Review of Institution of Chemical Engineers (“IChemE”) Engineering, Procurement and Construction Management (EPCM) Contract (“The Blue Book”), first edition 2023
by Mark Pantry, Partner
Earlier this year, the Institution of Chemical Engineers (“IChemE”) published its Engineering, Procurement and Construction Management (EPCM) contract into the market, known as “The Blue Book”. With other publishing bodies like FIDIC expected to follow suit in the near future, Mark Pantry reviews the industry’s first attempt at a standard form EPCM contract.
What is EPCM?
EPCM is a form of procurement for major construction projects which, while sounding very similar to Engineering, Procurement and Construction (“EPC”) contracts, is very different in its approach. An EPC contract is a type of turn-key contract where the EPC contractor takes full responsibility for the design, procurement and construction work forming the project, including the cost and time risks associated with delivering the project.
An EPCM contract is closer to a services contract in that the EPCM contractor provides engineering services to design the project and manages the construction works. The EPCM contractor is not expected to carry out any of the construction works and these would be carried out by works contractors engaged by the client (or “purchaser” as referred to in The Blue Book).
An EPCM contractor has no responsibility for the works undertaken by the works contractors appointed by the purchaser; instead the EPCM contractor is expected to manage the works contractors on the purchaser’s behalf to deliver the project to an agreed specification.
The Blue Book
While the other contracts in the IChemE suite are generally for domestic use in the United Kingdom, the Blue Book has been drafted for use on international projects and the parties to the contract are free to agree on the jurisdiction of the contract in Article 17 of the Agreement.
The Blue Book follows a fairly standard approach of contract structure having: (i) the Agreement, (ii) the General Conditions, (iii) the Optional Conditions, (iv) the Special Conditions, (v) the Specification and (vi) the Schedules and the Annex. Clause 1.2 of the General Conditions sets out an order of precedence for these documents which form the contract, but it should be noted that there is no order of precedence for documents within each heading. If, for example, the parties require one document forming part of the Specification to take precedence over another, then this would need to be addressed in a specific amendment in the Special Conditions.
The Agreement sets out the contract particulars, including the names of the parties, the plant to be constructed, and the location of the site of the plant. The Agreement also includes statements as to which of the Optional Conditions apply and whether any Special Conditions apply.
The Optional Conditions are comprised of three options: A, B and C. Part A sets out some UK-specific clauses for domestic projects, mainly limited to the application of statutory adjudication in the event of a dispute and the application of health and safety legislation. Part B contains specific clauses to be used where the contract is to be a target cost contract. Part C contains a number of project-specific clauses; for example, an agreement between the parties to use a dispute review board in relation to the settlement of disputes.
The 22 Schedules set out in the Agreement include many of the project-specific information referred to in the General Conditions, and the Guidance at the back of the Blue Book helpfully details the expectations of the content of these Schedules. Schedule 1 (Description of the Services and the Works) defines the role of the EPCM contractor and the services to be provided, including design work, procurement and management of the construction of the plant. Clause 3.2 of the General Conditions states that the “EPCM shall carry out the Services” with the reasonable skill and care to be expected of a qualified and competent EPCM contractor, a standard of skill and care similar to that of a professional consultant.
It should be noted that, if the EPCM contractor fails to perform the Services in accordance with any period stated in Schedule 11 (Times of Completion), the EPCM contractor may be liable to the purchaser for delay liquidated damages. Any liquidated damages payable would be capped at the amount stated in Schedule 12.
Pricing arrangements
The Blue Book has a flexible approach to pricing arrangements and can be adapted to be a reimbursable cost contract, a target cost contract (if Part B of the Optional Conditions is used), a lump sum contract or anything in between. The choice of pricing arrangement allows the parties to tailor the level of risk taken on by the EPCM contractor.
The purchaser makes payments to the EPCM contractor in accordance with Schedule 18 which should clearly set out the elements which together form the Contract Price. The Contract Price can be stated in one or more currencies. If a reimbursable or target cost arrangement is being used, then the Contract Price will be the total of the payment made for the cost elements set out in Schedule 18. The Guidance contains a typical list of main cost elements for reference when the parties are compiling this Schedule.
Testing and commissioning
As to be expected for complex plant contracts, the Blue Book includes detailed provisions on the process for the completion of construction works, taking over, performance testing and acceptance. The EPCM contractor is responsible for managing the process of performance testing and investigating with the relevant works contractors as to the cause of any failure to pass a performance test. Any additional cost incurred by the EPCM contractor in such investigations of failed tests forms part of the Contract Price.
It should be noted that the Blue Book does contain the option for there to be performance guarantees provided by the EPCM contractor in relation to the successful performance of the plant. This is unusual and, as anticipated in the guidance, because the EPCM Contract is dependent on the successful performance of the works contractors, it would be unlikely that an EPCM contractor would accept liquidated damages for the poor performance of the constructed plant except to the extent it has been directly caused by the EPCM contractor; for example, because of the EPCM contractor’s negligent design or management of the works contractors.
Works Contracts
Under the EPCM model, the actual works are to be undertaken by works contractors appointed by the Purchaser. The EPCM Contractor manages the works contractors on behalf of the Purchaser. In the Blue Book, clause 9 of the General Conditions set out the specific role of the EPCM Contractor in managing the works contractors with Schedule 7 setting out the procedures to be followed.
The EPCM Contractor proposes the scope for each works contract and proposes suitable tenders for each package. The Purchaser’s Representative then approves the appointment of each works contractor. The EPCM Contractor negotiates each works contract in accordance with the requirements contained in Schedule 7. The terms of each works contract are to be agreed between the parties but the Blue Book guidance notes suggest that other forms of IChemE contracts are used, such as the Red, Burgundy, Green or Orange Books. If these IChemE contracts are used as works contracts then they would need to be amended for this purpose; in particular, including modification to allow the management of the works contract by the EPCM Contractor.
Conclusion
The IChemE Blue Book is the first standard form EPCM contract available and provides a useful starting point for complex plant projects where the EPCM procurement method has been chosen. With other organisations likely to publish similar forms in the future, it will be interesting to see differences in approach and whether clients which currently use bespoke forms of EPCM contract will be willing to switch to a standard form.