Focus on EPCM Disputes - Defects under EPCM

Introduction

Under an EPCM contract, an EPCM contractor is employed to undertake some or all of the following:

• the Engineering (or design) for an individual project
• Procurement services – typically the preparation of the tender documents, analysis of the tender returns, and the negotiation of the works contracts. The works contracts are the direct contracts entered into between the client and individual works package contractors or equipment suppliers for the project and
• Construction Management services to manage the project through the execution phase of the project

A more detailed explanation of what EPCM is and a comparison between EPCM and EPC is contained in our articles, What is EPCM? and Comparison between EPCM and EPC

The structure and liabilities for EPCM contracting are fundamentally different to those of an EPC Contract. This is particularly the case in relation to remedying defects. Looking at each of these in turn:

The EPC position regarding defects

Under an EPC contract, the goal is for as much responsibility as possible for the design and works to be passed to the EPC contractor. For some projects, some elements of design responsibility and/or responsibility for delivery for part of the works may be retained by the client. However, to the extent that the EPC contractor is responsible, where elements of the design and/or works are subcontracted by the EPC contractor, this doesn’t make any difference to the liabilities of the EPC contractor.

The EPC contractor also offers a wrap defects liability obligation, meaning that the defects liability period will start from a single date for a section or the whole of the works - irrespective of when the defects liability obligations start and finish under individual sub-contracts.

Assuming that the EPC contractor is responsible for both designing and undertaking the works, there is no need to consider the nature of a defect under an EPC contract – the EPC contractor is required to rectify all defects.

Most EPC contracts also contain delay liquidated damages to ensure that defects which arise prior to completion are remedied as quickly as possible by the EPC contractor. In certain sectors, EPC Contracts will additionally contain liquidated damages or other time incentives that operate after take-over has occurred to motivate the EPC contractor to rectify defects that arise after completion as quickly as possible. 

The EPCM position regarding defects

Under the EPCM contracting structure, the obligations in relation to remedying of defects are more complex.

The EPCM contractor may have some or all of the following responsibilities:

• design for all or part of the project
• design co-ordination of the works contractors’ designs into the overall design
• on-going monitoring duties during the construction phase

Individual works contractors may have some or all of the responsibilities:

• design for their works package
• undertaking works and/or supplying materials or equipment for their works package

The source of a defect may therefore arise from one or more works contracts, from the EPCM contract or may also be a combination of the two. Under an EPCM contract, defects therefore need to be considered in two ways:

i) what are the mechanics for getting the defect remedied?

ii) what are the liabilities for the defect?

Mechanics for getting the defect remedied under EPCM

As a result of the split of responsibilities for the delivery of design and works in an EPCM contracting structure, a defect might arise that requires works to be undertaken by a works contractor that do not arise from a defect under the relevant works contract.

For example, take a design defect that formed part of the specification provided to an individual works contractor. The rectified design might require an adjustment to the specification. Do the mechanics exist in the works contract to allow for such an adjustment? If they don’t, correcting the defect might require a negotiation with the original supplier at a time when there is no commercial bargaining power.

Understanding the starting point for the defects liability periods for the individual works contracts under an EPCM contracting structure is also key when compared to the wrap position offered by an EPC contract.

Liabilities for defects

When compared to an EPC contract, it is likely that the liability pot will be smaller and spread across multiple contracts.

The client may be faced with paying for some or all of the costs of rectifying a defect and seeking recovery back from another party. This is the nature of multi-party contracting structures.

Dispute resolution mechanisms in both the EPCM contract and the works contracts should be considered to understand how they would operate in relation to all disputes that touch on more than one contract and defects is a key consideration of this analysis.

Conclusion

On first glance defect liability provisions in contracts used for delivering projects through an EPCM procurement route may look very similar to EPC procurement routes.

However, in an EPCM structure liabilities for defects are spread across multiple contracts and consideration should be given to how the defects mechanics across works contracts and the EPCM contracts knit together and whether individual contracts provide adequate recourse for a failure to comply with their contractual obligations - including the knock-on impact of that failure on other contracts.