EPC arrangements are a commonly used procurement method in Qatar and theoretically have several advantages including cost and risk certainty for owners. However, on projects where the owner does not have a clear defined scope of work or set of requirements, EPC contactors face pressure to implement changes to their designs, even though theirs is fit for purpose and satisfies the performance requirements in the contract.
EPC contractors that document changes imposed on them and their impact on the cost and time of performing the contract will be better placed to pursue a claim for those entitlements from project owners. EPC contractors can also take steps at the tender stage, to ensure the contract properly deals with such circumstances when they arise.
EPC contracting in Qatar
There are various methods of procuring infrastructure and energy projects. In Qatar a common approach is to use the EPC method, where unlike traditional 'construction only' contracts, the contractor is made responsible for the whole of the works, including design, procurement, construction, commissioning and handover. The EPC contractor takes overall design responsibility. Typically such contracts contain an obligation to produce a design which is 'fit for purpose' and which meets the owner's specific performance requirements.
Owners are usually permitted to comment on submittals, to identify discrepancies between the submittal and the contractual requirements. This process is colloquially referred to as 'design development', although contractually the design is not being 'developed', it is being 'reviewed' for compliance with the contract.
A common issue EPC contractors face during the design development phase is the owner requesting changes to submittals which are arguably 'fit for purpose' and satisfy the performance requirements. Such requests are often referred to as 'preferential engineering' - in other words the owner uses the EPC contractor's design phase as an opportunity to consider alternatives.
This process can lead to EPC contractors making claims for additional time and cost in dealing with the new suggestions from owners.
Owners dismiss these claims on the basis that their request to alter the submittal amounts to mere 'design development' which is the EPC contractor's responsibility and for which the EPC contractor assumed the risk when calculating the contract price. Regardless of the validity of the owner's position, EPC contractors typically comply with owners' instructions to adopt alternative designs, either because the EPC contract requires compliance with any such instructions issued, or because resisting such requests would give rise to unacceptable levels of exposure to risk, and threats of breaches of contract and/or termination from the owners.
However, if they do comply, EPC contractors should ensure they protect their entitlement to the additional cost incurred, including time-related costs, if the owner's instruction delays an engineering activity on the critical path, and ultimately the completion date.
Composing the claim
EPC contractors often experience difficulties successfully pursuing claims for additional time and cost in such circumstances. Analysing these events retrospectively, to identify the precise set of facts which led to the additional time and cost incurred, can be difficult. It requires the following:
- a detailed review to be undertaken of the comment log or tracker, which can contain hundreds of thousands of comments, to identify the specific comment which changed the original design submittal.
- analysis of the original submittal against the relevant contract documents including the employer's requirements and performance specifications contained within the contract in order to identify the original design intent and parameters, to show compliance.
- if the comment has delayed the contractor, both in the design phase, right through the construction phase, and ultimately impacting the completion date, the contractor must demonstrate the delay to the programme using a robust method of delay analysis.
- review of the relevant contract terms governing the engineering design submittal process for any potential limitations placed on the owner which can assist with the claim, if not complied with, and the variation procedure. Typically, entitlement to additional time/cost as a result of an instructed variation involves the EPC contractor submitting an assessment of the impact of the instructed change, followed by detailed particulars, interim updates and final assessments. Compliance with the procedure, whenever the owner comments on an otherwise 'fit for purpose' engineering design submittal, is required to protect entitlement. EPC contractors should treat such comments in the same way as any other instructed variation.
Where the contractor is unable to follow this approach, the claim often ends up being advanced on a 'global' basis, and is thus more likely to be rejected for lack of causation.
How to pre-empt and address the issue at the start
The most successful way to capture the necessary evidence for claims to succeed is to commit staff at the start of the project to review all comments received on submittals against the contractual requirements, to identify comments or requests for alterations which go beyond the original scope. In doing so, contractors are more likely to identify and advance such claims contemporaneously.
Another way to try to avoid comments being made, which go beyond the original scope of work, is to address it in the contractual procedure governing submittals. Some engineering forms include a comprehensive procedure through which the owner may comment on submittals. Owner's comments are, under such standard forms, given one of three statuses, namely:
- 'A' – the EPC contractor can proceed
- 'B' – the EPC contractor can proceed as long as the owner's comments are incorporated and the EPC contractor submits a revised engineering design
- 'C' – the EPC contractor cannot proceed. The EPC contractor must submit a revised engineering design document to the owner to obtain status 'A' or 'B'.
The owner, via the engineer, can only mark a submittal as status 'B' or 'C' if the engineering design submitted is not in accordance with the contract. Thus, the owner should not, in theory, be able to make comments on engineering design submittals which constitute preferential engineering.
The EPC contractor is then afforded an opportunity to notify the owner and express disagreement with the status awarded and explain why, in its opinion, the engineering design is compliant. Failure to do so prevents the EPC contractor from recovering additional costs incurred in respect of changes it consequently makes to the engineering design, even if the owner's comment proves to be 'preferential engineering'.
Other measures EPC contractors can consider, to reduce the likelihood of such a risk arising, include:
- At the outset of the project, EPC contractors should ensure the contract documents, particularly the performance specifications and the employer's requirements, clearly define the EPC contractor's obligations in respect of each and every aspect of the engineering design.
- The variation mechanism should also be carefully reviewed for clarity, to ensure entitlement to additional time/cost is available where the client requests a change.
- EPC contractors should record in writing the date on which it considers the engineering design submittal has reached a level which is 'fit for purpose', both internally and to the owner. The EPC contractor can use that date as its milestone and any alteration to the design subsequent to that, should be reviewed carefully to assess for preferential engineering.
- Including a 'one iteration' clause in the contract can help to reduce the volume of comments owners are permitted to make on submittals. Such a clause may assist to avoid owners from over-engineering. EPC contractors should note, however, that such a provision does not relieve them from carrying out their engineering design obligations; it merely prohibits the owner from making an excessive number of comments on submittals.
Pamela McDonald of Pinsent Masons, the law firm behind Out-Law.com, is an expert in EPC contracts in Qatar.