EPC contract settlement
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A private enterprise directly commissioned a design institute, without going through a bidding process, to carry out the construction of a large-scale chemical project under an EPC contract (schedule-based model). The design institute reduced the volume of work significantly through \"so-called optimizations\"; this can be considered, to some extent, as intentional concealment of important facts or fraud, rather than an honest expression of intentions. It can also be seen as a change in the scope of work specified in the contract, resulting in a significant difference between the actual amount of work performed and the amount specified in the contract. In accordance with the principle of risk allocation as outlined in the list, does the owner have the right to request a share of the reduction in the contract price resulting from the so-called \"optimizations\", given that this is not specified in the contract? Is there a legal basis?
This post was last edited by snmyf on 2017-1-10 at 11:35. Who provided the list? Through technical optimization, if all the required functions can be fully achieved, the reduction in workload is beneficial for both the owner and the EPC contractor. The key issue is that if this list is prepared by the EPC contractor, and they already know before signing the contract that significant workloads can be reduced through optimization, this is considered unethical. After all, carrying out technical optimization involves a lot of work such as design, calculations, and the reselection of equipment, in addition to having to bear the risks that may arise from such optimizations. EPC is a turnkey project, and by convention, the owner should have no grounds to request a reduction in the cost of the construction works due to technical optimizations; that’s how I understand it. Since the owner has agreed to carry out the optimization, it indicates that the optimization plan is clearly reliable and advanced.
The owner did not prepare the list; instead, it was prepared by the EPC contractor. This is one of the disadvantages of direct contracting – there is no thorough comparison and evaluation through a bidding process. Even though it is a mature technology, there are still opportunities for \"so-called optimization\".
We believe that the scope of the contract has changed, for example, two sets of XXX have become one set of XX. The owner should prepare a list; the work during the project definition phase was not thorough.
“Two sets of XXX became one set of XX”. If there are new products that can replace the two sets of XX without affecting production or the performance evaluations, then this is a viable option.
This post was last edited by Zhizhi Ming on 2017-1-13 at 08:21. The approach of private enterprises entrusting design firms directly (without going through bidding processes) under an EPC contract (using a bill of quantities format) seems feasible; the key is to have proper settlement and audit procedures in place, otherwise it will only result in losses for everyone involved.
If the scope changes, which means the baseline has changed, then it’s a major change, and a change approval process must be followed. If the client is also involved in the approval process, then you shouldn’t have to bear any of the associated risks
If the scope changes, which means the baseline has changed, then it’s a major change, and a change approval process must be followed. If the client is also involved in the approval process, then you shouldn’t have to bear any of the associated risks