Focus on EPCM contracting - Design Responsibilities under an EPCM contract

Introduction

Under an EPCM contract, an EPCM Contractor is employed to undertake some or all of the following services:

• the engineering - (or design) for an individual project,
• the procurement services – typically the preparing of the tender documents, analysis of the tender returns and the negotiation of the works contracts. The works contracts are the direct contracts entered into between the Client and individual works package contractors or equipment suppliers for the project, and
• the construction management services - to manage the project through the execution phase of the project

Separately, the execution of the works and supply of materials/equipment is procured through a series of direct contracts between the Client and the supply chain.

By contrast, under an EPC contract the goal is typically to structure the contract so that the EPC Contractor is responsible for the delivery of all design and the works (albeit elements of these may be subcontracted but this doesn’t make any difference to the liabilities of the EPC Contractor).

This different contractual structure in EPC and EPCM procurements can give rise to design responsibilities operating in different ways in an EPCM and EPC structure. This articles looks at some of these issues:

Standard of care for design

Under English law, there is a considerable body of case-law in relation to the interpretation of fitness for purpose obligations (both as express terms of a contract and as implied terms). Many professional indemnity insurance policies do not cover fitness for purpose obligations.

A reasonable skill and care duty is usually drafted so that a designer will only be liable where they have failed to exercise the standard of skill and care expected from their profession and sector. This is a common standard to apply where consultants are providing services.

A fitness for purpose is linked to the product itself – does it do what it was supposed to do? This might be fit for a specific purpose or it might be generally fit for purpose. Where a fit for purpose obligation exists, then this is more typically found in a contract that combines both design and works obligations (see for example clause 3.4 in the IChemE Red Book contracts).

Comparing the EPCM contracting structure (where the EPCM Contractor delivers services only) to an EPC contracting structures (where the EPC Contractor is delivering both design and works), it can be seen that as a services based contract, the EPCM Contractor‘s design duties are likely to be linked to reasonable and care. By contrast, an EPC Contractor’s duties, might be more closely linked to fitness for purpose. This typically gives a different standard of care between these two different methods of procuring projects.

There is a close overlap between this topic and liabilities for performance guarantees. In many EPC Contracts, the contract prescribes exactly what happens if certainty functionality has not been achieved (for example a certain level of output generated or input processed). There may be an agreement on which functions are guaranteed and what levels of damages are payable for failure to meet the specification.

As referred to our other article, Performance guarantees under an EPCM contract, under an EPCM structure, the scope and extent of available performance guarantees might be more complex under an EPCM structure.

Responsibility for ground conditions

Typically under an EPCM contracting strategy, the ground investigations are undertaken by or on behalf of the Client with this information being provided to the EPCM Contractor as information that should be considered and built upon (using reasonable skill and care) for the purpose of the EPCM Contractor’s design. The steps that the EPCM Contractor should take to build on this information should be clearly set out in the EPCM Contract.

Understanding the impact that different ground conditions could have on the project is key to an EPCM structure:

• would this result in the civils works taking a longer time?
• would this result in the need for a third party to be brought in to undertake certain works (eg asbestos treatment of the soil)?
• would this result in the need to redesign the foundations for the works?
• would this result in the need to redesign some or all of the equipment that is being supplied to form part of the works?

Once the risks for the individual project are understood, a strategy that works for EPCM contract structures can be developed. It may be appropriate to build this into a cross project roles and responsibilities document. The strategy may include items such as:

• commencing ground preparation civils works early to minimise any impact that any time overrun has on the rest of the project;
• second stage ground investigations after the EPCM Contractor is engaged, with the EPCM Contractor being involved in the scoping of these works and/or
• considering how variation mechanisms operate across all of the contracts to ensure that suitable flexibility is included in the project documents.

Multi-party issues

It is common under an EPCM Contract for design responsibilities to be split across the EPCM Contract and the various works contracts that are engaged directly by the Client in an EPCM structure.

This has a key impact on how liabilities operate in the event of a design defect (see our article Defects under EPCM). A key part of the EPCM contracting strategy should consider cross contract disputes, as consider further in our article Dealing with disputes under the EPCM structure.

Conclusions

The structure of an EPCM contract has an impact on the contractual responsibilities that each party has. Some standard assumptions that are made when using EPC contracts need to be reassessed and kept in check, as the position is fundamentally different under EPCM contracts. This is most notable when considering how risks surrounding design and ground conditions are dealt with.