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A guide to
EPCM contracts
A guide to
EPCM contracts

A Norton Rose Fulbright guide

Contents
Summary 04

Contract for professional services, not works 05

Advantages to EPCM contracting 06

Form of contract – what should be 07

the starting point?

EPCM services 09

Price certainty on the cost of the works 11

Payment 12

Incentives 13

Limitations on liability 15

Tax issues – on-shore/off-shore 17

When things go wrong – choice of law 19

and dispute resolution

Contacts 20
A guide to EPCM contracts

Summary
This document provides a description of the EPCM procurement structure and some of
the key issues that should be considered by any junior miner contemplating its use for
mining infrastructure delivery.

04 Norton Rose Fulbright

 Contract for professional services, not works

Contract for professional services, not works

An EPCM contractor will not carry out construction works. The EPCM contract is
essentially a professional services appointment under which the EPCM contractor’s
services will usually be limited to the production of detailed design and the procurement,
construction management and coordination of the works necessary to deliver the project.

Whilst often confused with the EPC contracting solution, the EPCM and EPC contracting
solutions are very different in terms of the nature of the obligations undertaken and the
risk allocation assumed by the respective contractors.

An important difference between the two is that an EPCM contractor will not accept cost
and/or time risk for the delivery of the project, this is a risk retained by the employer.
The employer will therefore need to manage these risks with the professional assistance
and support of the EPCM contractor through the construction and equipment/plant
supply chain.

Save as highlighted in this document, the quality of the EPCM contractor’s performance
will generally be determined by reference to the extent to which it has performed its
services in accordance with the level of skill and care required by the EPCM contract,
rather than by reference to the achievement of overall project budgetary or scheduling
targets.

Historically, the mining sector has tended to see quite an unsophisticated approach to
EPCM contracting when compared to other sectors where the model is commonly used
(for instance, in the petrochemicals industries).

Well advised employers in the mining sector are however seeing that contractors
undertaking EPCM services are increasingly willing to accommodate a more onerous
risk profile under which the EPCM contractor may be more effectively incentivised
to manage time and cost overrun exposure for employers (see ‘Incentives’ below).
The drivers for this development are numerous but clearly economic pressure during
a downturn, and so competition for work, is key.

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A guide to EPCM contracts

Advantages to EPCM contracting

The EPCM solution is the preferred procurement structure for junior miners, since it can
offer significant advantages if properly managed.

Initial capital estimates for completion of the works can be significantly

lower under the EPCM solution when compared with EPC fixed price
‘turn-key’ solutions
This is because EPC turn-key solutions will tend to include significant levels of
contingent pricing introduced to manage overall project delivery risk. The EPCM
solution may therefore assist with project economics and so help to attract debt and
equity funding.

The EPCM solution will allow employers to retain ultimate control over
design development throughout construction
This will provide flexibility to allow employers to adapt design to suit precise (and
sometimes changing) requirements and to allow optimisation and value engineering
where relevant to control capital costs. Such flexibility is not possible under an EPC
solution (at least not without significant price consequences) since design development
will be controlled by the EPC contractor.

The EPCM solution will allow flexibility in the procurement process

This is particularly important where there is an extended build period with a multi-
phase construction programme with many distinct and separate packages for overall
infrastructure delivery (eg, process plant, road, rail and port infrastructure etc.).

But the advantage of lower costs and increased flexibility under an EPCM solution
should always be balanced against the significant additional risks being retained by
the employer in project delivery. As mentioned above, the employer under an EPCM
solution will not be insulated from cost overrun risk in the same way as they would be
under a fixed price EPC solution.

The employer’s role in the management of the works in parallel with the EPCM
contractor is therefore paramount. For successful project implementation, the EPCM
solution requires a well-equipped and mobilised employer’s team to take a hands-on
and intrusive role in the management and administration of the works.

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 Form of contract – what should be the starting point?

Form of contract –
what should be the starting point?
There is no international standard form template contract for the EPCM contracting
solution, unlike for EPC turnkey or traditional build contracts.

Is use of standardised forms of contract appropriate?

EPCM contracting is essentially contracting for the delivery of professional services.
There are numerous published standard forms of contract (the most popular being the
FIDIC White Book) that could be adopted for these purposes. It is important however for
employers to recognise that:

• the published standardised contract forms are typically developed to be consultant/

contractor friendly

• simple professional services appointments will tend to lack the sophistication

necessary to readily address many of the issues that arise in a mining project.

In our experience:

• significant amendment will be required to standardised forms of professional

services appointment to generate a form of EPCM contract that could be reasonably
acceptable to well advised employers in the mining sector

• licences to amend such forms are not easily obtained

• difficulties may be encountered from a negotiating perspective when attempting

to justify to the EPCM contractor (and its board of directors) the reasons for a move
away from what are ‘internationally accepted contracting principles’, ignoring, of
course, that the terms were not appropriate for the employer in the first place.

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A guide to EPCM contracts

Suggested approach to contract form selection

The format should always be driven by the requirements of the employer and his
backers and not by a format that the contractor has delivered services on in the past.
The fact that the contractor has used a particular form previously says nothing of the
appropriateness of the form proposed.

In our experience, significant time and cost can be saved by the employer taking the
initiative in this regard and delivering terms to the EPCM contractor which represent
those on which it is prepared to negotiate.

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 EPCM services

EPCM services
EPCM services typically fall into the following categories:

‘E’ – Engineering services

This is the design of the process plant, the buildings housing the process plant and any
associated infrastructure. The EPCM contractor may or may not have been involved in
producing the basic design and/or the ‘process flow design’ at feasibility stage.

Where the EPCM contractor has not produced basic design, the EPCM contractor should
accept the risk of the accuracy and completeness of the basic design or at least verifying
the same to the employer.

The EPCM contractor should be allocated responsibility for overall co-ordination of

design for the project to ensure that the completed works meet the required technical
and performance specification (but note ‘Price certainty on the cost of the works’
and ‘Incentives’ below describing the limited liability typically accepted by EPCM
contractors in this regard).

‘P’ – Procurement services

The EPCM contractor should be allocated responsibility for the overall procurement
strategy. He will also source contractors, consultants and the necessary plant and
equipment in consultation with the employer and in accordance with the employer’s
requirements and the assumptions established at feasibility stage.

The EPCM will advise on the timing of the letting of the relevant packages and will
advise the employer on the terms available and will typically negotiate the contract
packages on the employer’s behalf.

It is usual for the employer to enter into the works and supply contracts directly but
we have seen exceptions to this approach under which the EPCM contractor enters into
contracts as the employer’s agent.

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A guide to EPCM contracts

‘CM’ – Construction Management services

The EPCM contractor should be allocated responsibility for overall management of the
carrying out and completion of the works. This will include the co-ordination of the
works and services being procured on the employer’s behalf to achieve completion of
the works in accordance with the project schedule, the project budget and to meet the
required technical and performance specification (but, again, note ‘Price certainty on
the cost of the works’ and ‘Incentives’ below and the limited liability typically accepted
by EPCM contractors in this regard).

The construction management services will also typically include the management of
health and safety at the site, the management of disputes between the employer, the
works contractors and/or the suppliers, the establishment of quality assurance systems
and the management of the remedying of defective works and/or services provided by
other parties.

In all cases, it is important that the nature and extent of the services being provided are
well defined and that appropriate levels of contractual flexibility are created to allow the
scope of services to be adapted through the execution of the project in a manner which
does not expose the employer to de-scoping ‘penalties’ or inflated pricing for enhanced
services.

The above allocation of responsibility is not the only solution. Hybrid solutions have also
become more common, for instance where employers wholly retain the management
function through the owner’s team to create an EP/CM split. The appropriateness of the
structure proposed will always be something that the employer should consider with its
technical, commercial and legal advisers on a case-by-case basis.

10 Norton Rose Fulbright

 Price certainty on the cost of the works

Price certainty on the cost of the works

Whilst an EPCM contractor may accept some limited risk in delivering a project
on-time and on-budget (see ‘Incentives’ below), EPCM contracting does not offer a
fixed price solution.

Cost control must ultimately be achieved through the implementation of a robust

procurement strategy, typically developed and managed by the EPCM Contractor in
consultation with the employer, as outlined above.

Key to this will be the separation of the works into appropriate works and supply
packages which should each be procured on robust terms which seek to insulate the
employer from time and cost overrun risk. The procurement strategy should seek to
avoid where possible the creation of time, design and works interfaces and where
the creation of such interfaces is unavoidable, a clear strategy for the management
of them should be established by the EPCM contractor (and indeed this should be a
contractual requirement).

The role of the employer’s team in monitoring, supporting and supplementing the
services of the EPCM contractor is extremely important to achieve successful project
execution and delivery within project budgetary constraints.

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A guide to EPCM contracts

Payment
The usual basis of payment for EPCM contractors is as follows:

• payment on a cost reimbursable basis for the man hours expended at agreed rates
(rates should reflect the actual and verifiable cost and the contract should expressly
provide that these rates should usually NOT include profit) plus

• overhead payments that will be charged at a fixed percentage of the reimbursable

rate plus

• a fixed fee element representing the EPCM contractor’s profit. Employer’s should
seek to agree to fix this amount at day 1 and not permit any increase in the event of
project cost and/or time overruns (ie, to avoid any indirect disincentive to the control
of overruns).

The EPCM contractor should warrant that the agreed rates in that the agreed rates in
the first two bullet points above do not contain any profit element, and the employer
should have the right to claw-back any profit element subsequently identified through
agreed audit rights or as disclosed by the EPCM contractor.

The value of the hours expended by the EPCM contractor in providing the required
services are not typically subject to an overall cap or limit, although employers
sometimes offer incentive payment for the achievement of budgeted man hours.

However, with a competitive market, there are contractors who may be willing to accept
delivery of all the EPCM services for a fixed amount. The only exceptions to this would
be subject to negotiation but might include: variations to the EPCM or trade contracts;
breach by the Employer of the EPCM contract or trade contracts and possibly ‘force
majeure’ type events.

On the face of it, capping the amounts payable to the EPCM contractor appears
commercially sensible but employers need to be aware that where matters have
taken a turn for the worse – for instance where the project has fallen into delay (which
may be for reasons beyond the reasonable control of the EPCM contractor), employers
will want to avoid effectively putting a halt to the services or disincentivising the EPCM
contractor from applying appropriate resource to the project to assist in rectifying the
relevant issues.

12 Norton Rose Fulbright

 Incentives

Incentives
The EPCM contractor will not backstop project delivery risk and, importantly, the
achievement of key project targets. The EPCM contractor will however be responsible
for managing the same on behalf of the employer.

The challenge for employers will be to incentivise the EPCM contractor to effectively
and proactively manage project delivery and the achievement of key project targets.

The approach typically adopted relies on an incentive structure which provides

positive (and sometimes negative) incentives to the achievement of key project targets.
These provisions are generally bespoke and may be underpinned by fairly complex
calculations but equally can be fairly straight forward depending on the approach
preferred by employers.

Typically, incentive regimes cover the following:

• bonus payments for the works being completed on time or within a fixed period
following the scheduled completion date

• bonus payments for the works being completed for an overall outturn cost below or
within a fixed amount over the outturn cost budget

• bonus payments based on the health and safety record at the site

• bonus payments for completing the required EPCM services within the projected
budget for such services (based on projected man hours at the agreed rates)

but there will always be variations on the approaches outlined above and the proposed
approach will tend to be shaped by the concerns the employer may have in respect of
key aspects of project delivery.

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A guide to EPCM contracts

It will be a matter for the employer to consider commercially whether the incentives
should remain payable where extraneous circumstances outside of the control of the
EPCM contractor have undermined the achievement of the relevant project targets. We
have seen varying approaches in this regard.

Since the EPCM contractor will typically set key project targets (eg, the project budget
and the project programme), appropriate due diligence will need to be undertaken
by the employer to establish that the project targets are sensible in the context of the
project proposed.

More recently, we have seen EPCM contractors willing to accept negative incentives
around the achievement of the key project targets, such that they are prepared to place
an element of their profit at risk. This approach has been commonplace in other sectors
using the EPCM model for some time but it is now becoming more common now in the
mining sector.

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 Limitations on liability

Limitations on liability
All EPCM Contractors will expect to cap their liability under the terms of the
EPCM contract.

The liability accepted by the EPCM contractor must be appropriately sized but the ethos
of EPCM contracting is that the EPCM contractor is providing consultancy services
only and is not underwriting project risk. The size of the liability caps under the EPCM
contract (compared to the overall project cost) and security package (if any) supporting
the EPCM contract will be reflective of this.

Sizing of the liability cap

It would be usual for EPCM contractor’s to limit their liability to a percentage of
the budgeted fees or an amount equal to their profit at the date of contracting. The
approach taken differs from one contract to the next but our experience is that
liability tends to be limited to an amount equal to 10-20 per cent of the budgeted cost
reimbursable element of the EPCM payment (which broadly equates the level of profit
expected by EPCM contractors).

Exclusions from the liability cap

Certain defined liabilities must be uncapped and so excluded from any limitation on
liability. These liabilities should include those which can not be limited at law (eg,
fraud, death and personal injury etc.).

In addition, there is usually an agreed list of further liabilities that will not count
towards the liability limit. This is usually a matter for commercial negotiation and will,
to a certain extent, be driven by project specific concerns.

Consequential losses
Liability for consequential losses (ie, the losses that arise indirectly from the failure,
act or omission of the EPCM contractor) is a key issue:

• employers will be concerned about the cost of its ‘trade’ contractors having to re-
perform works as a result of defective services or design by the EPCM contractor

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A guide to EPCM contracts

• the extent of liability typically accepted by EPCM contractors will leave the employer
exposed given the likely quantum of these liabilities

• professional indemnity insurance should therefore be arranged to cover these types

of losses (either procured by the EPCM contractor or by the employer as part of the
wider project insurances)

• where professional indemnity insurances is available, such liability should be

uncapped to the extent it is recoverable under the relevant policy. This would permit
full recovery by the employer (subject to the extent of the insurance cover)

• the allocation of insurance deductible risk will be a matter for commercial negotiation.

Re-performance of defective services

Many EPCM contractors look to limit their liability to ‘re-performance’ of defective
services only:

• this is a difficult concept for an employer to accept particularly given the above
described trade contractor losses

• employers should resist this since any such re-performance should be treated as a
cost of performing the services and is not a liability as such

• many liabilities that should be captured by the EPCM contract liability regime
may not be remediable through re-performance of defective services alone, so this
approach will not provide for an appropriate remedy in many circumstances

• it ignores the purposes of professional indemnity insurance cover.

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 Tax issues – on-shore/off-shore

Tax issues – on-shore/off-shore

Most developing countries have tax regimes which seek to control, through taxation,
the amount of investment in a mine development that does not become directly
invested in the country (so for example, professional services fees). Withholding tax is
the most common form of taxation that needs to be considered when structuring the
construction development stage of any mining project.

It would be unusual for any contractor to bear withholding tax risk and, if it did, then
it would simply become a ‘cost’ to the project that would add to the overall project
economics. It is important therefore:

• to give proper consideration to structuring the construction contracting

arrangements very early in the procurement of a mining project

• to obtain the early buy-in by the local tax authorities (either directly or through
local advisers) to those arrangements.

One of the most common means of mitigating withholding tax exposure is to adopt a
split ‘on-shore’ and ‘off-shore’ contract structure. This usually means that there will
be two contracts, each entered into by a different EPCM contractor entity and each
containing different scope of services. For example, there will usually be:

• one contract for those services which may take place outside of the country in which
the works are being delivered, payment for which may therefore be structured to
avoid withholding tax. This contract will typically be entered into by a non-local
EPCM contractor entity, (the ‘off-shore contract’)

• one contract for those services which must be performed in the country in which
the works are being delivered, such as the EPCM construction management services
(because there must be personnel presence on the ground in order to carry out the
supervision), payment for which may be subject to the relevant local withholding
tax regime. This contract will typically be entered into by a locally registered EPCM
contractor entity (the ‘on-shore contract’).

The obvious risk to the employer with a split structure is that he is required to deal with
two contractors each with a separate scope of work and separate rights and obligations.

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A guide to EPCM contracts

It is important therefore that these contracts are well drafted and dovetail together so
that they include, at least, the following provisions:

• a recognition of the joint objectives across the two contracts and a requirement for
coordination

• an acknowledgment by each entity of the scope of the services being performed by

the other and an allocation of responsibility for any gaps between the two scopes

• an obligation to not interfere with or impede the other entity

• an acknowledgement that any act, omission or default by one entity will not give rise
to any right of the other entity to relief from or a right to claim against the employer

• default termination triggers in one contract automatically triggering termination of

the other contract (so called, cross default provisions)

• a right for the employer to consolidate any dispute against one entity with any
dispute against the other.

The employer will usually look to limit its exposure to breach by the separate on-shore
and off-shore contractors by putting in place further contractual arrangements which
provide for the off-shore EPCM contractor entity (or a suitable parent) providing a
performance and financial guarantee (backed by indemnities and, possibly, suitable
financial security) in respect of discharge by both the on-shore and off-shore entities
of their respective and collective obligations. This guarantee (which could be wrapped
into the off-shore contract) is often referred to as an ‘umbrella agreement’.

However, in jurisdictions where the tax authorities do not recognise this ‘split’ due to
the presence of the guarantee (or ‘wrap’) provided by the umbrella agreement, then
further careful consideration is required in the drafting of the on-shore and off-shore
contracts in order to deal specifically with the above concerns.

English law is the preferred governing law for substantial international contracts
because it carries a guarantee of impartiality and integrity that is recognised worldwide
and provides the ideal balance of predictability and flexibility. It is invariably the
preferred choice of lenders in the EPCM market.

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 When things go wrong – choice of law and dispute resolution

When things go wrong – choice of law

and dispute resolution
• The dispute resolution clause can provide for a tiered approach involving high level
commercial negotiation then alternative dispute resolution (mediation usually) with
arbitration only to follow after those processes are exhausted.

• Arbitration (contrasted with court proceedings) has the advantages of easy

enforcement of an award as the New York Convention is in force in 148 countries.
There is no comparable treaty in place to enforce court jurisdictions which are only
generally enforceable where there are reciprocal enforcement arrangements in place
(for example, within the EU). Further, arbitral proceedings are confidential and any
award is final and binding with limited exceptions.

• There are well established international arbitral rules (such as the ICC, LCIA) which
have dedicated resources to deal with all administrative aspects of the arbitral
process including but not limited to nomination of arbitrators, advances on costs
and recommended model clauses.

• Finally the place (or seat) of arbitration needs careful consideration because:

—— it determines where the award is made (and hence whether it is an award

of a party state for the New York Convention)

—— the arbitration will be subject to the procedural law of the seat

—— the courts of the seat will have a supervisory/supportive function in connection

with the arbitration.

Advice should be sought on a case-by-case basis to ensure that the EPCM contract
contains appropriate dispute resolution provisions which provide clear recourse for
the employer and a high degree of certainty in terms of its ability to enforce any award
made in its favour.

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A guide to EPCM contracts

Contacts
Martin McCann
Global head of mining,
infrastructure and commodities
Norton Rose Fulbright LLP
Tel +44 20 7444 3573
martin.mccann@nortonrosefulbright.com

Mark Berry
Partner, London
Norton Rose Fulbright LLP
Tel +44 20 7444 3531
mark.berry@nortonrosefulbright.com

Matthew Hardwick
Senior associate, London
Norton Rose Fulbright LLP
Tel +44 20 7444 5550
matthew.hardwick@nortonrosefulbright.com

20 Norton Rose Fulbright

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