Normally, for building a polyester plant, the Owner will
sign an EPC (Engineering, Procurement and Construction included pre –
Commissioning and Commissioning and training) contract with the EPC contractor.
In the petrochemical and polyester industry, there is no any EPC Contractor in
Vietnam who can execute a full EPC project. Therefore the EPC contractor is
selected and awarded by the international bidding. The major factors for
executing an EPC project are the contract clauses which are normally stipulated
too generally with unclear understanding and interpretation when having
disputes between the contractor and the owner. Therefore, studying the method
to develop the effective clauses in the EPC contract is necessary to simplify
and make involved parties to understand and interpret clearly during the
contract negotiation prior to the EPC contract signing and commencement. The
understandable and applicable contract clauses properly will help an EPC
project to be executed smoothly and effectively.
In order to minimize the interfaces and risks between the
separated contractors and the Owner during executing a polyester project,
Owners normally prefer to award and sign an EPC contract with an EPC contractor.
However, this project delivery method will take a lot of time to make bidding,
clarification, explanation and get the mutually agreement on the contract
clauses between the contractor and the Owner. The following problems are
normally involved with the EPC contract clauses:
1. Take time to make the
bidding, clarification and finalization before contract signing;
2. Wrong understanding and
interpreting of stipulated clauses in the contract;
3. Conflict between contractor
and the Owner during project execution.
An EPC contract is generally applied for developing a
polyester project, in case of problems or disputes happen during the project
execution, then these problems and disputes shall be resolved in accordance
with stipulated clauses in the signed contract. Therefore, Vu Dinh Duy made
a case study which focused on the following issues related to EPC
contract:
1. To study EPC contract
process and management from literature review;
2. To study the contract
clauses in EPC polyester project;
3. To study the implementations
of the contract clauses and their performance with reference to project
advantages and problems.
EPC Contract, known as the
“Lump-sum Turnkey Contract”, “package deal”, or Engineering, Procurement,
Construction and Commissioning Contract, places the duty to design, procure,
construct and commissioning solely on the Contractor. The term “Lump-sum
Turnkey” tends to mean the most extreme form of placing design, procurement,
construction and commission responsibility on the contractor such that after
completion the Owner need only turn the key to commence operation of the Plant
or Constructed facilities.
The use of EPC Contract results
in a considerable reduction of intervention by the Owner in design,
procurement, construction and commissioning process throughout the Project. The
role of the Owner will consist primarily of contract administration, such as
supervision, review and/or approval of critical works of detailed designs,
procurement of long-lead items etc.
Lump-sum pricing method is often
used for EPC Contract and enables the use of fixed payment by stages of
completion. Lump-sum pricing and fixed installment payments provide the Owner
with greater certainty in overall cost as well as in the timing of payment.
Advantages of EPC Contract
The EPC Contract makes contractor
entirely responsible for the whole project regarding detailed design,
procurement, construction and commissioning. The Owner receives a completed
project in accordance with his performance specification.
The Owner does not need to worry
about co-coordinating contractors effectively and avoids claims resulting from
lack of interface definition.
In addition, single-point
responsibility can also reduce the opportunity for claims by the contract. The
Contractor must deliver the works that are fully operational to the
specifications of the Owner; any defect or default is automatically his
responsibility except where the contract provides otherwise. Everything
relating to the works can, thus, be concentrated in a single point of
responsibility – the contractor.
With lump-sum pricing method,
this system reduces front-loading by the contractor and encourages rapid
completion. Also, it facilitates financing, as lender will have greater certainty
of financial exposure and the timing of draw-downs.
The control given to the
contractor should facilitate implementation of new and better approaches to
design, developed through his experience and expertise. The contractor will
have an intensive to implement such time saving changes under the turnkey
structure.
Since the designer, purchaser,
constructor work as a team, they are more likely to identify critical flaws in
the design at an earlier stage, ensuring avoidance or mitigation of the flaw
when such action is more effective. This team approach will help avoid many
design, procurement, construction, commissioning risks which a separate
designer, purchaser, constructor would not be able to identify, The joining of
the design, procurement, construction and commissioning task under on
contractor may also reduce the number of disputes which arise between the
contractor and Owner.
Disadvantages of EPC Contract:
Loss of control. The overall
supervision role of the Owner is absent from the EPC Contract. The EPC model
generally contemplates less day-to-day intervention. Under the EPC contract, it
may be more difficult for the Owner to exercise his variation power properly.
He may be distanced from the design, procurement, construction activities,
reducing his understanding of the process used and his ability to verify for a
variation and whether a variation proposed will affect the performance of the
finished works.
The contractor will want to
execute the works within the parameters of the Owner’s requirements for the least
cost possible. The contractor in a EPC contract may be tempted to under-design
the project in order to cut his costs and save on time.
Cost of risks. Under the EPC
contract the Owner benefits from an increased amount of the risk of the project
being placed on the contractor. However, depending upon market forces, a
contractor will attempt to increase the contract price in accordance with the
increase in risk. Where there is little competition, the Owner may have to
assume the cost of the increased risk placed on the contractor. Thus the Owner
may end up paying a higher overall price for the project due to the degree of
risk that is placed on the contractor and the need for the contractor to price
such risk.
So that, EPC contracts nowadays
become popular in construction projects, especially in oil and gas sector.
However, together with the advantages, EPC contract also exposes its
disadvantages and is quite complicated in terms of legal issues, therefore the
Owner and the EPC Contractor shall have enough experiences and knowledge to
understand lump sum contract characteristics from the perspectives of both the
contractor and the Owner in order to avoid their faults and mitigate the risks
during contract execution.
The EPC contract also come many
new risks that are often severe, due to the complex nature and high cost
frequently associated with this type of project. Understanding the risks and
some of the other unique characteristics of EPC contracting is critical to a
successful project where both the owner and the contractor obtain the high
rewards for the risk.
Abstract
The Vietnamese Textile and Garment (T&G) industry
consists of around 2.000 enterprises (25 State owned enterprises, 1.500 private
enterprises and 450 reign direct investment enterprises) with over 2 million
employees involved. Vietnam is ranking the 10th largest textile and apparel
export countries in the world. The industry generates an economy contribution
of 8% to country’s GDP. The T&G industry is employing 12% of national
industrial workforce, holding the second position in export turnover and making
the contribution of 14% to country‘s export turnover. Average growth rate from
2002 - 2007 is about 18% per year.
Therefore, valuable arguments for the implementation of a
Polyester fiber project:
1. Saving
of foreign currency due to substitution of imported Polyester staple fiber and
filament;
2. Creation
of new employment for qualified labor;
3. Further
strengthening of the textile industry in Vietnam as a second largest export
earner after crude oil;
4. Establishment
of the whole polyester esterification, polycondensation, spinning and fiber
drawing process through introduction and transfer of state-of-the-art
technology;
5. First
step in the Vietnamese synthetic fiber industry to extend the business into the
upstream petrochemical industry, e.g. production of PTA;
6. Stable
and long term local supply of staple fiber to the domestic downstream textile
industry including the improvement of quality due to close cooperation between
domestic companies.
Normally, for building a polyester plant the Owner will
sign an EPC (Engineering, Procurement and Construction included pre –
Commissioning and Commissioning and training) contract with an EPC contractor.
In the petrochemical and polyester industry, there is not any EPC Contractor in
Vietnam who can execute a full EPC project, therefore the EPC contractor is
selected and awarded by the international bidding. The major factors for
executing an EPC project are the contract clauses which are normally stipulated
too generally with unclearly understanding and interpreting when having
disputes between the contractor and the owner. Therefore, studying the method
to develop the effective clauses in the EPC contract is necessary to simplify
and make involved parties to understand and interpret clearly during the
contract negotiation prior to the EPC contract signing and commencement. The
understandable and applicable contract clauses properly will help an EPC
project to be executed smoothly and effectively.
The sensitive clauses in the EPC
contract are also needed to focus in order to minimize the conflicts and risks
between the EPC contractor and the Owner. This study will also discuss on point
of view and how to managing the EPC contract of Dinh Vu Polyester project and
focus on the following issues related to EPC contract:
i. To study EPC contract process and management from literature
review;
ii. To study the contract clauses in EPC polyester project;
iii. To study the actual
Dinh Vu polyester project Contract implementation.
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