One of the key factors that have significant and positive influence on economic growth, especially in the developing countries, is infrastructure development (ADB, 1996).
However, infrastructure development requires massive capital investments because most infrastructure projects are large in size and have a high level of complexity (Grimsey & Lewis, 2002). Due to the capital-intensive nature of infrastructure projects, most developing countries do not have the required amount of capital to develop the necessary infrastructure on their own.
Without the required capital, these nations would not be able to properly develop their infrastructure sector, and without these developments their economic condition could suffer. Therefore, in order to keep pace with the economic growth and the increasing demand from the ever-growing population, the private sector participation was introduced with the intention to assist the government of these developing countries by providing additional capital investment to finance the infrastructure sector development (Walker & Smith, 1995).
However, the private participation in infrastructure in the East Asia and Pacific region is not regarded as a challenger or rival, instead it is utilized to complement the investment made by government agencies and/or state-owned enterprises. As a result of this approach, private participation is not utilized to increase the efficiency of the existing enterprises but rather to build new assets through Greenfield projects (World Bank, 2002). A Greenfield project is a project where a particular private entity or a public-private joint venture builds and operates a new facility for a period of time, which has been determined previously in the project contract, and the facility itself may be returned to the public sector at the end of the concession period (Beery & Crow, 2003). These projects can be broken down into several sub-classes, such as buildlease-own, build-own-transfer, build-own-operate-transfer, build-own-operate, build-operate-transfer, etc. However, the build-operate-transfer (BOT) approach is widely accepted as the preferred form of infrastructure financing, not only in Asia but also in many countries around the world (Lombardo, 1999).
Private sector participation had actually existed as early as the 17th century (Walker & Smith, 1995); however, there are currently still a lot of projects with private participation that have failed. There are several things that could cause these types of projects to fail and they are mostly due to the following reasons (Kumaraswany & Zhang, 2001):
1. Poor arrangement and coordination between government agencies in packaging the projects.
2. Insufficient legal arrangements.
3. Lack of coordination between private and public sectors.
4. The unwillingness of the host government to provide guarantees against the risks originating from the unstable economical and political environment.
The results of previous studies on risk allocation and project success is still insufficient because they have not been able to assess whether or not the risks have been properly allocated, which party actually has the ability and willingness to accept the consequences of these risks and what needs to be done to achieve proper risk allocation. Therefore, there is a need to develop a guideline that can help assess the ability and willingness of the parties that are involved in these kinds of projects to help achieve proper risk allocation and ultimately project success.
Mr. Martinus P. Abednego made a case study on PPP as his dissertation thesis for his Ph. D. degree. The main objective of his research is to assess the relationships between risk allocation and project success by developing a common ground concept of proper risk allocation and utilize its result as the foundation to produce a guideline that can help determine proper risk allocation arrangement at the project initiation stage as well as perform as a control system for the project and its participants along the concession period of a tollway project developed under PPP procurement system. From his main objective, several sub-objectives were further elaborated as follows:
1. To identify the project risks in each stage of project development based on the perceptions of the public sector (government agencies) and private sectors (concessionaire and contractors).
2. To identify the critical success factors that are significant for project success based on the goals and objectives of the public and private sectors.
3. To investigate the risk allocation arrangements used by the public and private sectors.
4. To investigate the influence of risk allocation arrangements on project success.
Moreover, the expected outcomes from his research are:
An improved theory of relationship between risk allocation and project success, especially in tollway projects that are developed under PPP procurement system.
A conceptual framework of good project governance (GPG) for assessing proper risk allocation so that it may enhance the project performance thus achieving an overall project success.
In his overall conclusions, he cited that Public-Private Partnership can be defined in many ways depending on which perspective one chooses. Regardless of differences in perspective, all possess similar characteristics (Peters, 1998). These characteristics can be summarized into a general perception of PPP as a form of partnership of at least one public and one private entity in which each entity contributes its key resource(s) with a willingness to accept the consequences that are associated with the responsibilities. Accordingly, a lot of advantages can be obtained from its implementation, especially in the development of public infrastructure. One of the main advantages is in terms of project financing. Unfortunately what generally happens is the exact opposite, especially when it is put into practice in countries such as Indonesia, Thailand and Vietnam that has less or no experience regarding the approach. The common misconception of the PPP procurement system is that the government as the owner of the project has more authority in the partnership, thus considered as a justification for being superior towards the other stakeholders.
Additionally, the general approach in dealing with the consequences of the risks that occur in projects developed under this system is through problem solving rather than prevention. As a result, the private sector has no choice but to accept these consequences for most of the times even though it does not have the required resources and experience to manage the unanticipated losses. When such situation continues, the possibility of projects experiencing further problems in the future will be greater - making it even more difficult to achieve success, both in the short-term and the long-term. Unfortunately, the majority of stakeholders do not realize that projects developed under this system would have to deal with short-term issues as well as long-term issues.
Mr. Abednego’s research provides an alternative point of view in observing PPP projects by pointing out that these projects are not only confronted with project management problems but also they have project governance concerns. Good Project Governance concept was developed in an effort to ensure the achievement of long-term project success. It has the characteristics of: 1) Making the right decision at the right time; 2) Ensuring contract fairness; 3) Information transparency; 4) Responsiveness; 5) Continuous project control and monitoring; 6) Equality; 7) Effectiveness and efficiency and 8) Accountability (Abednego & Ogunlana, 2006). Four core principles of GPG were established from this to help assess the relationship between risk allocation and project success in each of the case studies. These core principles are fairness, transparency, accountability and sustainability. Each of these principles was further devolved into subcomponents and each subcomponent into key analytical issues, which are then used to assess whether or not risks have been properly allocated and to judge how it affects project success.
Mr. Abednego has several significant conclusions made from his research and each of them is briefly described in the following sections.
1. Perceptions on risk and its allocation - The result of the analysis shows that the government has a clearly different perception compared to the private sector with regards to what is considered as potential risk. In all of the case studies, the governments tend to be more concerned about the problems that may occur during the construction stage of the project. On the other hand, the private sectors are more concerned about the lack of commitment and support from the government that shows in the existing regulations, laws and policies that tend to be discriminatory and insufficient in providing the necessary protection for private investments. This shows that the private sector is more concerned about the source of the problem rather than the actual problem itself because of the belief that problems can be prevented if necessary improvements are made towards the source. Although the private sector is more than willing to be responsible for the consequences of decisions and actions, however, they also expect the government to accept its own share of responsibilities, starting by honoring agreements and providing the necessary guarantees for the private sector, this condition most of the time if they want to be involved in such projects. This puts them in an inferior position relative to the government and eventually prevents project risks from being allocated properly.
2. Perceptions on project success - the following are the significant success factors that were identified from the case studies:
Ability to carry out negotiations
Accurate estimation (traffic demand & construction cost)
Advance risk management system
Availability of the required resources
Communication method
Compliance on agreement/contract
Continuous project monitoring and control
Attractive investment environment/condition
Non-discriminative and non-ambiguous agreement/contract
Effective project management
Equality of rights and responsibilities among stakeholders
Experience
Fair compensation policy
Fair tendering process
Financial achievement
Functionality
Good contractor/concessionaire selection system
Good coordination
Good managerial capabilities
Government guarantee
Government support
Improved laws/regulations related to PPP procurement system
Information dissemination
Market/demand oriented
Minimize government interference
Minimize land acquisition problem
Less political pressure
On-time project completion
Professionalism
Project quality achievement
Proper infrastructure development planning
Proper project financing strategy
Public participation
Reasonable payback structure
Sufficient time to complete project engineering design
Trust
There is a lack of knowledge with respect to the unique characteristics of projects that are developed under the PPP scheme. Most stakeholders do not realize that this kind of projects have governance concerns in addition to management concerns. Consequently, PPP projects are still managed like regular construction projects that are considered to be successful as long as they manage to deal with the short-term issues. Unfortunately, without acknowledging and understanding the importance of addressing the long-term issues, the overall success of PPP projects will be affected.
3. Assessment based on the fairness principle - The main issue discovered from the case studies that prevent the risks to be allocated properly and creating unfair conditions is government’s unwillingness to provide the necessary support and guarantees that would protect private sector investments. This condition is worsened by the ambiguity in the agreements between the government and private sector, and also by the constant interference by the government during the whole course of the project. As a result, the private sector was not able to properly identify the project risks, causing them to involuntarily assume the consequences that were not actually theirs. This would negatively affect the private sector’s revenue in the long run and eventually jeopardize the overall success of projects.
4. Assessment based on the transparency principle - Information dissemination is often a problem in PPP projects. Instead of being shared, it is often obscured; resulting in misperception and misinformation in the project. Unfortunately, this condition is often exploited by the government for fear that the information may be used by the private sector to make claims. Adding to the fact that the existing information management system is insufficient and still requires further improvements, these circumstances prevented the private sector from developing accurate plans and make better preparations. In addition, the government had not also been able or willing to make reasonable adjustments on the project’s financing strategy as previously agreed. Due to this lack of information and financial transparency, conflicts and disputes are inevitable, causing additional problems.
5. Assessment based on the accountability principle
The government and the private sector often overlooked the end-users of the infrastructure as well as its surrounding communities in the process of developing projects. Aside from the Don Muang Tollway project, the projects in Indonesia and Vietnam did not involve any public hearings. As such, the people were given no chance to raise their concerns or even offer suggestions for the project, which prevented them from participating and contributing directly to the project. Regarding the quality issue, most stakeholders refer to it in terms of the physical condition of the infrastructure whereas it should also include the management value and this, unfortunately, is the real situation. Unless the public is given more opportunity to be involved in the development process of projects and quality, both physical and managerial, is improved, the government is (here considered to be) accountable for the negative consequences that it may cause.
6. Assessment based on the sustainability principle
Lack of coordination between government agencies and also between the government and the private sector has prevented the stakeholders of PPP projects from sustaining their partnership in the long run. Consequently, this would affect project performance. For example, lack of coordination would result in inappropriate information dissemination creating difficulties to produce accurate estimation in terms of project cost. The latter situation would then further affect the development of a suitable project financing strategy and payback structure. Ultimately, disputes are inevitable and the sustainability of the project is vulnerable.
7. Overall achievement in terms of Good Project Governance
Based on the assessments that have been made using the four core principles of GPG, the risks in the three case studies were still allocated improperly. This condition influenced the performance of the projects, not only during the initiation and construction stages but also for throughout whole concession period. Consequently, it prevented the projects from achieving overall success. Therefore, these projects cannot be considered to have good project governance because they failed to deal with most of the issues that have long-term implications on the projects, which are mainly caused by improper risk allocation.
His thesis abstract is copied and posted.
Abstract
Studies have shown that there are increasing trends of using Public-Private Partnership (PPP) procurement system in developing countries, including the Southeast Asia countries. In addition to this, the concept of good governance is also becoming a more perceived issue, especially in state-owned enterprises. With such development in the construction industry, it is important to understand what would be the best approach to govern (manage) a construction project, especially public infrastructure projects under PPP procurement system such as tollway projects, so that it may increase the project’s level of success.
Proper risk allocation is considered as one of the critical success factors to enhance the performance of PPP projects. However, parties that are involved in a PPP project typically have different perception of risks, risk allocation strategy as well as project success. Moreover, PPP projects are generally challenged with both project management problems, which require day-to-day supervision (short-term) as well as partnership problems that require more of a strategic approach (long-term). Due to this unique condition, PPP projects can be considered to have governance concerns in addition to management concerns because it deals with monitoring and overseeing strategic direction as well as strategic decision-making (Mueller, 1981).
This research is conducted to examine the influence of risk allocation towards project success. Since proper risk allocation is considered to be an essential part for attaining good project governance, therefore, it is assumed that the performance level of a project would increase due to the proper allocation thus generating a successful project. A good project governance concept was developed as a result of this research. Its four core principles, fairness, transparency, accountability and sustainability is used to assess the influence of the risk allocation arrangements that were applied towards the project success, especially in the long-term. Three tollway projects from Indonesia, Thailand and Vietnam were selected as case studies for this research. The research discovered that the government clearly has a different perception of risk and proper risk allocation compared to the private sector. However, these two stakeholders still lack the knowledge to the unique characteristics of PPP projects and fail to recognize the fact that this kind of projects has governance concerns in addition to management concerns. As a result of their short-term oriented point of view, the project’s long-term issues were often overlooked, affecting its overall success.
Mining Equipment for Sale:2006 Caterpillar 740 Articulated Dump Trucks
Mining Equipment: Here is our new listing of used mining and construction equipment for sale:http://www.msloaneconsulting.
MSloane Consulting is pleased to offer its latest used mining and
construction equipment located in Jakarta, Indonesia:
14 Units of 2005/2006 Caterpillar 740 Articulated Dump Trucks
* Price: $165,000 to $175,000 USD (Negotiable)
* Hours: 9,000 to 15,000
* Weight: 33 Tons
* Location: Jakarta, Indonesia
* As is. Ready to use. In good running condition.
Contact us for more information: msloane@msloaneconsulting.com
For our listing of other mining and construction equipment for sale, please
go to: http://www.msloaneconsulting.
Mining and Construction Equipment for Lease in the Philippines
Here is our new listing of used mining and construction equipment for lease:
http://www.msloaneconsulting.com/2009.10.16_equipment.for.lease.html
MSloane Consulting is pleased to its *Equipment for Lease in the Philippines*.
1 Unit
Komatsu PC800-6 Hydraulic Excavator for lease
Php 7,950.00 - Rental Rate per hour per unit (VAT Exclusive)
1 Unit
Komatsu PC650-6EO Hydraulic Excavator for lease
Php 6,900.00 - Rental Rate per hour per unit (VAT Exclusive)
1 Unit
Komatsu PC450-7 Hydraulic Excavator for lease
Php 4,000.00 - Rental Rate per hour per unit (VAT Exclusive)
1 Unit
Komatsu HD405-6 Rigid Dump Truck
Php 3,950.00 - Rental Rate per hour per unit (VAT Exclusive)
1 Unit
Komatsu D155A-5 Crawler Dozer for lease
Php 4,200.00 - Rental Rate per hour per unit (VAT Exclusive)
As is. Ready to use. In good running condition.
Contact us for more information.
For our listing of other mining and construction equipment for sale, please
go to: http://www.msloaneconsulting.com
Thank you.
http://www.msloaneconsulting.
MSloane Consulting is pleased to its *Equipment for Lease in the Philippines*.
1 UnitKomatsu PC800-6 Hydraulic Excavator for lease
Php 7,950.00 - Rental Rate per hour per unit (VAT Exclusive)
1 Unit
Komatsu PC650-6EO Hydraulic Excavator for lease
Php 6,900.00 - Rental Rate per hour per unit (VAT Exclusive)
1 Unit
Komatsu PC450-7 Hydraulic Excavator for lease
Php 4,000.00 - Rental Rate per hour per unit (VAT Exclusive)
1 Unit
Komatsu HD405-6 Rigid Dump Truck
Php 3,950.00 - Rental Rate per hour per unit (VAT Exclusive)
1 UnitKomatsu D155A-5 Crawler Dozer for lease
Php 4,200.00 - Rental Rate per hour per unit (VAT Exclusive)
As is. Ready to use. In good running condition.
Contact us for more information.
For our listing of other mining and construction equipment for sale, please
go to: http://www.msloaneconsulting.
Thank you.
Used Mining Equipment for Sale:2006 Caterpillar 740 Articulated Dump Trucks
Used Mining Equipment: Here is our new listing of used mining and construction equipment for sale:http://www.msloaneconsulting.
MSloane Consulting is pleased to offer its latest used mining and
construction equipment located in Jakarta, Indonesia:
14 Units of 2005/2006 Caterpillar 740 Articulated Dump Trucks
* Price: $165,000 to $175,000 USD (Negotiable)
* Hours: 9,000 to 15,000
* Weight: 33 Tons
* Location: Jakarta, Indonesia
* As is. Ready to use. In good running condition.
Contact us for more information: msloane@msloaneconsulting.com
For our listing of other mining and construction equipment for sale, please
go to: http://www.msloaneconsulting.
Thank you.
Contract Clauses In EPC Oil And Gas Projects: A Case Study Of The Pearl Development Project
Recently, the oil and gas prices increase day by day which makes difficulties for developing countries like China, India and Vietnam to have a stable economic condition. The demand of oil and gas consumption all over the world is increasing, therefore the services required in developing new offshore facilities for oil and gas exploration also increases.
Developing the facilities for an offshore oil and gas field such as platform, Oil and Gas 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 only few numbers of 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 generally stipulated, with unclear understanding and interpretation when having disputes between the contractor and the project company. Therefore, studying the method in developing the effective, simplified and understandable clauses in the EPC contract is necessary. In this context, involved parties will understand and interpret clearly 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 oil and gas project, the oil and gas 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:
1. Take time to make the clarification and finalization before contract signing;
2. Wrong understanding and interpreting of stipulated clauses in the contract;
3. Conflict between contractor and the project company during project execution.
Mr. Nguyen Van Diep made a case study that focused on the issues related to EPC contract. His study objectives are to (1) study the advantages and disadvantages of EPC contract; (2) study the contract clauses to manage EPC oil and gas project; and (3) state the problems in the contract and propose the effective solutions to resolve the problems.
Mr. Diep outlined below the summary of effective clauses in oil and gas EPC project and lessons learned in the EPC contract and conclusion. He also gave some suggestions in applying the effective clauses that can be carried out to expand the understanding regarding the contracting arrangement that are used in EPC project in the Vietnam Oil and Gas industry.
1. Summary of contract clauses
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 that 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.
2. Lessons learned in the EPC contract
EPC contract is quite complicated in terms 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 execution. There are some key elements that the Contractor shall be needed to focus on the following issues below to implement in an EPC contract:
- Incorporate a more thorough requirement of using an earned value system with an objective measurement method. Try to use the Contractor’s standard system to its full extent and make sure it is an objective, not a subjective, measurement.
- Specify the types, formats, and frequency of reports in the contract to set the expectations and to avoid disturbing contractor’s standard practices
- Agree on the monthly percent completion of EPC early and compare them with other past EPC project experiences
- Continue the use of “monthly milestone events” evaluation and payment structure.
- Distinguish documents subject to the project company’s approval turnaround and documents subject to the project company’s review
- Assign the Project Company’s specific equipment and drawing numbers early
- Ask each discipline engineer to write and communicate the hottest items/concerns in their areas of responsibilities in the early stage of the Project
- Promote a proactive planning effort throughout the organization
- Devise a method to facilitate the early detection of potential cost and schedule deviation to minimize surprises
- Use variance analysis to concentrate the management efforts
- Ensure that milestone events and progress curves support and consistency each other
- Clarify the project company’s responsibilities and roles in construction, commissioning and hand-over.
- Identify commissioning system/events early.
For the project company to manage EPC lump sum contract, they also need to understand lump sum contract characteristics from the perspectives of both the contractor and the Project Company. EPC projects offer a mutually beneficial and exciting form of project delivery for both the project company and the contractor. However the EPC contract 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 project company and the contractor obtain the high rewards for the risk.
3. Conclusion for the advantages and disadvantages of EPC Contract
The advantage from the Project Company’s point of view of an EPC contract is that the contractor takes full responsibility in respect of the following:
- Cost of completion if it is a lump sum contract (subject to limited adjustments);
- The time for completion (subject to extensions of time);
- The quality of the design and work and achievement of performance guarantees (subject to any exclusion).
This means that the potential factors for multiple disputes is also avoided. However, the major disadvantage for the Project Company of the EPC contract is that the detailed design is the contractor's prerogative. Accordingly, in an EPC contract, great care needs to be taken that the Project Company specifies and defines the design parameters and deliverables (including consumption of utilities and emissions) so that the Project obtains a project of the required standard. This is usually required more than simply stipulating performance criteria in relation to the output of the project, and will include design-life and maintenance issues.
The results from his study have identified that the advantages and disadvantages of EPC contract as well as description of the application for some major clauses and finding the way how to minimize the risks for the Project by providing the effective amendment in consideration of the EPC Contractor’s point of view and the project objectives expected by the Project Company.
4. Conclusion for the contract clauses to manage EPC oil & gas project
The contract clauses are the most important tool to manage the EPC project. Therefore, the involved parties (i.e. 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.
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.
5. Conclusion for resolving the problems in an EPC contract
The problems always happen in the construction project and it will be very difficult to avoid problems happening to the project; however the problems can be ignored or minimized by understanding clearly about the scope of application for each contract clause in term of legal aspects and project requirement. In addition, these problems can be foreseen and negotiable during the bidding phase prior to finalization of contract documents and these shall be controlled and monitored during all phases of project.
In conclusion, besides the other relationships between Project Company and EPC Contractor, the fair and effective contract clauses stipulated in the contract document are tool to resolve all problems in an EPC contract in term of contractual relationships between 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, oil and gas, etc.
His thesis abstract is copied and posted.
ABSTRACT
Nowadays, the EPC contract is very wide applied in oil and gas industry in this Region for developing an oil & gas 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.
Developing the facilities for an offshore oil and gas field such as platform, Oil and Gas 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 only few numbers of 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 generally stipulated, with unclear understanding and interpretation when having disputes between the contractor and the project company. Therefore, studying the method in developing the effective, simplified and understandable clauses in the EPC contract is necessary. In this context, involved parties will understand and interpret clearly 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 oil and gas project, the oil and gas 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:
1. Take time to make the clarification and finalization before contract signing;
2. Wrong understanding and interpreting of stipulated clauses in the contract;
3. Conflict between contractor and the project company during project execution.
Mr. Nguyen Van Diep made a case study that focused on the issues related to EPC contract. His study objectives are to (1) study the advantages and disadvantages of EPC contract; (2) study the contract clauses to manage EPC oil and gas project; and (3) state the problems in the contract and propose the effective solutions to resolve the problems.
Mr. Diep outlined below the summary of effective clauses in oil and gas EPC project and lessons learned in the EPC contract and conclusion. He also gave some suggestions in applying the effective clauses that can be carried out to expand the understanding regarding the contracting arrangement that are used in EPC project in the Vietnam Oil and Gas industry.
1. Summary of contract clauses
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 that 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.
2. Lessons learned in the EPC contract
EPC contract is quite complicated in terms 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 execution. There are some key elements that the Contractor shall be needed to focus on the following issues below to implement in an EPC contract:
- Incorporate a more thorough requirement of using an earned value system with an objective measurement method. Try to use the Contractor’s standard system to its full extent and make sure it is an objective, not a subjective, measurement.
- Specify the types, formats, and frequency of reports in the contract to set the expectations and to avoid disturbing contractor’s standard practices
- Agree on the monthly percent completion of EPC early and compare them with other past EPC project experiences
- Continue the use of “monthly milestone events” evaluation and payment structure.
- Distinguish documents subject to the project company’s approval turnaround and documents subject to the project company’s review
- Assign the Project Company’s specific equipment and drawing numbers early
- Ask each discipline engineer to write and communicate the hottest items/concerns in their areas of responsibilities in the early stage of the Project
- Promote a proactive planning effort throughout the organization
- Devise a method to facilitate the early detection of potential cost and schedule deviation to minimize surprises
- Use variance analysis to concentrate the management efforts
- Ensure that milestone events and progress curves support and consistency each other
- Clarify the project company’s responsibilities and roles in construction, commissioning and hand-over.
- Identify commissioning system/events early.
For the project company to manage EPC lump sum contract, they also need to understand lump sum contract characteristics from the perspectives of both the contractor and the Project Company. EPC projects offer a mutually beneficial and exciting form of project delivery for both the project company and the contractor. However the EPC contract 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 project company and the contractor obtain the high rewards for the risk.
3. Conclusion for the advantages and disadvantages of EPC Contract
The advantage from the Project Company’s point of view of an EPC contract is that the contractor takes full responsibility in respect of the following:
- Cost of completion if it is a lump sum contract (subject to limited adjustments);
- The time for completion (subject to extensions of time);
- The quality of the design and work and achievement of performance guarantees (subject to any exclusion).
This means that the potential factors for multiple disputes is also avoided. However, the major disadvantage for the Project Company of the EPC contract is that the detailed design is the contractor's prerogative. Accordingly, in an EPC contract, great care needs to be taken that the Project Company specifies and defines the design parameters and deliverables (including consumption of utilities and emissions) so that the Project obtains a project of the required standard. This is usually required more than simply stipulating performance criteria in relation to the output of the project, and will include design-life and maintenance issues.
The results from his study have identified that the advantages and disadvantages of EPC contract as well as description of the application for some major clauses and finding the way how to minimize the risks for the Project by providing the effective amendment in consideration of the EPC Contractor’s point of view and the project objectives expected by the Project Company.
4. Conclusion for the contract clauses to manage EPC oil & gas project
The contract clauses are the most important tool to manage the EPC project. Therefore, the involved parties (i.e. 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.
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.
5. Conclusion for resolving the problems in an EPC contract
The problems always happen in the construction project and it will be very difficult to avoid problems happening to the project; however the problems can be ignored or minimized by understanding clearly about the scope of application for each contract clause in term of legal aspects and project requirement. In addition, these problems can be foreseen and negotiable during the bidding phase prior to finalization of contract documents and these shall be controlled and monitored during all phases of project.
In conclusion, besides the other relationships between Project Company and EPC Contractor, the fair and effective contract clauses stipulated in the contract document are tool to resolve all problems in an EPC contract in term of contractual relationships between 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, oil and gas, etc.
His thesis abstract is copied and posted.
ABSTRACT
Nowadays, the EPC contract is very wide applied in oil and gas industry in this Region for developing an oil & gas 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.
Subscribe to:
Posts (Atom)
