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Standard Contract forms

A few standard forms of Contracts have evolved over the years and are commonly in use in the Oil & Gas, Petrochemical and Power sector for Engineering, Construction and other services that are discussed below.

Engineering, Procurement and Construction (EPC) Contracts

EPC Contract form is a very popular lump sum “turnkey type” contract for which the contractor has total responsibility for the engineering and design, procurement and construction (EPC) of the work against a clear definition of requirements or performance issued by Client. Client has little if any involvement in the technical selection or specification of technical solutions to meet a given technical requirement. The Clients role is reduced to monitoring Contractors performance against Contractual milestones to enable payments of lump sums as the work proceeds or on completion.

To see typical Pricing in an EPC form click here > Pricing of Tenders / Contracts > Pricing Standard Forms > Engineering, Procurement and Construction (EPC) Contract Pricing

To see typical Payment Terms in an EPC form Click here > EPC lumpsum work

Engineering, Procurement and Construction management (EPCM) Services Contracts

A form of Contract that is a hybrid between the lump sum and the reimbursable type of Contract i.e. part fixed and part reimbursable. This form though initially did not find favor, has gradually gained popularity over the years particularly in the oil & gas industry.

EPCM Contract form is normally employed where an early start of the site construction works is required pending finalization of the basic design and engineering or where the construction Contractor is unable to guarantee design and hence the design Contractor is involved in managing works for which he has design responsibility. EPCM takes responsibility for design but does not take responsibility for the actual construction of the works. The EPCM is an integral part of the Client organisation and works closely with the Client Project Management Team (PMT). EPCM is a design and management Contractor providing services rather than any construction works himself.

Under this form Client allows time for itself, in conjunction with the EPCM Contractor, to finalise the construction Contract while the engineering and scope definition is underway. The EPCM has the responsibility of supervising the construction contractor once construction work Contract is awarded.

The Contract is virtually split into a fixed part comprising of a known scope of responsibilities i.e. design, engineering and procurement services (for LLI’s and major subcontracts) and an unknown, reimbursable part i.e. the management of the construction works (performed by a different construction contractor) reimbursed on the basis of fixed rates for various categories of personnel based on an estimated duration for which such personnel are. The construction Contractor has little or no responsibility for the workability of the basic design.

The pricing of an EPCM typically consists of the following:

  1. Fixed Fee;
  2. Lump sums: Cost of design and engineering Services (Home Offices);
  3. Provisional sums;
  4. Reimbursable related to supervision of the construction contractor in the field;
  5. Other estimated costs.

Fixed Fee: a fixed amount to include all Contractors indirect costs for performing the lump sum portion of the works. The Fixed Fee is fixed and is not subject to change whatsoever except in case of design changes ordered by the Client.

Payment of the Fixed Fee could be made against certain milestones achieved i.e.:

  • Approval of basic design and engineering package;
  • Issue of Purchase Order’s for all required materials not bought by the EPC contractor;
  • Preparation of the ITT package for the construction works;
  • Award of the construction works contract;
  • Commissioning of the plant/facility.

Lump sum services: are reimbursed on manhours and rates approved thru timesheets or on clearly identified milestone deliverables. In certain cases the lump sum could also be based on reimbursement upto the agreed guaranteed maximum manhours arrived at with an elaborate list of various engineering and other personnel required with rates, manhours and total amount for each discipline carried to a grand total i.e. the guaranteed maximum manhour (GMM) cost. Fixed fees are not adjusted in case services are carried out in more or less manhours than the agreed guaranteed maximum.

Provisional Sums: in fast track requirements there could be a need to engage specialist subcontractors for specific activities such as Surge / Hydraulic Analysis of pipelines, Architectural Consultancy, Ergonomic Studies, Inspection Services and others, the nature and extent of which is normally not known with certainty at the stage of the EPCM Contract award and consequently its price. Thus for such items, provisional amounts are included into the Contract price with an understanding that the price of these items shall be adjusted upon finalisation and conclusion of the relevant subcontracts as the work progresses, at an appropriate time. Such items are termed as “Provisional Sums”. At the appropriate time into the Contract, subcontracts are concluded and prices finalised. Thereafter the Contract could be amended as necessary to reflect final price agreements for such items.

Construction supervision / field costs: are on a fully reimbursable basis with fixed rates for EPCM personnel of the EPCM, on an estimated or “Target Hours” for field activities based on the construction works schedule of the construction contractor.

Other costs: the Contract could also contain costs of services provided by Contractor to Client during design and engineering such as office facilities, computer usage, stationery, etc which is estimated in the Contract Price and reimbursed against actual consumption (or agreed on a fixed monthly basis).

Project Management Consultancy (PMC) Services

PMC Contracts are fully reimbursable types of Contracts but with agreed rates where Contractor is reimbursed for the Services provided on rates. They could in a sense be termed manpower hire Contracts where the PMC (to a large extent) “independently” (thru the Client PMT) manages the Works/Services on behalf of the Client. The major contrast with a manpower Contract being in the vast experience and the organizational backing and support that the Contractor brings to the Client and virtually takes full responsibility for the works that it manages. Therefore the key requirement in the selection of a PMC effectively boils down to review of CV’s / quality of personnel proposed for the services and organizational backing.

While working independently, in finalizing Purchase Orders or Subcontracts for works and services on behalf of the Client, PMC should use Clients’ standard terms and conditions, policies and procedures and, actual Contract commitments should be signed by Clients.

Pricing most often is a collection of fixed unit rates and estimated duration – quantities for engagement of each of Contractors personnel required, normally in some relation to the schedule of the actual work that is required to be managed i.e. the EPC or FEED.

There is almost no risk assumed by the Contractor under this form.

Click here to see a typical PMC pricing.

Call-Off Contracts

Call-Off Contracts are used essentially for the provision of Services (manpower, equipment and maintenance works) which do not themselves commit Client to any financial commitment / expenditure or to the employment of any specific Contractor.

The objective of Call-Off Contracts is to provide a pre-arranged contract facility for the provision of simple ad-hoc Services or supply of goods, all based on agreed scope and specifications, in support of Client’s operational requirements which can be foreseen as being required on a repetitive or routine basis and/or over a certain period of time. Such an arrangement ensures ready availability of Services and, facilitates Users in obtaining these Services when required without going thru a time consuming Tender Process all over again. Call-Off Contracts typically contain various unit rates and are executed thru individual “Call-Off Orders”. Normally Contracts are signed for a duration of 1 year. However the practice of letting Contracts for durations of 2 or more years is not uncommon. Longer duration Contracts could come with escalation provisions.

Though a Call-Off Contract is based on the principle of no or minimum commitment, to enable Tenderers to submit a price to perform to Client requirements, there are two distinct practices adopted:

  • confirming a minimum commitment or guarantee of consumption of Services based on past experience; or
  • no minimum commitment or guarantee of consumption of Services.

The Contracts Engineer should ensure selection of an appropriate strategy since it could influence the final Tender cost to Client. Some Clients have the practice of indicating expected consumption of Works/Services in the ITT to enable the Tenderer to assess the possible extent of Works/Services under the proposed Contract. While other Clients see this as a potential point of contention with the Contractor claiming Works/Services to the extent of it indicated during the Tender stage. It is left to the Contracts Engineer to select appropriate strategy as such issues also depend on the legal/contracting environment one operates in.

Call-Off Contracts could contain a limit of total expenditure by Client in the form of total payments to Contractor for Services provided under the Contract and any Services carried out beyond such limit shall be only upon issue of a formal amendment to the Contract amending the limit of financial expenditure.

Furthermore, fixed costs such as bank guarantees, insurances, etc should be separately identified for assessment of claims in case of early termination.

Call-Off Contracts could also be issued to more than one Contractor for the same requirement thereby ensuring uninterrupted availability of Works/Services and, as and when requirement arises, mini Tenders invited from Contractors and Call-Off Order issued to the Contractor with the best value for money (delivery time or lowest cost). However, Contract Users / Holders should make every effort to use those Contractors providing the most competitive prices unless prevented by technical reasons or unavailability or schedule reasons.

Maintaining a log of all the Call-Off Orders issued against a particular Contract, funds management funds and limits of expenditure approved against a particular Contract, is the responsibility of Contracts Administrators of user departments / contract holders.

Framework Agreements / Master Agreements

Similar to a Call-Off Contract, a Framework Agreement generally ensures availability of standard Vendors’ Goods/Services over a certain time period. Such agreement is not a firm commitment for supply of Goods/Services, but is an enabling agreement providing agreed scope, specifications, delivery terms and unit rates for Users to Call-Off requirements as and when need arises.

Based on this agreement, individual orders are placed against requirements. As in the case of Call-Off Contracts, the Framework Agreement may or may not specify minimum consumption of Goods/Services or a minimum Contract Value.

For purchase of Software licenses and related services, sometimes the Framework Agreement is also referred to as a “Master Service Agreement” or simply “Master Agreement” and requirements called off thru “Service Orders”.

Term Maintenance and Service Contracts

There are fundamentally two forms of Term Maintenance Services Contracts:

  • Provision of specialist Services (under the full control of the Contractor): Standard Services such as maintenance of Air-conditioning Systems, maintenance of Power Generating Equipments and systems, Lighting Equipment Maintenance, UPS Equipment Maintenance, etc where the Services required have a clearly defined scope (which could also include materials) and are carried out under the supervision of the Contractor.

    Pricing could come in many forms i.e. fixed monthly payments for routine services or based on units of work carried out on a call-off basis or in case of a large plant turnaround / maintenance situation, on a schedule of rates with various incentives, etc.

  • Provision of skilled manpower (Services under the control of Client): for services that are pretty straightforward, not particularly well defined and at times irregular needing skilled manpower, Contractors supply such manpower on unit rates for Services such as Painting of Plant Facilities, Erecting Scaffoldings, Civil Maintenance Works, etc under the direct supervision and direction of Client.

    Pricing is normally based on fixed daily/monthly manpower and material unit rates and payments made against approved timesheets.

Since routine maintenance services are required on a regular basis, normally Contracts run for a duration of 1-2-3 years extendable for further periods and could contain escalation provisions. These could come without any minimum guarantee of consumption depending on practices and view taken.

Selection of the successful Tenderer is based on a certain estimate of Client requirements over the proposed Contract duration either included in the ITT or otherwise.

Software License Contracts

Most software licenses are proprietary to the Contractor (Licensor) holding the license (except resellers and agents). In software Contracts, the license or product becomes immediately available to Client for use upon installation and providing rights to use.

Most often Client’s standard T’s & C’s are more geared to suit traditional Contracting works such as construction or other services and hence it is not always possible to impose such conditions to Software Contracts fundamentally due to lack of necessary protection against intellectual property and copyright infringement, confidentiality indemnities and other related right to use issues. In certain instances the software supplied could be easily copied and unauthorisedly used elsewhere as well, depriving Contractor of rightful revenue.

Thus, over the years Contractors have developed terms and conditions that contain such protection and hence there are no suggestions in shankce.in.

Contract commitments under such an arrangement are called-off based on fixed unit prices in the backdrop of a Master Software Agreement and fixed lump sums for a defined scope of software consultancy services such as customization, program development, etc.

Process License Agreements

Most specialised process licenses are intellectual properties and registered, patented information, copy right protected by license holders (Contractors) and therefore not available for use freely by Clients. Licenses are developed by scientists over years of research and experiment thru simulations and tests in pilot plants, experimental / laboratories and finally in an actual large scale facility/plant investing a large amount of resources in the process. They normally contain a very high degree of specific technical information on how a particular end product is produced with full details on the chemical reactions involved, catalysts to be used, mix of volumes of various products, temperature, pressure, humidity and other associated conditions. And all of such effort/expenditure by Contractors are built into their costs.

In a process license Contract, pricing is normally on fixed lump sums with unit rates for any consultancy, supervision by process specialists during any stage of the Contract execution. Typically it could consist of:

  • Paid-up royalty for grant of rights related to a named process;
  • Preparation and submission of the Process Design Package as per scope of work; and
  • Daily rates for Licensor’s specialists during execution, as required.

Some of the important considerations typical to such Contracts are:

Confidentiality
While entering into Contracts license owners demand conditions on maintaining strict confidentiality related to the licenses that they grant.

Since the license is related to a plant/facility of a Client, there could be certain confidential information on Clients’ existing processes and production methods that the Client would want confidentiality maintained by Contractor.

Hence confidentiality clauses are a key condition in a process license Contract and should be stipulated according to specific needs.

Obligations
Of a Contractor generally are to:

  • Disclose all technical and process information alongwith any design and engineering package to Client;
  • Provide a non-exclusive right to use certain technical information for the engineering and construction of the plant/facility required;
  • Provide a non-exclusive, unconditional and irrevocable license under the Contractors patent rights, for so long as they are in force, for the operation of the process in the plant/facility and the use and sale of the products produced using such license. The Client thus acquires a fully paid-up right and license to operate the process for its use in the plant/facility.

The obligations of Client towards a Contractor are to make available to Contractor a royalty-free, non-exclusive right on any of its related current licenses that the Client may possess and allow the Contractor to:

  • Use such related technical information, and
  • To disclose such technical information to the extent required.

Secrecy / non-use conditions

Contractors conditions could include the following:

  • Client not to disclose to any third party any of the technical information received either directly or indirectly from Contractor under Contract; and
  • Client not to use technical information for any purpose other than the engineering, procurement, construction and operation of the plant/facility.
  • In some situations the Contractor could limit the license use for substantial expansion of capacities. In which case the Client could be allowed to use technical information for the modification of the plant/facility upto a certain percentage increase in production. Production beyond such percentage could come with additional royalty/fee.
  • Client not to disclose any technical information to any third party for the purpose of the modification of the plant/facility until (a) Client imposes on such third party substantially same confidentiality obligation as undertaken by Client and (b) such disclosure could be with the approval of Contractor.

Normally such secrecy conditions do not apply or extend to any technical information which:

  • was, as can be established by Client with adequate proof, in its possession without binder of secrecy or formed part of the public domain or literature at the time of Client’ receipt, directly or indirectly, from Contractor;
  • following its disclosure to Client by Contractor, has been received by Client without any obligation not to disclose it from a source free to disclose it other than Contractor;
  • has, through no default on the part of Client, become part of the public domain or literature since Client’ receipt, directly or indirectly, from Contractor.

Finally, such secrecy conditions are continuing obligations and are not affected by the termination of the Contract.

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