In order to meet the needs
of chemicals and fertilizers in Vietnam, the Government has many projects which
are being done under Vinachem. To develop these projects, Vinachem needs to
consider which contracting method is appropriate for its particular institutional
and technical strength and weakness (including access to financing). Export
financing tend to favor the turkey contract/EPC contract and many developing
countries are willing to adopt a turkey contract as a mean of financing a
project (Merna and Smith, 1990). Turkey contracting is appropriate for both
employer and contractor who have knowledge and experience of it.
However, in the past,
Vinachem developed project under Design-Bid-Build form. The project is separated
into many packages. The employer managed the project and solved the interface
and conflicts, but it usually applied for small and medium size under about 50
million dollars. Some trouble happened at the closed out stage of project, because
of the employer’s decision to separate it into many packages. At the
commissioning and performance test run, no one is fully responsible for this
duty, it made difficulty for employer.
Recently, Vinachem
developed three large scale projects on investment. The chemical-fertilizer
plant cost about 500 to 600 million dollars. All selected contractor comes from
China and the quality is not so good in contract and project management. Most
of the major and modern chemical and fertilizer projects have never met the
high expectation. Therefore, this project is determined as critical case and
selected in order to learn lessons for the further project.
Due to the advancement in
process and technology needs in developing countries, especially Vietnam, the
chemical & fertilizer projects are increasing in size and becoming complex.
As the result, contract forms are more complex and difficult, and causing
adversarial impacts such as increase in number and frequency of claims and
disputes, besides time and cost overruns. To overcome the worsening scenario,
it is essential to develop a system that can assist the contract administrators
to understand and evaluate worth of their claims prior to taking it to
litigation (Lyer et al, 2007).
Nguyen Hong Hanh
made a case study which aimed to: (i) examine the organization structure
of the project and their performance with contractor’s effort in EPC project;
(ii) study contract administration practice in EPC of Di-ammonia phosphate
project problem in term of time and cost objectives; (iii) conduct comparative study
of important clauses between International Standard Turnkey Contract (FIDIC
Silver) and Di-ammonia phosphate Contract to identify strengths and weaknesses,
and (iv) generalize and purpose the recommendation for improving EPC Contract
implementation process for chemical & fertilizer project implemented by
Vinachem.
Conclusion
The contract
management is essential for construction project in every stage from conceptual
phase until project completion. The appropriate contract administration is significantly
important to determine the success or failure of any construction project. It
is impossible to know unforeseeable difficulties in advance and complicated to
cover all possible risks of both parties during contract negotiation stage.
Different projects have different uniqueness in many ways such as organization
administration, nature of construction work itself even when it is copied from
another similar project. There are many types of International contract forms
for Turnkey/EPC project to give guidance; therefore, both of parties need to
consider which contract form is appropriate for uniqueness of project
characteristic such as particular institutional and technical strength and
weakness of parties.
Although it
offers several advantages for large and complex projects, it brings some risks
and complexities. Each contract form affects in its own way the allocation of
risk and responsibility and co-ordination of the project. The most successful
turnkey/EPC projects have been those where most contingencies were resolved in
negotiation prior to contract signing. Turnkey procurement method is suitable
for both employer and contractor who have knowledge and experience of it in
past.
The result of
this study are presented into three main categories, namely, organization
analysis in DAP project, analysis the procedure and comment with actual
execution, and comparison of DAP contract conditions with FIDIC Silver Book.
(1)
Organization Interface Analysis in DAP project
As a result of
the organization analysis in DAP project, some factors are found out which
negatively affect to the performance of project. These all factors affect the
actual execution, some factor may occur in the future.
(a) Negative
during negotiation with Licensor:
- Lack of consistency to deal with Licensor during the
Bidding and Negotiation.
- The method for working with Licensor
(b) Negative
factor of interfacing of scope between Contractor and Owner
- Interfacing during execution of three main packages has separated
in the project (administrative area and road by Local; Process areas by foreign
contractor and railway system by Owner) may occur due to deference schedule.
(c) Negative
factors of Employer’s Organization in DAP project
- Lack of Co-ordination among employer’s organization
- Lack of experience and knowledge of employer’s personnel
in turnkey/EPC contract.
- PMC is mobilized for project too late.
(d) Procedures
in execution
- Engineering, Procurement and Construction are clearly to
execution.
- Way for execution may difference among parties relate to
project.
(2) Contract
Administration and Critical Problems at DAP project
Though the
study contract administration from mobilization, project organization,
procedures, schedule and payment method of project, it would be impossible to
identify all problems in DAP project due to the project just start in May 2012.
It may forecast based on analysis above. Most of critical may or apart has
happened as follows:
- Time and Cost impacted by Licensor
- Schedule delay in interfacing among scope of Owner and
Contractors.
- Time impacted due to site preparation and some temporary
system provided by Owner.
- Schedule delayed due to payment method, may cause the
overall schedule in the future.
There are many
factors caused to schedule delay of DAP2. Among of these, the significant
factor is payment delay to Contractor, it make the Contractor cannot catch
progress and speed up the project ahead. Consequently, this fact may lead to be
late procurement of materials. Otherwise, other parties relate project such as
the Licensor, PMC, and other contractor should consider carefully.
(3) Comparison
of DAP contract with FIDIC
The potential
problems found in this study caused from inadequacy contract administration to
cover the risk of management in the employer’s organization. As a result of
investigation in DAP contract, the Contract Price was not adjusted to take
account with some conditions related to cost that unforeseen difficulties, lack
of co-operation the employer’s personnel, interfacing among parties relate to
project, payment method, hence the employer typically placed the risks
regarding on the contractor. Consequently, due to the absence of some sub
clause that coordination of the employer’s organization and payment schedule,
the contractor has no potential claim to the employer.
Recommendation
for improving EPC project in chemical & fertilizer field in Vietnam
The contract
administration among the parties should provide a proper fair risk allocation
that covers all possible risk in accordance with the nature of each project.
The feasibility study is a significant role to determine not only any possible
risk during contract negotiation stage but also long term and short term
benefits of the particular project. In order to achieve success of chemical
& fertilizer project, the contractor should aware of all possible risks
including organizational risk, additional payment risk, payment method risk, interfacing
of all participants should develop effective communication and coordination
system.
DAP contract
complied with Silver Book. Hence, according to Huse, (2002), the conditions of
contract for EPC/Turnkey Projects (FIDIC Silver Book, 1999) are not suitable
for use in the following circumstances:
- If there is insufficient time or information for tenders
to scrutinize and check the Employer’s Requirements or for them to carry out
their designs, risk assessment studies and estimating
- If the Employer intends to supervise closely or control
the Contractor’s work, or to review most of the construction drawings.
If a
contractor needs develop the EPC contract on chemical & fertilizer project
in Vietnam, there are some useful recommendations for EPC contract
administration that should be considered as following:
(i) Licensors -
Set clear provisions of Licensor and its responsibilities before EPC contract.
(ii) Payment
term
- Set clear provision on payment method & term,
considering carefully the cash flow and agree with Owner in advance, may
consider sub-clause in FIDIC Silver Book.
- Payment should pay thought Consortium Leader to control
other member.
(iii) Extension
of Time
- Make sure that to entitle time extension due to any
delay, impediment or prevention caused by not only the Employer but also its
personnel.
(iv) Employer’s
Personnel
- To provide Employer’s Personnel Clause if a contractor
needs to coordinate with employer’s organization.
- To provide for a remedy in the event that employer fails
to ensure that his personnel cooperate with the contractor’s effort
- The time limit for the employer’s schedule delay should
be provided in the provision; otherwise, if the contractor suffers delay, the
employer should pay for acceleration cost.
(v) Risk and
Responsibility
- Describe adequate definition of their responsibilities
and provisions for impact of any delay or damages due to failure of its
responsibilities
- Clearly identify and allocate risks through the
owner/sponsor's procurement/contracting policies and procedures
- Set clear interface and request proper conditions with
Owner and other parties involved to project.
The thesis
abstract is copied and pasted below.
Abstract
The contract administration
is essential for construction project in every stage from conceptual phase
until project close out. The appropriate contract administration is vitally important
to determine the success or failure of any construction project. In recent
years, turkey/EPC projects have seen rapid growth and have been a popular
system in public sector. Due to the development in construction industry, the
natures of construction project are increase in size and becoming more complex.
In order to decrease number and frequency of claims and disputes, it is
essential to have knowledge, understanding in contract administration and
strong negotiation skill. The objective of this study intends to assist the
process of turnkey/EPC contract implementation in chemical & fertilizer
project in Vietnam, which is increasingly developed in public sector.
This study
emphasizes particular on turnkey/EPC contract implementation of chemical &
fertilizer project in Vietnam, Di-Ammonia Phosphate Project (DAP) as a critical
and single case. Due to the project just has started in May 2012 and only
getting about 30% engineering, so limit of information from project, and
therefore this study is conducted from mobilization and procedures of project
on engineering, procurement and construction, it also focus on critical issue
relate to schedule delay and payment process of project and comparative between
contract and FIDIC Silver form.
Finding from
this study is that inadequacy contract administration to cover the risk of management
in the employer’s organization, the dealing with Licensor and payment issue are
concerned as the weakness of the project contract from the point of view of
contractor. Accordingly, unclear contract conditions may lead to the dispute
arising and losing chances to recover claim. To overcome the worsening situations,
it is recommended that the contract administration among the parties should provide
a proper fair risk allocation that covers all possible risk in accordance with
the nature of each project.
