#6 - I Will Make a Difference

Taking on the responsibility for installation, effectively transforming your EPC contract to an EPCI contract may seem like merely a minor adjustment to your scope. Sure, installation is normally not a part of your core business, but you may have the capability and the resources. You want the job, and you don’t want your potential new project to end up with your competitor. So, what's the problem? Well, the "I" has a significant impact on the risk picture, hence, it carries with it contractual implications that you may want to consider. Here's some of them.

Under a normal EPC contract (Engineering, Procurement and Construction) your work is basically done when delivery takes place. There may of course be warranty issues extending beyond delivery, but that's a risk that you have considered in your pricing. If you convert to an EPCI contract (Engineering, Procurement, Construction and Installation) this will affect the delivery date, the warranties, the liability regime, basically your whole exposure under the contract. Here's why.

Since you now have added installation to your scope delivery of you project will not take place before installation has been performed. One thing is to take the responsibility for carrying out the actual installation work, but it also means that you have accepted to take on the responsibility and risk for the interface between construction and installation. That is a different animal. It means that you are now responsible and liable, not only for your work, but also for the availability and timeliness of all factors required for the installation work. If the installation takes place offshore this will for instance include the marine spread and it could be delayed for a mundane reason such as bad weather. If they are delayed, the whole project is delayed, the E, the P, the C and the I.

Hence, even if the construction was on time and otherwise flawless, a delay related to installation can have severe consequences. One reason is simply that liquidated damages will apply based on the whole delivery and consequently the entire contract price. You should note that the same phenomenon applies to any limitations on liability that you have in your contract. Liability is normally capped as a percentage of the contract price, again, the entire contract price. Do you see where I am going with this?

Another reason is that the warranty period will not start before installation has been finalized. If there are severe delays during installation this may have a detrimental effect on the warranty considerations that you based your construction on. Just saying.

A third reason, which may be a bit harder to spot, is that none of the limitations on liability that you fought so hard to include in the contract will apply if installation is delayed or fails. Why? Because I am willing to bet that you, like most other suppliers, have the full risk of loss or damage up and until delivery has taken place. Again - delivery does not take place before installation is complete. So you are looking at the potential of unlimited liability for failure in a part of the contract which probably is not the most profitable part of the project. You may have insurance for this, but does your insurance also cover liquidated damages?

The good news is that there are ways to deal with this. One is a thoughtful review and revision of the EPC terms to actually reflect the added installation. A smarter way may be to enter into a separate installation contract. Separate terms on liquidated damages, separate liability caps and separate warranty terms. And here's the golden nugget. Since delivery has already taken place under the EPC contract, the equipment is now likely to be considered as a customer provided item (take a look at Supplier's Corner #5) under the installation contract. If there is a delay due to the equipment (and your contracts are drafted carefully) this will not only decrease your potential liability, it may also qualify as a change order under the installation contract.