Logic behind using IChemE contracts
STUART JORDAN* urges the use of a sector-specific contract when doing process engineering, instead of the standard international construction contracts.
01 May 2015
It is stating the obvious that the Middle East is big on chemical engineering. The Gulf region has a huge concentration of petrochemical and other process plants with plans everywhere to build more.
Process plants can include oil refining, gas conversion, other petrochemical processes, industrial chemical processes, food production, water treatment, waste-to-energy, carbon capture and nuclear power generation.
Hence, it is surprising that there is not much use of specialised process engineering contracts to build them – specifically the Institution of Chemical Engineers (IChemE) forms of contract. These are the only international forms written specifically for this purpose and, as such, they deal very well with issues specific to this sector. These forms are still relative new on the market, the international versions having been first published in 2007. For anyone thinking of using an IChemE form, it will useful to look at its overall suitability, strengths and weaknesses, including:
• How does it compare with other, more well-used forms such as Fidic (Fédération Internationale des Ingénieurs-Conseils)?
• What is the core risk profile? Is it generally tough on contractors? Is it “bankable”?
• Is it an EPC (engineering, procurement and construction) contract?
• What is special about it? How does it deal with design, construction, completion and commissioning of process plant?
• Is it easy and familiar to operate, or is it unusual or strange in its approach to contract administration?
Of course, Fidic forms dominate in the Gulf. The sheer familiarity of them among contractors, project managers, consultants, clients and banks has created a self-reinforcing kind of currency for those contracts, which makes it difficult sometimes to use anything else. That is often not a problem as Fidic forms are a good platform for many types of project. That said, Fidic has gained so much currency in part because for a long time it was the only “international” suite of contracts that is not produced for a single domestic market and not carrying country-specific references.
The IChemE also published only domestic forms prior to publishing the international versions. There are four international forms – three main contracts and a sub-contract – as follows:
• For lump sum (fixed price) contracts (International Red Book);
• For reimbursable contracts (International Green Book);
• For target cost contracts (International Burgundy Book); and
• Sub-contract (International Yellow Book).
The IChemE forms work on a dual track. One track deals with physical defects in the plant, and the provisions for identifying and dealing with those defects are similar to other contracts. Quite separately, the IChemE forms test and certify plant performance against performance guarantees set in the contract. On that measure, the IChemE forms are conventional EPC contracts. The main distinguishing factor is in the provisions for testing performance-critical elements, fixing them and in testing and optimising whole-plant performance. The consequences of failure to meet performance guarantees are quite separate from defects correction.
The rationale behind a specialised process contract is that process plant tends to be more complex than other forms of engineering; so the contracts need to make proper provision for various levels of testing and inspection, that is, to describe those tests and inspections, to allocate responsibility for them or for each part of them, to clarify their timing and the location and conditions of carrying them out, the consequences of passing them and the consequences of various degrees of failure.
All other engineering contracts, of course, contain a testing regime but they are not as detailed or as extensive (covering pre-completion, taking over and acceptance stages) as the IChemE regime, which recognises the high level of technical input required in the design and construction of process plant. As with other types of plant, there is need for a demonstrated level of performance of the completed and commissioned plant. At the low end, these tests can be one-off, simple and quick to do. However, because the technical solution in process plant is both more complex and often bespoke, a conventional testing regime with a “pass/fail” outcome is not suitable. The contract needs to recognise that optimisation of the plant’s performance is complex, lengthy and, in many ways, a collaborative process.
BASIC RISK PROVISIONS
The risk profile is not as onerous on the contractor as is the Fidic the EPC/Turnkey (Silver Book) form.
The contractor may be entitled to additional time and money on encountering site conditions which could not reasonably have been foreseen, and which also could not have been obtained by a visual inspection or by “reasonable enquiry”.
The purchaser (employer) is responsible for other accuracy of any information provided by him or on his behalf. This is directly opposite to the Silver Book approach, which does not allow the contractor to rely on any information outside of very limited categories.
The contractor is required to correct any error, discrepancy or omission in any documentation provided by the purchaser and will overcome the consequences of such error, etc, but this will be at the purchasers’ cost. The purchaser is required to obtain any permits and licences.
To many on the developer side, especially in the Gulf, this will be an unacceptable risk profile in any EPC contract. Of course, these provisions are routinely amended and this can be done without detracting from the really useful provisions on completion, testing and certification.
COMPLETION ETC
This is where the IChemE form comes into its own. There are extensive provisions for pre-installation and other pre-completion testing.
The completion certificate will only be given when the plant is substantially complete “and in a condition such that any procedures needed to be carried out before the plant is put into operation may be safely carried out”. The contractor carries out the completion of construction testing and the project manager is entitled to attend.
Next, taking over is triggered by the contractor declaring that the plant is ready for the takeover tests. Schedule 15 contains those procedures and again the contractor undertakes those tests.
On issue of the takeover certificate, the purchaser takes occupation, control and risk for the plant. Most important is that here, the takeover tests are divisible and do not need to be passed all at once unless adjustments to any item have been made in testing, in which case the project manager may require a combined retest. The takeover certificate may also granted on a provisional basis with certain tests not done or not passed – but this remains a risk for the contractor because if the plant subsequently fails to satisfy the requirements of any relevant takeover procedure which had previously been failed or omitted then this can lead to cancellation of the takeover certificate.
Immediately following the issue of the takeover certificate, the contractor clears site and performance tests begin.
The purchaser undertakes the performance tests, which are the ultimate tests of the plant in a running condition. The performance tests aim directly at testing the performance guarantees as set out in the contract.
The acceptance certificate which results from successful passing of all performance tests may also be given conditionally, that is, with some performance tests either not attempted or not passed.
ACCEPTANCE & DEFECTS
Subject to all of the above caveats, the acceptance certificate is confirmation that the performance guarantees have been met and that the process element of the plant is accepted as it is with or without damages levied. This does not affect the contractor’s separate obligations with regards defects.
The provisions for identifying and correcting defects are conventional. The final certificate is to be given later on the expiry of the defects liability period or the point where the contractor has made good all of the identified defects.
CONCLUSIONS
This is a straightforward and robust form of contract. It is reasonably well-balanced and most of the concepts will be familiar to users of the mainstream international contracts.
In truth, the more difficult contractual challenge with many process projects is getting any contractor to take full single-point responsibility for overall plant performance. The process engineering itself can come from several different engineers, each in small consultancies. They generally do not like the idea of being novated to EPC contractors. Their proprietary processes are not purchased but used under technology licences. Each of them might be held to a performance guarantee, just for their own part of the process. The front-end engineering (Feed) contractor will coordinate the inputs but will not usually adopt responsibility for it. In that situation, it can be difficult to roll all of those responsibilities into a single EPC.
These issues exist regardless of the form of main construction contract, so we should at least to use one which is designed for process engineering.
*Stuart Jordan is partner and co-head construction for the international law firm King & Wood Mallesons (KWM). Based largely in Dubai, UAE, he specialises in engineering and construction matters, cross border, both front end and disputes.
