Responsibility for the Commissioning Process in EPC Projects

The commissioning process – involving start-up, commissioning and performance testing – is critical to the success of an engineering, procurement and construction (EPC) project. Responsibility for this phase of the project must be properly allocated between the parties and a balance needs to be struck between the competing interests of the various stakeholders; this requires a sound understanding of the pertinent issues, some of which are considered in this update.

 

The nature of the facility may make it more logical for one party rather than another to take responsibility for the commissioning process. If the facility consists of multiple plants which are to interface with each other, but each of which is to be constructed by a different EPC contractor, no individual contractor will wish to bear the risk of other contractors’ failures at the interface points. The owner may therefore be in the best position to run coordinated and properly interfaced commissioning process. Conversely, if a single contractor is responsible for the delivery of the entire facility, there may be little practical advantage in having the owner coordinate and control the commissioning process.

If the contractor is responsible for the commissioning process, the handover of the facility to the owner will not take place until the performance tests have been completed, and the owner will be unable to operate the facility commercially until after the handover. If the owner is responsible for the commissioning process, it will have control of the facility and will therefore be able to begin commercial operation earlier. However, the extent of the benefits arising from early operation may depend on the intended off take arrangements. In addition, the owner should ensure the contract is drafted in such a way that early commercial operation does not enable the contractor to argue that the owner has accepted the facility as complete, which could result in the owner losing the benefit of the performance guarantees and so having little recourse against the contractor if a performance failure is subsequently detected.

In circumstances where the owner is responsible for the commissioning process, the care, custody and control of the facility will have been transferred from the contractor to the owner before the start of the commissioning process. The contractor will not want to be exposed to delay-liquidated damages after such handover. Consequently, the owner will have little if any recourse against the contractor for delays which occur during the commissioning process, regardless of whether such delays result from defects in the facility which are attributable to the contractor. The question then arises as to how the owner will cover additional costs arising from such delays. This may prompt funders to require additional completion support in order to cover the owner’s exposure to delay risk.

If the owner is responsible for the commissioning process, it is more likely that acts or omissions of the owner or its personnel during the commissioning process will have an impact on the performance of the facility, making it easy for the contractor to argue that a performance failure has been caused by the owner and is not attributable to the contractor, or that the owner has failed to follow the performance-testing procedures set out in the contract. In Yorkshire Water Services Ltd v Taylor Woodrow Construction Northern Ltd [2004] EWHC 1660 an owner was unable to recover damages from a contractor in relation to certain costs, defects and performance failures due to the manner in which the owner had undertaken the commissioning and testing of a wastewater treatment facility. A properly drafted contract can help to avoid such a situation, even if the owner or its personnel are involved in the commissioning process (eg, if the owner’s personnel are seconded to the contractor and assist the contractor under its direction and control). However, if the contractor retains responsibility for the commissioning process, this goes a long way towards ensuring that the performance guarantees remain valid, thereby reducing funder completion support requirements.

Allocation of responsibility for the commissioning process will almost inevitably require a balancing of the contract price against the funder completion support requirements. The owner may seek to minimize completion support requirements by requiring the contractor to take responsibility for the commissioning process. If it does so, it must accept that the contract price will be higher due to the cost and risk to the contractor associated with such responsibility. Alternatively, the owner may seek to reduce the contract price and accept additional funder completion support requirements by taking responsibility for the commissioning process itself. In assessing this issue, the owner must consider that, although completion support may have a more direct impact on sponsors, it is at least contingent: it will be paid only if the relevant risks arise. An increased contract price is payable in any case.

No single factor is likely to determine which party should take responsibility for the commissioning process under an EPC contract. The decision should be based on an analysis of the technical constraints, legal pitfalls and the requirements of the lending market, as well as accepted industry practice. The contract must properly document the allocation of responsibility based on a clear understanding of this analysis. The complexity and interdependence of the issues involved dictate that financial, technical and legal advisers play a role in the allocation of responsibility for the process. Although of vital importance to the success of a project, the completion of the process may not be the end of matters. Detailed defect rectification regimes and ongoing warranties may regulate the rights of the parties to the contract long after the process has been completed.

 

Reference by Andrew Chapman


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