【Haichuan EPC】The EPC fixed-price contract exceeds the budget – where lies the boundary of responsibilities between construction and design?

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In the field of EPC projects, “cost overruns in lump-sum contracts” is a problem that gives headaches to clients, contractors, and designers alike. When the design and construction costs exceed the estimated budget due to the client’s requirements, can the contractor be paid based on the actual amount of work done? Should the designer still bear the cost of the overruns? Today we’re going to clarify this matter. I. The core conflict in the dispute among the three parties: The contractor presents the design drawings with an overestimated cost to the client, saying, “It was you who caused the design to have an overestimated cost; therefore, the settlement should be based on the actual construction drawings!” ”Party A immediately turned to the design firm and said, “You’ll be responsible for the costs that exceed the budget!” ”The designer was full of resentment: \"It was modified according to your client’s requirements – why should we bear the blame?\" ”The three parties entered into a tug-of-war over this matter. II. What does the law say? During the trial, the contractor cited Article 777 of the Civil Code: \"If the client changes the requirements for the work undertaken midway, causing losses to the contractor, they shall compensate for those losses.\" ”The message is clear: it was the client who requested an overbudget design, so the settlement must be based on the actual costs. Party A countered: \"The design within the estimated cost is an obligation of the consortium; any costs exceeding the estimate are the responsibility of the party responsible for the design and construction.\" ”The designers also argued firmly: “It is my duty to carry out the design within the estimated budget; any changes beyond that were made at the client’s request, so it is not our responsibility.” ” The court ultimately ruled that: • As long as Party A approves the revised design, the contractor has the right to receive payment based on the actual costs incurred, which is in line with the principles outlined in Article 777 of the Civil Code. •The design unit has exceeded the budget as required by Party A, and thus bears no responsibility for any additional costs. •Party A shall settle the payment based on the actual cost after the budget exceeds the initial estimate. III. Three key points for clarifying rights and responsibilities
1. If the contractor’s right to settlement exceeds the estimated amount due to requirements and approval from the client, and not because the design unit made unauthorized modifications, then the contractor may be settled based on the actual amount of work completed. Article 777 of the Civil Code provides a clear basis for this. 2. Scope of responsibilities of the design party: The design agency is obligated to carry out the design within the estimated budget; however, if the client requests additional work beyond this budget and the design agency complies with such requests, it is not liable for the extra costs. However, if the design unit fails to follow the specifications during design, resulting in unnecessary cost overruns, it may still be held liable, even if the client approves such overruns. 3. Significance of the employer’s approval: The employer’s approval for exceeding the budget does not mean that the designer can design arbitrarily without adhering to relevant standards; however, if the excess budget is requested by the employer itself and the designer is not at fault, then the designer is exempt from liability. IV. Three key actions to avoid pitfalls in practice 1. The contractor: Keep evidence of the client’s instructions. Save all written instructions, meeting minutes, emails, etc., from the client that request an increase in costs, to prove that it was the client’s wish for such an increase and not the design firm’s own decision; this lays a solid foundation for subsequent cost settlements. 2. Designer: Submit for approval and organize process documentation. This includes the client’s approval documents regarding any design revisions that exceed the budget, as well as the designer’s own documentation detailing how it adjusted the design in accordance with the client’s requirements. This serves to demonstrate that the design complies with the client’s instructions and that no faults were committed by the designer, thereby avoiding any liability. 3. Consortium: The parties involved can form a consortium by negotiating with Party A regarding design and construction, work together with Party A to clarify the responsibilities of each party, and strive for a settlement based on actual costs, thereby avoiding working in isolation. In summary, in cases where the EPC contract exceeds the budget, as long as such excess is requested and approved by the client, the contractor can settle the accounts based on the actual costs, and the designer, by carrying out the work as required, bears no responsibility. The key is to identify the evidence of \"who caused the overgeneralization\", and make sure that the boundaries of responsibility remain clear.