Contractual Risk and Uncertainty in EPC Capital Projects in the Middle East
The type (nature) of the Agreement (Contract) on public capital projects affects the interests of the Public, Government authorities, Financial and Insurance institutions, Contractors, and other stakeholders participating in the construction process.
In the Middle East, most Contracts are based on the FIDIC suite of contracts, written and published by the International Federation of Consulting Engineers. The FIDIC Red Book (Red Book Conditions of Contract for Construction For Building and Engineering works designed by the Employer) is the most common type, where design/built specifications are defined by the Owner (Public and/or Public Consultant) and construction liability rests with the Contractor.
These contracts are primarily the Engineering, Procurement, and Construction (EPC) type. EPC (or turnkey contracts) is the most common agreement type between the Client (Project Owner) and the Contractor(s) (single or multiple prime contractors). EPC contracts constitute a deal between the Client/Owner (Public) and one or more Contractors, who must deliver/construct a physical asset within the stipulated specs, time, and cost.
On the EPC Projects, liability mainly relies on the Contractor. The Contractor is solely responsible for completing the project on-time and handing it over to the Owner in a turnkey condition. EPC Contracts are designed and written deliberately to shift the construction risk to the Contactor.
The Contractor deals with Capital Costs and Risks.
Most EPC Contracts are lump sum, meaning that a fixed price is agreed upon before the works begin, and the Contractor agrees to execute the works described in the contract for a total sum of money (the contract sum).
The Contract Sum is the ceiling price (the cost baseline) against which the Contractor needs to reference all costs. The nature of these costs needs to be defined in the bidding stage of the project as:
1. Direct Costs
Costs required to construct an Asset are directly attributable to its construction. Expenses related to labor, materials, machinery, subcontractors
and
2. Indirect Costs
The cost of supplies, consumables, transportation, engineering services, certain overheads, insurance, compensation for damages, taxes, and capitalized interest.
Contract and Construction Management
The rules of engagement on each Contract require two main things:
- Realistic/Updated Project Budgeting
- Capture data onsite and Control the Costs
Contractors refer to and relate construction management to scheduling (planning). Well, this is partially true.
Planning is one of the project management ‘dimensions’ that should be considered in the Construction Management process. However, the most prominent and essential factor for the Contractor is the cost of resources (direct and indirect). Resources are associated with each BoQ Code Line, defining the projects’ specifications and consequently bearing the actual quantity and the cost of the work needed.
Due to the lack of integrated software tools, Contractors will usually cost the project roughly (ballpark cost) and allocate these theoretical costs to the WBS activities of the scheduling (Oracle Primavera P6), adopting a non-realistic cost estimation approach that relies on abstract and hypothetical assumptions.
Irrational Scheduling plans and WBS-based costs become the norm of construction management as duration and relations of activites provide a cost of works and impact project’s cashflow in a totally unregulated manner. Without any actual (cost database, cost recipes, productivity templates) Cost substantiation either on the actual cost of resources or the quantity required.
Change Management — Claims — Variations
WBS-based ‘construction management’ may be suitable for the Consultants, and the Owner is definitely unsuitable for the Contractor.
The Owner/Consultant directs management, claims, and payments to the project entities to his advantage.
- Duration of works (activities)
- Specs of the materials
- Quality Assurance
The Contractors' reality and perspectives are different. They are BoQ-based
The contractor’s reality is the actual site conditions, including the new works, change requests, delays from public authorities, approvals, and… unforeseen activities that trigger cost changes and scheduling delays.
The contractor must register the new site evidence daily, providing realistic on-site conditions and facilitating the collaboration between the site and office to manage works, control costs, and justify the change management claims.
Rethink Project Control: Progress seen from the lens of Cost
Signing a Contract requires ongoing Construction Management. Proper Construction Management requires integrating all processes (site and office) under a Value Perception.
A One-of-a-Kind Trilateral (3-Way) Integration of:
1) WHAT: BoQ Item Codes (Project Requirements)
2) HOW: Work Breakdown Structure (WBS) Activities
3) CONTROL: Company-wide Cost Control Codes
that interconnects all Project’s Data Dimensions, either Effort-driven, Time-driven, or Cost-driven, providing Omnipresent Projects’ Performance
