Turnkey/EPC Contract Administration

[MPM - Thạc sĩ Quản lý dự án Xây dựng Quốc tế]

XIN CHÀO CÁC TÂN SINH VIÊN MPM, ĐÍCH ĐẾN ĐẦU TIÊN CỦA CÁC BẠN ĐƠN GIẢN CHỈ LÀ MỘT CÔNG TRÌNH VỚI 1.915 TỪ NÀY THÔI - ÍT HƠN SỐ GẠCH XÂY DỰNG MỘT NGÔI NHÀ, GOOD LUCK!

Ms. Nguyen Hong Hanh - Manager of Planning & Sales Dept. at Chemical Industry Engineering Joint Stock Company (CECO) – graduated from Professional Master Program in Project Management specialized in Construction, Intake 2011 - AIT Alumni

Visit an EPC project in South Korea of  Master student in Project Management in Construction

Abstract of Master Final report - Ms. Nguyen Hong Hanh

The contract administration is essential for construction project in every stage from conceptual phase until project close out. The appropriate contract administration is vitally important to determine the success or failure of any construction project. In recent years, turkey/EPC projects have seen rapid growth and have been a popular system in public sector. Due to the development in construction industry, the natures of construction project are increase in size and becoming more complex. In order to decrease number and frequency of claims and disputes, it is essential to have knowledge, understanding in contract administration and strong negotiation skill. The objective of this study intends to assist the process of turnkey/EPC contract implementation in chemical & fertilizer project in Vietnam, which is increasingly developed in public sector.

This study emphasizes particular on turnkey/EPC contract implementation of chemical & fertilizer project in Vietnam, Di-Ammonia Phosphate Project (DAP) as a critical and single case. Due to the project just has started in May 2012 and only getting about 30% engineering, so limit of information from project, and therefore this study is conducted from mobilization and procedures of project on engineering, procurement and construction, it also focus on critical issue relate to schedule delay and payment process of project and comparative between contract and FIDIC Silver form.

Finding from this study is that inadequacy contract administration to cover the risk of management in the employer’s organization, the dealing with Licensor and payment issue are concerned as the weakness of the project contract from the point of view of contractor. Accordingly, unclear contract conditions may lead to the dispute arising and losing chances to recover claim. To overcome the worsening situations, it is recommended that the contract administration among the parties should provide a proper fair risk allocation that covers all possible risk in accordance with the nature of each project.

Turnkey/EPC Contract Administration for Chemical & Fertilizer Project - A Case Study of Di-Ammonia Phosphat (Fertilizer) Project in Vietnam

In order to meet the needs of chemicals and fertilizers in Vietnam, the Government has many projects which are being done under Vinachem. To develop these projects, Vinachem needs to consider which contracting method is appropriate for its particular institutional and technical strength and weakness (including access to financing). Export financing tend to favor the turkey contract/EPC contract and many developing countries are willing to adopt a turkey contract as a mean of financing a project (Merna and Smith, 1990). Turkey contracting is appropriate for both employer and contractor who have knowledge and experience of it.

However, in the past, Vinachem developed project under Design-Bid-Build form. The project is separated into many packages. The employer managed the project and solved the interface and conflicts, but it usually applied for small and medium size under about 50 million dollars. Some trouble happened at the closed out stage of project, because of the employer’s decision to separate it into many packages. At the commissioning and performance test run, no one is fully responsible for this duty, it made difficulty for employer.

Recently, Vinachem developed three large scale projects on investment. The chemical-fertilizer plant cost about 500 to 600 million dollars. All selected contractor comes from China and the quality is not so good in contract and project management. Most of the major and modern chemical and fertilizer projects have never met the high expectation. Therefore, this project is determined as critical case and selected in order to learn lessons for the further project.

Due to the advancement in process and technology needs in developing countries, especially Vietnam, the chemical & fertilizer projects are increasing in size and becoming complex. As the result, contract forms are more complex and difficult, and causing adversarial impacts such as increase in number and frequency of claims and disputes, besides time and cost overruns. To overcome the worsening scenario, it is essential to develop a system that can assist the contract administrators to understand and evaluate worth of their claims prior to taking it to litigation (Lyer et al, 2007).

Nguyen Hong Hanh made a case study which aimed to: (i) examine the organization structure of the project and their performance with contractor’s effort in EPC project; (ii) study contract administration practice in EPC of Di-ammonia phosphate project problem in term of time and cost objectives; (iii) conduct comparative study of important clauses between International Standard Turnkey Contract (FIDIC Silver) and Di-ammonia phosphate Contract to identify strengths and weaknesses, and (iv) generalize and purpose the recommendation for improving EPC Contract implementation process for chemical & fertilizer project implemented by Vinachem.

Conclusion

The contract management is essential for construction project in every stage from conceptual phase until project completion. The appropriate contract administration is significantly important to determine the success or failure of any construction project. It is impossible to know unforeseeable difficulties in advance and complicated to cover all possible risks of both parties during contract negotiation stage. Different projects have different uniqueness in many ways such as organization administration, nature of construction work itself even when it is copied from another similar project. There are many types of International contract forms for Turnkey/EPC project to give guidance; therefore, both of parties need to consider which contract form is appropriate for uniqueness of project characteristic such as particular institutional and technical strength and weakness of parties.

Although it offers several advantages for large and complex projects, it brings some risks and complexities. Each contract form affects in its own way the allocation of risk and responsibility and co-ordination of the project. The most successful turnkey/EPC projects have been those where most contingencies were resolved in negotiation prior to contract signing. Turnkey procurement method is suitable for both employer and contractor who have knowledge and experience of it in past.

The result of this study are presented into three main categories, namely, organization analysis in DAP project, analysis the procedure and comment with actual execution, and comparison of DAP contract conditions with FIDIC Silver Book.

(1) Organization Interface Analysis in DAP project

As a result of the organization analysis in DAP project, some factors are found out which negatively affect to the performance of project. These all factors affect the actual execution, some factor may occur in the future.

(a) Negative during negotiation with Licensor:
- Lack of consistency to deal with Licensor during the Bidding and Negotiation.
- The method for working with Licensor

(b) Negative factor of interfacing of scope between Contractor and Owner
- Interfacing during execution of three main packages has separated in the project (administrative area and road by Local; Process areas by foreign contractor and railway system by Owner) may occur due to deference schedule.

(c) Negative factors of Employer’s Organization in DAP project
- Lack of Co-ordination among employer’s organization
- Lack of experience and knowledge of employer’s personnel in turnkey/EPC contract.
- PMC is mobilized for project too late.

(d) Procedures in execution
- Engineering, Procurement and Construction are clearly to execution.
- Way for execution may difference among parties relate to project.

(2) Contract Administration and Critical Problems at DAP project

Though the study contract administration from mobilization, project organization, procedures, schedule and payment method of project, it would be impossible to identify all problems in DAP project due to the project just start in May 2012. It may forecast based on analysis above. Most of critical may or apart has happened as follows:

- Time and Cost impacted by Licensor
- Schedule delay in interfacing among scope of Owner and Contractors.
- Time impacted due to site preparation and some temporary system provided by Owner.
- Schedule delayed due to payment method, may cause the overall schedule in the future.

There are many factors caused to schedule delay of DAP2. Among of these, the significant factor is payment delay to Contractor, it make the Contractor cannot catch progress and speed up the project ahead. Consequently, this fact may lead to be late procurement of materials. Otherwise, other parties relate project such as the Licensor, PMC, and other contractor should consider carefully.

(3) Comparison of DAP contract with FIDIC

The potential problems found in this study caused from inadequacy contract administration to cover the risk of management in the employer’s organization. As a result of investigation in DAP contract, the Contract Price was not adjusted to take account with some conditions related to cost that unforeseen difficulties, lack of co-operation the employer’s personnel, interfacing among parties relate to project, payment method, hence the employer typically placed the risks regarding on the contractor. Consequently, due to the absence of some sub clause that coordination of the employer’s organization and payment schedule, the contractor has no potential claim to the employer.

Recommendation for improving EPC project in chemical & fertilizer field in Vietnam

The contract administration among the parties should provide a proper fair risk allocation that covers all possible risk in accordance with the nature of each project. The feasibility study is a significant role to determine not only any possible risk during contract negotiation stage but also long term and short term benefits of the particular project. In order to achieve success of chemical & fertilizer project, the contractor should aware of all possible risks including organizational risk, additional payment risk, payment method risk, interfacing of all participants should develop effective communication and coordination system.

DAP contract complied with Silver Book. Hence, according to Huse, (2002), the conditions of contract for EPC/Turnkey Projects (FIDIC Silver Book, 1999) are not suitable for use in the following circumstances:

- If there is insufficient time or information for tenders to scrutinize and check the Employer’s Requirements or for them to carry out their designs, risk assessment studies and estimating
- If the Employer intends to supervise closely or control the Contractor’s work, or to review most of the construction drawings.

If a contractor needs develop the EPC contract on chemical & fertilizer project in Vietnam, there are some useful recommendations for EPC contract administration that should be considered as following:

(i) Licensors - Set clear provisions of Licensor and its responsibilities before EPC contract.

(ii) Payment term
- Set clear provision on payment method & term, considering carefully the cash flow and agree with Owner in advance, may consider sub-clause in FIDIC Silver Book.
- Payment should pay thought Consortium Leader to control other member.

(iii) Extension of Time
- Make sure that to entitle time extension due to any delay, impediment or prevention caused by not only the Employer but also its personnel.

(iv) Employer’s Personnel
- To provide Employer’s Personnel Clause if a contractor needs to coordinate with employer’s organization.
- To provide for a remedy in the event that employer fails to ensure that his personnel cooperate with the contractor’s effort
- The time limit for the employer’s schedule delay should be provided in the provision; otherwise, if the contractor suffers delay, the employer should pay for acceleration cost.

(v) Risk and Responsibility
- Describe adequate definition of their responsibilities and provisions for impact of any delay or damages due to failure of its responsibilities
- Clearly identify and allocate risks through the owner/sponsor's procurement/contracting policies and procedures
- Set clear interface and request proper conditions with Owner and other parties involved to project.

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