The new IChemE Blue Book: the industry’s first EPCM contract
With the increasing popularity of EPCM-based contracting, the Institution of Chemical Engineers (IChemE) added a standard form Engineering, Procurement and Construction Management (EPCM) Contract, the Blue Book, to their suite last year.
What is EPCM?
EPCM is a form of construction management. Under an EPCM model, a purchaser (i.e. the client) appoints an EPCM contractor for designing, procuring and managing the construction of the works. It is in reality a professional services contract. It will not include construction or installation works, as this will be covered by a number of separate works contracts entered into directly by the purchaser.
The EPCM contractor therefore has limited responsibility for the quality of the works beyond the scope of its design obligations, or for the timing of their delivery (save to the extent due to its negligence). A purchaser must look directly to the individual works contractors for their respective failures.
The EPCM model therefore allows a purchaser to engage a contractor with the skills and experience to manage a major project without the contractor assuming (and pricing) the risks associated with single point design and construction responsibility. The appetite for assuming these risks has been in decline.
EPCM can be contrasted with EPC / turnkey procurements, where one EPC contractor has single point responsibility for designing, constructing and commissioning the works, typically for a lump sum.
The Blue Book
The Blue Book is the first standard form in the market for EPCM contracting. Until now, parties have tended to amend professional services forms (such as the IChemE Silver Book) or use a bespoke form.
The Blue Book is in the same format as other IChemE contracts, with an agreement and general conditions of contract, and it uses many of the same provisions as the other IChemE contracts.
The IChemE have chosen not to prescribe the form of works contract to be used by the purchaser, instead suggesting that one of their existing standard forms may be used (red, burgundy, green or orange books). Whilst providing guidance on the content of the works contract, it does mean that this suite is missing a fundamental component in this procurement route. This seems to be a missed opportunity for standardisation and the creation of efficiencies for those using EPCM procurement.
The Blue Book is heavily reliant on its schedules, covering things such as scope, payment, testing regimes, performance guarantees, time for completion, liquidated damages and other issues. These schedules need to be properly populated.
Like the other IChemE contracts, the Blue Book is designed for use on process plant projects, but can be adapted for use on other types of projects, such as those including civil works.
This article looks at some of the areas of difference in the Blue Book to the usual IChemE approach.
The Blue Book is structured with the use of optional provisions so that it can be used in any jurisdiction. There is therefore no separate international form, unlike some of the other IChemE contracts. There is a separate Part A in the optional conditions of contract for use on UK projects to enable compliance with the Housing Grants, Construction and Regeneration Act 1996.
Other amendments to the main terms will almost inevitably be needed for compliance with local laws if the project is outside the UK.
Rather than using different IChemE forms for different pricing arrangements, the Blue Book allows the parties to adopt a cost reimbursable or a lump sum approach (or mix of the two) through the pricing mechanisms to be included in the relevant schedules. Part B in the optional conditions of contract sets out additional drafting to be used if parties want to adopt target cost pricing, with establishing how to ascertain the gain or pain share to be drafted by the parties and included in the relevant schedule. The IChemE has chosen not to draft the specifics for this mechanism, recognising that the approach to pain/gain share arrangements can vary considerably. However, it may have been helpful to provide example drafting that the parties could amend as necessary.
Similar to the IChemE Silver Book, the dispute resolution mechanism is tiered. The parties must attempt to negotiate a settlement of a dispute in good faith, failing which they may refer it to mediation, or to arbitration for final resolution. Where the relevant adjudication optional drafting is adopted in Part A of the optional conditions of contract, adjudication will provide an interim method of dispute resolution, followed by arbitration (if required). This contractual right to adjudicate reduces the risk of confusion where the contract is a hybrid one, with parts of the works being within the remit of the Housing Grants, Construction and Regeneration Act 1996 and others outside of it.
There are also optional provisions dealing with referring a dispute to an expert and a dispute review board. It should be noted that the Blue Book does not include the courts as a method of final dispute resolution.
There are also some key differences in relation to liability. The Blue Book includes the usual IChemE aggregate cap on liability, exclusions of recovery of certain types of losses such as loss of revenue, loss of use, loss of production, etc and a clause which (broadly speaking) limits the parties’ rights to those expressly set out in the contract (known as an exclusive remedies clause). It also includes the usual provision seen in IChemE contracts stating that the issue of the final certificate is (in general terms) conclusive evidence that the plant has been completed and defects made good in accordance with the contract. Clause 45 of the Blue Book goes further to limit the EPCM contractor’s liability by including a net contribution clause.
However, given that under this method of procurement the works contractors are engaged by the purchaser rather than the EPCM contractor, this has a number of consequences, including:
- As the EPCM contractor is performing services rather than carrying out works, the EPCM contractor’s role can be considered more akin to that of a consultant, and the Blue Book provides that the standards with which the EPCM contractor must comply are skill and care based. The standards therefore do not include any “fitness for purpose” obligations.
- Therefore, as long as the EPCM contractor exercises the required skill and care in providing those services, it has no exposure to claims arising from project outcomes such as delay and disruption to works progress, cost overruns, defects or problems with performance testing. On the contrary, these problems are mostly events entitling the EPCM contractor to additional money. That is unless it has some skin in the game through the optional target cost mechanism.
- Consistent with the approach taken in the lump sum red book, the EPCM contractor’s liability for loss and damage to the plant is very limited, recognising that the purchaser will be expected to insure the plant.
- The EPCM contractor will be liable for liquidated damages for delay but only in relation to delay in carrying out its services and not delays to completion of the plant or the project as a whole. In addition, this is subject to the overall aggregate cap on liability as well as the net contribution clause, which potentially further limit recovery.
Whilst there may be cost and time savings to be found in an EPCM model, the risk allocation is dispersed across a number of contractors, potentially making a purchaser’s delay or defects claims harder to establish against any one party.
The publishers have set a benchmark for how to appoint ECPM contractor in the Blue Book and parties are free to use it as it is or change it through the Special Conditions.
With other organisations likely to publish similar forms in the future, it will be interesting to see differences in approach and whether there will be an uptake from clients which currently use bespoke forms of EPCM contracts in using a standard form.
FIDIC had confirmed it had set up a task force to develop its own EPCM by the end of 2023. However, no new form has yet been published.