Considerations For New Contracting Strategy For EM Contracts

Hedcor Inc. - Engineering and Construction Department

20 July 2012

1.0

Current Contracting Strategy For Electro-Mechanical Supply Contracts

1.1.

Forms of Contracts Currently Used

A. Use FIDIC 1999 'Yellow Book' for off-shore Design/Supply only contract.
B. Use a separate professional services type of contract for the on-shore Installation
Supervision and Commissioning Services;
C. Since A & B above are with the same company, then a separate interface agreement letter is
being used to link certain liabilities between the two contracts.

1.2.

Problems Encountered
(Lettered items correspond to lettered items in 1.1 above)
A. Out of a total 168 Sub-clauses, the following changes have been made:

Deletion of 50 original Sub-clauses (30%);

Total of 65 original Sub-clauses modified (39%);
Total of 20 new Sub-clauses added.

Such a high level of changes is due to the fact that FIDIC Yellow Book was designed to be
used as a design/supply and install contract. When you try to make the contract off-shore
only and remove the installation component from the scope, then the contract has to be redesigned.
Typically, if you have to make so many changes to the conditions of contract, then you are
probably using the wrong form of contract
B. Contract cannot be linked to the Supply Contract in any way in order to prevent show-cause
for enjoinment.

Separate Commencement Date which is 4 months after the Commencement Date of

the Supply Contract;
Contractor is only supervising the Employer's installation team, but has no authority
over them. However, the Contractor is then 100% responsible for completing the
commissioning works. Poor performance of the Employer's installation team could
be used as an excuse for delay of the commissioning.

C. The Supply Contract and the Supervision and Commissioning Services Contract have the
same end date - namely when the Employer issues the Taking Over Certificate. So all the
Contractor's obligations under the Supply Contract (i.e. performance guarantee, liability for
defective plant, clear and concise installation drawings, etc.) remain in force during the

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Considerations For New Contracting Strategy For EM Contracts

Hedcor Inc. - Engineering and Construction Department

20 July 2012

duration of the Supervision and Commissioning Services Contract. So a separate Interface

Agreement letter should not be necessary to 'bridge' the two contracts.

2.0

Suggested Contracting Alternatives

2.1.

OPTION 1 - Using the NEC3 Supply Contract 2007 and NEC3 Professional Services
Contract
This would be similar to our current contracting strategy - having a separate off-shore Supply
Contract and an on-shore Construction and Commissioning Management PSC.
The New Engineering Contract (NEC) system is a division of the Institution of Civil Engineers
(ICE). NEC3 is a family of standard contracts with the following notable characteristics:

Its use stimulates good management of the relationship between the two
parties to the contract;
It can be used in a wide variety of commercial situations, for a wide variety of
types of work and in any location;
It is a clear and simple document - using language and a structure which are
straightforward and easily understood ('Legalese' is removed).

A. NEC3 Supply Contract 2007

1. Typical target applications include:

major supplies, particularly across international boundaries;

complex process plant installed by a purchaser but requiring on site
commissioning and testing by the plant supplier.

2. The following options would be used in assembling the Supply Contract:

Option 'A' - Priced contract with activity schedule;

Option X3 - Multiple currencies;
Option X4 - Parent Company Guarantee;
Option X7A - Delay damages for delay of Delivery;
Option X7B - Delay damages for delay of Completion;
Option X12 - Partnering (in the case of a Joint Venture);
Option X13 - Performance bond;
Option X14 - Advance payment to the Supplier;
Option X17 - Low performance damages;
Option X20 - Key Performance Indicators;
Option X21 - Delay to the defects date;
Option X22 - Spare parts

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Considerations For New Contracting Strategy For EM Contracts

Hedcor Inc. - Engineering and Construction Department

20 July 2012

B. NEC3 Professional Services Contract (PSC)

1. This form of contract can be used for the appointment of a construction manager or
supervisor under an NEC contract and also for the appointment of persons fulfilling
other roles associated with construction contracts (such as a designer responsible
directly to the Employer). It is a 'shell' contract which requires important information
to be provided separately as the Contract Data (like the Appendices and Schedules
used in FIDIC).
2. Very flexible and provides four types of payment mechanisms:

Option A - Priced contract with activity schedule - a lump sum priced contract
in which the risks of performing the Scope of Services at the agreed price are
borne mostly by the Contractor;

Option C - Target contract - where the financial risks are shared by the
Employer and the Contractor in agreed proportions;

Option E - Time based contract - type of cost reimbursable contract in which

the financial risk is borne mostly by the Employer; and

Option G - Term contract -where various items of work are priced on a time
basis.

3. The following secondary options would be used in assembling the Contract:

Option X1 - Price adjustment for inflation;

Option X2 - Changes in the law;
Option X3 - Multiple currencies;
Option X4 - Parent company guarantee;
Option X5 - Sectional Completion;
Option X6 - Bonus for early completion;
Option X7 - Delay damages;
Option X8 - Collateral warranty agreements;
Option X9 - Transfer of rights;
Option X10 - Employer's Agent;
Option X11 - Termination by the Employer;
Option X12 - Partnering (in the case of a Joint Venture);
Option X13 - Performance bond;
Option X18 - Limitation of liability;
Option X20 - Key Performance Indicators;
Option X21 - Delay to the defects date;
Option X22 - Spare parts

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Considerations For New Contracting Strategy For EM Contracts

Hedcor Inc. - Engineering and Construction Department
2.2.

20 July 2012

OPTION 1 - Using An EPCM (Engineering, Procurement and Construction Management)

Form Of Contract
A. This of course would be combining the off-shore component with an on-shore professional
service component. The Employer would be responsible for installation and commissioning
works. Fee Schedule would consist of a payment milestone table for the off-shore
design/supply components and a separate lump sum amount for the construction
management professional service. The Scope of Services would also be clearly separated
into the two parts as well.
As confirmed with Hedcor's taxation officer, as long as the Fee Schedule clearly separates
the amount associated with the off-shore component from the amount associated with the
on-shore professional service component, then we can still enjoy the tax holiday only on the
off-shore component. And as long as the on-shore construction management component
does not exceed 183 days, then only VAT is applicable to the on-shore component. Only if
the duration of the on-shore component exceeds 183 days will a separate withholding tax
be imposed. And depending on which country the Contractor is from, the withholding tax
percentage would be reduced in accordance with any tax treaties with that country.
1. Advantages
1 One contract between the Employer and Contractor liabilities and performance
2
3

guarantees are effective throughout the contract's duration up to issuance of

completion certificate.
Contractor is responsible for managing the installation and commissioning works
so that performance requirements are achieved. More obligatory than just
casually supervision of the installation works.
Employer's Operations Team gets first-hand experience in installing and
commissioning the Plant under the management of the Supplier.

4 One Programme so managing cause and effect issues is a lot more simple.
5 A separate Interface Agreement letter is not necessary to link a Supply Contract
and a separate Supervision and Commissioning Services Contract.

B. The term 'EPCM' is still relatively unknown amongst a large part of the construction
fraternity. Under the EPCM model the contractor does no building or construction - rather
he develops the design, supplies the equipment and manages the construction process on
the Owner's behalf. An EPCM contract is a professional services contract which has a
radically different risk allocation and different legal consequences when compared to a
standard EPC contract. The key difference is that under an EPCM contract, other parties
[the Employer for example] constructs the project.
The following forms of contract could be used:

EPCM contract by the Construction Owners Association of Alberta; or

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Considerations For New Contracting Strategy For EM Contracts

Hedcor Inc. - Engineering and Construction Department

2.3.

20 July 2012

The NEC3 Supply Contract (the conditions are well suited and only certain parts of
the Contract Data sections would need to have two parts - one for the off-shore
supply component and one for the on-shore construction management services
component.

Recommendation
Actually, I would recommend having both of the options outlined above included into our new
tendering and contracting strategies.
To simplify the new tendering strategy, and also the contract administration after execution, I
would recommend going with OPTION 2 above if we intend to use one Contractor for both the
supply and the construction management.
If we ever decide to contract one company to supply the equipment and then a separate
company to perform the construction/commissioning management, then of course OPTION 1
above would be appropriate.

Prepared by:
Jeff Barnes
Commercial Manager
Hedcor - Engineering and Construction Dept.

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