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Key Process-Plant Specific Clauses in Process-Plant EPC Contracts

29 June, 2016

Feed stock and product storage

Mostly, EPC Contracts will not provide for the handover of the facility to the project company until all commissioning and reliability trialing has been successfully completed. The raises the significant issue of the supply of feedstock and other consumables and receipt of product during testing and commissioning. The EPC Contract must clearly define the obligations of the project company in providing feed stock and sufficient storage or product demand to fully and properly commission and test the facility.

Given that the project company's failure will stein from restrictions imposed on it under its supply or off take agreements, the best answer is to match the project company's obligations under the EPC Contract with its supply and off take agreements. This approach will not eliminate the risk associated with commissioning and testing issues but will make it more manageable.

Interfacing of commissioning and testing regimes

The commissioning and testing regimes in the EPC Contract should mirror the requirements of any supply and off take agreements. Consideration must also be given to the appropriate mechanism to deal with potential mismatches between the ongoing obligation of complying with laws, and the contractor's obligation to build to a specification agreed at a previous time. This is especially significant in relation to environmental requirements, which may change over the course of the contract.

Feed stock specification issues

Where there is a supply agreement, it is vitally important that adequate review is done during the contracting process to ensure that the feedstock being provided under the supply agreement meets the requirements of the EPC Contract. Similar consideration is necessary if the project company is supplying feedstock itself. Differing feed stock specification requirements can only result in delay, cost, Claims and extension of time claims.

Interface issues between a suppliers or off taker and the EPC contractor

The project company must ensure the EPC Contract states clearly that it is the appropriate party to correspond with the supplier or off taker and the system operator. Any uncertainty may unfortunately see the EPC contractor dealing with the supplier or off taker and/or the system operator, thus possibly risking the relationship of the project company with its customer. It is the project company, which must develop and nurture an ongoing and long-term relationship with the off taker; and the EPC Contract should reflect this.

Interface issues between the operating and maintenance agreement and the EPC Contract

In many EPC Contracts, the project company is required to provide personnel to assist the contractor with commissioning. These will usually be personnel of the operator. As a result, the EPC Contract must require the contractor to give advance notice to the project company as to the likely date of commissioning, to give the operator adequate time to mobilize their personnel.

The same issue arises at completion and handover of the facility. Again, the operator will need to have sufficient notice of the likely date of completion, as the commencement date under the Operating and Maintenance Agreement will immediately follow this date.

Testing

Performance tests are essential to the economic success of process plants. As a result, their guidelines and conditions must be carefully set out at the contracting stage. It is also important to consider how these tests might interact with other agreements and obligations of the project sponsors. Three important types of tests are:

Fuiwtionaltests: These test the functionality of certain parts of the facility. They are usually discrete tests, which do not test the facility as a whole and are absolute obligations that must be complied with to reach the next stage of completion.

Satisfaction of the minimum performance guarantees is normally an absolute obligation. The minimum performance guarantees should be set at a level of performance at which it is economic to accept the facility.

Emissions tests These test compliance against environmental requirements, and are particularly important in the context of' process plants. Again, these are normally absolute obligations because the consequences of failure can be as severe as being forced to shut down the facility. These tests should ensure the most stringent obligations imposed on the project company, whether by government regulations or by lenders, are met.

Performance tests These test the ability of the facility to meet the performance criteria specified in the contract. There are often minimum and guaranteed levels of' performance specified and, providing the minimum levels are met, the consequence of failure is normally the payment of performance liquidated damages.

Satisfaction of the minimum performance guarantees is normally an absolute obligation. The minimum performance guarantees should be set at a level of performance at which it is economic to accept the facility.

As a conclusion, Because of their flexibility, the value and the certainty sponsors and lenders derive from EPC Contracts, the authors believe EPC Contracts will continue to be a pre-eminent form of construction contract used on large- scale process-plant projects in most jurisdictions. As long as careful consideration is given to other agreements when drafting, EPC Contracts provide the project sponsor with a most effective means of project delivery.

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