Focus on EPCM Disputes - Design liability and defects on EPCM projects

Introduction

Under an EPCM structure the Client directly procures the physical works and delivery of the materials under a series of works contracts and an EPCM Contractor undertakes some or all of the design and manages those works contracts. There are therefore numerous interfaces across multiple parties to deal with.

This has a key impact on how liabilities operate, particularly in the event of a design defect. As noted in our articles “Design responsibilities under EPCM” and “Defects under EPCM”, EPCM contracts commonly split design liability across the EPCM contract and the various supply chain and works contracts that are engaged directly by the Client in an EPCM structure.

This can also lead to complicated multi-party disputes - we look at why these arise and how they can be managed in our articles: “Why disputes arise and resolution strategies” and “Dealing with multi-party disputes”.

Split design liability

Under an EPCM structure, the EPCM contractor will undertake engineering or design services for the Client. This obligation may include a wide range of different obligations, for example:

• taking the Client’s design and developing it to apply to the particular project;
• developing a fully designed solution for the Client; or
• taking the Client’s requirements and breaking them down into a series of specifications to take out to tender for individual works contracts.

In many of the scenarios, individual works contractors may have some design responsibility in addition to the EPCM Contractor. The Client might also expect that both the EPCM Contractor and the works contractor should also have duties to notify of design defects as and when they become apparent to them.

The responsibility for design and what happens if things go wrong can therefore be much more complex than it would be under an EPC “turn-key” project.

What can happen when there is a design defect?

When a design defect arises during the execution phase of a Project, the question of who is responsible for the design might not be a simple one to answer. In any event, the project needs to resolve the issue and this may result in the EPCM Contractor issuing a scope change variation to a works contractor, additional services being undertaken by the EPCM Contractor and, potentially, delays to other works contracts (resulting in claims from them).

Under the EPCM structure, the Client would need to pay:

1. the works contractor receiving a scope change (unless there was the scope to argue that the design defect was their responsibility);
2. the EPCM Contractor for its additional services (unless there was the scope to argue that the design defect was their responsibility); and
3. the costs claimed by other works contractors delayed/impacted by the situation.

The matter is further complicated by the issue of design development – at what point is an issue a design defect?

A key part of the EPCM procurement structure is that the EPCM Contractor acts as the project manager under the EPCM Contract, issuing scope change variations. Where the design originates from the EPCM Contractor or an issue in the design should arguably have been identified by the EPCM Contractor, at what point should the Client be seeking to bring an action against the EPCM Contractor to recover its costs under (1) and (2) and not paying the EPCM Contractor’s costs of dealing with the issue?

Tips on how to manage

Picking and incentivising the right team

Key is picking the right team upfront and ensuring you select an experienced and reliable EPCM Contractor.

Contract incentives can also be offered to the EPCM Contractor – but it is important that they motivate the right behaviours. For example, what time incentive is correct for the EPCM Contractor and for the Project:

• Delay damages? Perhaps more of a deterrent than an incentive, and these can have the potential to generate adversarial behaviours between the Client and the EPCM Contractor; or
• Payment mechanics which incentivise the EPCM Contractor to seek to complete the Project as quickly as possible? Equally, if a Project is delayed, the EPCM team needs to be incentivised to remain fully engaged – these two potentially conflicting requirements need to be balanced in structuring the incentive scheme.

Checks and balances throughout the Project

Most EPCM Contractor’s contracts will contain duties on the EPCM Contractor to report to the Client. A key issue is the quality of the reports and who prepares them – as noted above, the EPCM Contractor could have responsibility for the defect and be protecting its own position. How will the Client be aware of any potential claim?

We can offer independent reviews of monthly progress reports through the lens of an experienced disputes lawyer, which can help identify these issues as they arise and explain your position both legally and commercially.

Client involvement and access to information

It is also important that there is not over-reliance placed on the EPCM Contractor in terms of notification of issues and access to information/documentation. Early involvement in meetings and having sufficient internal resources and processes in place to deal with issues proactively will assist.

We can also offer contract teach-ins to highlight key project delivery risks, and run workshops with the project team to ensure robust and consistent implementation of the relevant contracts.

Please see our “EPCM and Project Advisory Services” article for more information on how we can assist.