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Payment Terms in an EPC / Lump Sum Works

Compensation under the EPC or other large and complex lump sum Services Contract such as FEED with a large number of activities depends on a wide range of issues and takes various forms. Payments are normally made in stages as work progresses that is measured on a certain basis i.e. Bar Chart / “S” Curve or upon specific milestone achievement or a combination of the two.

Milestone: Where an activity is a single major event such as delivery of a major piece of equipment or installation of a major piece of item or submission of an important deliverable the “Basic Design or Engineering Package”, a milestone is said to be achieved that is significant from the Client’s progress point of view and payment is made upon achievement of such a milestone. The milestone activities are normally identified in the price schedule as a separate line item.

However for activities where the Work/Service extends over a long(er) period of time and involves a large expenditure by the Contractor on a continuous basis, payment is made against progress achieved by Contractor, measured on a pre-agreed basis.

Small value EPC lump sum Contract

  • Where the Contract price is not large
  • Work/Service does not extend over a long period of time
  • Has a single lump sum price for a Contract price

In such Contracts, payments terms could be agreed on a percentage basis upon completion of activities/milestones i.e.:

A __ % of each of the total Contract price as:

  • Advance payment;
  • Completion of Engineering;
  • Site set up and mobilisation of required resources;
  • Supply of all materials;
  • Installation;
  • Commissioning and hand over;
  • Submission of As-Built Documents / Dossier;
  • Others.

Large value complex multiple activity EPC lump sum FEED form of a Contract

High value Contracts where typically Works/Services are performed over a long period of time with large stage-wise cash outflows / expenditures and high number of milestone activities, the following terms of payments could be considered:

No

Milestone Activity

Payment Method

1

Advance payment

Milestone / at Contract award

2

Site set up and mobilisation of manpower, construction plant and equipment

Milestone

3

Fixed amount or percentage upon submission of certain documentation such as detailed drawings, procedures and related documents

Milestone

4

Upon issue of requisitions / purchase orders for all required materials and services

Milestone

5

Supply of materials and subcontracted items

Milestone

6

Construction works: against achieving actual progress as certified by Client representative based on an agreed method of measurement (calculated thru “S” Curves, Barchart, etc)

Progress achieved

7

Upon completion of installation

Milestone

8

Upon completion of mechanical completion

Milestone

9

Upon pre-commissioning

Milestone

10

Upon commissioning

Milestone

11

Test Run and handover of Plant/Facility

Milestone

12

As Built Drawings/Documents

Milestone

Advance payments: are normal where large upfront commitments are to be made by Contractors towards their suppliers/vendors/ subcontractors. The payment could be made as a pure advance as a percentage of the Contract price say 5 % or 10 % or against actual start of activities such as (achievement of milestones) placing PO’s for major items, Setting up of site office, mobilizing personnel (normally engineering staff), such others. Since advance payments are made prior to any progress made under the Contract, they are adjusted against each of Contractors invoice for work progress, till such time as the advance is fully adjusted. Most often advances are paid against collaterals i.e. bank guarantees.

Milestone payments: for other items (2 to 12 except item 6) in the table above, payments are made against milestones achieved. There could be intermediate milestones as well for an activity if it were extended.

Payment against Work done

For item 6 for e.g. involving civil works where it is not possible to define clear milestones and where Work/Service is continuous and/or for an extended duration, the method of payment against progress actually achieved, is most suited.

Measurement of progress: Normally at start or within a reasonable period of Contract becoming effective, a detailed bar chart schedule (Master Schedule) from start to completion date, phased in units of time (hours/days/weeks/months) is agreed between the Client and Contractor. The Planning Engineer/Planner is responsible for preparing this schedule in conjunction with the project manager.

The schedule contains a detailed and logical breakdown of all Contract activities, forming the first level and weights/percentages are attached (adding upto a 100 %) to them in the order of their relative importance and/or criticality in the Contract. As necessary, each such activity could be further broken down into its various elements and weights attached to them similarly in their relative importance/ criticality to that particular item.

Upon agreement between the Client and Contractor, this becomes the “Project Master Schedule” against which Contractual progress under the Contract is measured on a periodic basis.

In large Contracts, “lower level” schedules are created and “rolled up” to gain the next higher level schedule and rolled up further to the highest level as required. The various levels are meant to serve different purposes and for different responsibility levels. Schedules always come with critical activities, those activities where any slippages could have a knock on effect on the overall Contract completion and hence are closely monitored.

During execution the Planners alongwith Quantity Surveyors, measure and determine progress on a periodic (monthly) basis. Progress measured is then used in establishing the amount of monies due to the Contractor and invoices settled on this basis.

There are various ways in which software tools are used to compute progress i.e. simple bar chart schedule, “S” Curve and others.

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