC contracts in the construction industry. These clauses are normally defined and given by the Project Company in order to protect the project objectives and the Project Company from any kind of risks may happen. However from contractor’s point of view, it will be very risky if the Contractor complies with all these clauses without any exception or amendment. Therefore, providing the effective clauses based on the project documents and the Project Company’s interest shall be addressed during the bidding preparation and negotiation.

In summary, the effective clauses are the terms and conditions stipulated in the contract which shall be defined based on the interest and “win-win solution” basis for both the Project Company and the EPC Contractor.

Conclusion for important clauses in the contract that clearly identify risk, roles and responsibilities of each party

As discussed above, the EPC contract is quite complicated in term of legal issue, therefore the Project Company and the EPC Contractor shall have enough experiences and knowledge about the nature of project facilities in order to avoid their faults and minimize the risks during contract performance.

The Owner wish to transfer all of the construction risks to the contractor and be certain of his commitment. Usually, the responsibility for the package is vested in a single contractor, and bid evaluation is straightforward. The contractor agrees to carry out the work for the amount of money stated in the contract regardless of its actual cost as long as there is no change or breach of the contract from the owner. This is quite common for schools, warehouses and similar works where the scope is relatively well defined and the work is straightforward.

In this project, a fixed price lump sum turnkey contract is identified as the most suitable contract strategy provided the project could be completed within the owner’s budget. The owner can utilise model forms for the contract based on other projects procured in this manner.

Conclusion for the EPC project performance and how the contract contribute to the performance

The contract clauses are the most important tool to manage the EPC project. Therefore, the involved parties (Project Company, EPC Contractor) shall understand and know how to apply this tool effectively to manage the project in term of costly, timely and quality to the performence.

The contract clauses will be only effective when these are defined and stipulated in accordance with the project specification, documents and nature of work to be performed. Finally, these clauses also are established and finalized according to the mutually agreement between the Project Company and EPC Contractor.

General Conclusion

In conclusion, the major clauses in the EPC contracts are not the same for all project, these also depend on each project scope of work, complexity, specification and documents, the project company’s requirement and expectation and mostly on the outcome of contract negotiation between the Project Company and the EPC Contractor. Therefore, the meaning and application of major clauses in the EPC contracts shall be different in term of the standard form contract i.e. FIDIC or other organizations as well as in each kind of industry i.e. construction, etc.

His thesis abstract is copied and posted.

Abstract

Nowadays, the EPC contract is very wide applied in energy industry (specially in thermal projects) in this Region for developing an energy field project, this EPC contract is as a “fast track” tool to reduce the project duration. In order to execute this kind of contract successfully in term of the benefit for all involved parties, it is necessary to focus on some key factors that shall be affected on the project during execution phase i.e... contract terms and conditions clauses. Therefore, understanding and interpreting the application of term and condition clauses clearly in EPC contract will help the project to be executed and monitored by using the proper manning level in accordance with project specification and the project will be achieved its goals without the minimized disputations and conflicts happening.

This study will also discuss on the advantages and disadvantages of EPC contract from both Contractor and Project Company’s point of view and how to manage the EPC contract in accordance with term and condition clauses stipulated in the signed contract documents; how to resolve problems by understanding the contract clauses. However, the improvement of some major clauses are still needed in order to specify and define clearly the duties and responsibilities as well as obligations of involved parties to minimize the conflicts, interfaces, risks and disputes that can be happened during the project execution phase.