Earlier this year, the Institution of Chemical Engineers (IChemE) added a standard form Engineering, Procurement and Construction Management (EPCM) Contract, the Blue Book, to their suite. This is the first standard EPCM to hit the market, but won’t be the last with FIDIC set to introduce its own EPCM in the Autumn.
In this Law-Now, we talk a little bit about EPCM and its pros and cons, and then look at the main features of the new Blue Book.
What is EPCM?
EPCM is a form of construction management and, perhaps confusingly, is very different to EPC (engineering procurement and construction) which is based on a full turnkey project delivery. Under an EPCM model, a purchaser appoints an EPCM contractor to engineer and design the works, and to manage their delivery under a contract form that is more akin to a professional services contract than a works contract – but the EPCM contractor does not carry out the works itself and has no liability for any failures in the delivery of the works by the works contractors (save to the extent caused by the EPCM contractor’s negligence in their management). Instead, whilst the EPCM contractor may assist with the tender process as part of its services, it is the purchaser that appoints each trade contractor directly under separate contracts. The purchaser also appoints a representative to act as its agent and interface with the EPCM contractor.
Below is a simplified representation of the main contractual and management relationships in an EPCM model:
Under EPC / turnkey procurements, the EPC contractor has full, single point responsibility for designing and delivering the works on time and typically for a lump sum. Under the EPCM model, the EPCM contractor performs professional services for designing / engineering and managing the works, but has very limited responsibility for the quality of the works beyond the scope of its design obligations, or the timing of their delivery (save to the extent due to its mismanagement, as mentioned above). In other words, a purchaser must look directly to its individual trade contractors for their respective failures.
As such, whilst there may be cost and time savings to be found in an EPCM model, the purchaser’s risk allocation is disparate across a number of contractors, potentially making delay or defects arguments harder to establish against any one party.
The Blue Book
The IChemE has recognised that there are no off-the-shelf forms on the market for EPCM contracting, with parties tending to amend professional services forms (such as the IChemE Silver Book), or use a bespoke form, so has developed the Blue Book to fill this gap. It is similar in form to other IChemE books and it is intended for use alongside them (for example, for the works contracts, or where the EPCM contractor or the purchaser needs to procure other services). It is – as with the other IChemE forms – primarily aimed at process plant projects, but can be used more widely.
The new contract attempts to create a balanced approach between the parties, with a focus on collaboration and the use of ADR. It is jurisdictionally impartial to encourage international deployment, with a separate schedule for use in UK projects to enable compliance with the Housing Grants, Construction and Regeneration Act 1996 (as amended). There are two other “option” schedules on offer as well. Option B turns payment from what would typically be a reimbursable basis, into a target cost mechanic, and Option C contains “project specific options”, for example allowing for the use of a disputes resolution board, or expert determination. The Blue Book is heavily reliant on its schedules, of which there are 22 covering things such as scope, payment, testing regimes, performance guarantees, time for completion, liquidated damages and many more. As with the other IChemE forms, the schedules need to be properly populated.
In addition to the design and engineering, the EPCM contractor is responsible for managing works, controlling the site and health and safety, programme development and contract, budget monitoring and forecasting, tendering works packages, overseeing testing and inspections, certification, and managing defects. The boundaries of the EPCM contractor’s liabilities are however clearly drawn and, save in circumstances caused by its negligence, it is not responsible for defects in, loss or damage to, or delays to the works, and is entitled to additions to the contract price for these types of event. Whilst liquidated damages may be levied if the EPCM contractor fails to meet times for completion of its services, the contract allows for a cap, and the extension of time entitlement is broad and includes any matter which entitles any works contractor to an extension of time, or a failure of a works contractor to perform. The purchaser’s right to liquidated damages is lost if the EPCM contractor serves a notice to terminate for the purchaser’s breach of contract.
Neither party to the contract has any liability for any wastage of process consumables, and importantly, liability for ‘loss of profit / revenue / use / production, business interruption or similar damage, or for consequential or indirect loss’ is excluded. That exclusion is subject to certain carve-outs, but it should be noted that the EPCM contractor also benefits from an overall aggregate liability (which includes its liability for any liquidated damages) as well as a net contribution clause, potentially further limiting recovery.
The IChemE has successfully filled a gap by bringing to market an off-the-shelf form for EPCM procurement, but like all standard form contracts, one size may not fit all. Users should consider the form in detail against their own project needs and risk profiles, and consider whether any amendments are appropriate.