Focus on EPCM disputes - Why disputes arise and resolution strategies

What is EPCM?

EPCM (Engineering, Procurement and Construction Management) is a project delivery method often used on large and complex projects, where the Client directly procures the physical works and the delivery of materials under a series of works contracts and also engages an EPCM Contractor. The EPCM Contractor usually does not carry out any physical works, but is appointed to undertake engineering, procurement services (in connection with the works packages) and to provide construction management services during the execution phase of the project.

This means that, unlike many EPC contracts, under EPCM there is no single point of responsibility and the EPCM Contractor will not have full responsibility for delivery of the project in accordance with milestones or within budget and ultimately is not responsible for the overall performance of the works or project as a whole. The usual trade-off for this is that there may be savings in cost by avoiding the ‘wrap’ applied by an EPC Contractor and the Client may be able to get certain works packages away early. The Client may also wish to have greater control over certain elements of design than might be possible under a traditional EPC contract.

We talk more about the EPCM structure and when it is commonly used in our other articles on the EPCM hub: “What is EPCM?” and “When would you select EPCM?”

Why disputes arise

Whilst one of the key benefits of the EPCM structure is that it involves procuring a number of different work packages with different works contractors, giving the Client more control over the supply chain and potentially realising time and cost savings (see our article “Comparison of EPCM and EPC" on this), this multi-party contracting feature can also lend itself to complicated and protracted disputes.

Some common issues which can arise as a result of the multi-party nature and structure of EPCM are:

• Uncertainty as to where liability for design and work package interfaces rests and the degree of reliance that can be placed on information generated by the multiple parties involved in the project - this can lead to design defects, variations and associated delays;
• The progress of the works being reliant on detailed information sharing between numerous parties means there may be bottlenecks and resultant delay and disruption;
• Inconsistency between the works package contracts and/or the EPCM Contractor’s deliverables and responsibilities, means there may be a lack of clarity as to who is responsible for what and what recourse the Client has against whom.

The EPCM Contractor usually has responsibility for managing work packages and the design process with work contractors, whilst also being responsible for producing the design. The nature of this role can exacerbate issues that can lead to disputes, particularly because the EPCM Contractor may seek to protect its own position if there are issues with design and associated delay or cost increases. The key to unlocking the dispute is understanding where the line is between design development during the execution of a project and additional costs arising from defective design.

Our article “Design liability and defects on EPCM projects” will look in more detail at examples of disputes under EPCM, in particular those relating to design defects and the role of the EPCM contractor.

Dispute resolution strategies

Given the issues outlined above, as a Client setting up an EPCM procurement it is important to structure the Project to include the following from the outset: (i) a dispute avoidance strategy; (ii) adequate self-help remedies for the Client and, (iii) a dispute resolution strategy. Issues that are often worth considering include:

Clients and EPCM Contractors should be aware of what mechanisms they include in work package contracts in respect of variations and, where possible, try to negotiate clauses which allow the Project to continue to progress whilst matters of entitlement to time and money are being resolved. For example, ensuring that the works contractors must continue with instructed variations, whilst questions of liability and entitlement can be determined by the Client/EPCM Contractor (with the individual works contractor retaining the right to dispute this in the future).

• Do the contracts being used across the project talk to each-other? Do they have the same terminology and stages? Whilst the notion of ‘back-to-back’ does not apply as it does between a main contractor and subcontractor, have the contracts been considered alongside each other?
• How are issues required to be flagged to or by the EPCM Contractor? Early warnings, updated programmes, outturn cost forecasting, risk meetings and interfacing/co-ordination meetings may all have a part to play.
• Picking the right team and ensuring that the EPCM Contractor is sufficiently experienced with an appropriate internal management system in place to manage and administer the project.
• The balance between driving the correct behaviour with the EPCM Contractor and dealing with potential disputes with the EPCM Contractor. Incentivisation mechanisms in the EPCM Contractor’s contract may be appropriate for driving the right behaviour.
• The impact of some clauses on what “skin in the game” the EPCM Contractor has – responsibilities for defects, net contribution clauses, liability clauses all need to be carefully considered.
• Throughout the course of the Project, the Client should be kept fully involved in any issues at an early stage and ensure that it is kept informed by the EPCM Contractor, particularly in respect of early warnings, design defects and delays/disruption. The benefit of including effective obligations relating to regular meetings, sharing documents and reporting cannot be underestimated
• Whether the Client should have its own independent ‘expert’ on hand to be able to advise on the performance of the EPCM and works package contractors and also understanding potential design issues so that the Client is better able to identify who is at fault for any issues (e.g. defects or interfaces) at an early stage.
• Drafting consistent dispute resolution provisions across multiple contracts allowing disputes to be consolidated or parties to be joined can also help to avoid the time and cost of multiple concurrent proceedings and associated enforcement issues. Our article “Dealing with multi-party disputes” considers this in more detail.
• Considering:

o the role of ADR provisions to try to avoid formal disputes;

o the possible role of a Disputes Review Board or independent Engineer; and

o whether and how a statutory right to adjudication might cut across other provisions for multi-party disputes or ADR provisions.

The above are just some suggestions and tips for avoiding and managing disputes and having a strategy in place; however, given the fact specific nature of complex EPCM projects, please do get in touch with our experienced project advisory team if you have any issues on your project. Our article on “EPCM and Project Advisory Services” demonstrates how we can help.