Prior to any infrastructure project in Australia commencing, all parties involved are required to sign and adhere to the engineering, procurement and construction (EPC) contract model. A recent opinion piece in the Fin Review explored this contract model and how it compares to other styles used in Europe.
Scott Langdon, a partner at KordaMentha Restructuring suggests that the EPC contracts model creates a ‘cultural issue with how Australians approach infrastructure projects.’ In this article, we explore what an EPC contract is, how it impacts infrastructure projects and a new way forward.
What is the EPC Contracts Model?
The EPC contracts model is where the principal or owner enters into a contract with the designated contractor, who will in turn enter into subcontracts for aspects of the work. The designated contractor becomes responsible for the entire project, from design, procurement, construction, commissioning and handover of the project to the owner.
So, what happens when things go wrong?
From miscommunication to disagreements – problems are inevitable for infrastructure projects. And when things go wrong it tends to get ugly… The real issue is, these problems are generally dealt with by contractors going directly to their lawyer’s office, rather than the building site, to solve the problem. This way of dealing with project issues is heavily influenced by the EPC contract which ‘encourages blame shifting, litigation and often puts an inordinate amount of responsibility on the contractors’ shoulders’ suggests Langdon.
‘This dispute orientated approach ultimately leads to projects failing to be delivered on time and subsequent cost overruns, as the contractor and principal are focused on protecting their position, rather than on completing the project.’
The contract model has forced large contractors to pull out of the infrastructure space, simply because they don’t want to take on the level of risk when signing a contract – which is not ideal during an infrastructure boom. If tier one contractors are pulling out of the infrastructure space, then that’s surely telling you something…
A new way forward.
We need to start looking at a more collaborative, outcome driven approach. Langdon suggests we need to ‘deal with problems in a consensus-seeking one rather than a litigious fashion’. As an example, in Europe they have alliance-style contracts which materially mitigate cost overruns by reducing construction delays. ‘They involve the shared responsibility of bringing a project to fruition, and involve government and private sector working in partnership on big projects.’
‘Alliance contracts take proactive steps towards rectification, not retreat. This encourages a “we” mentality towards the inevitable construction challenges, rather than a them-versus-us approach.’
If we don’t change what we are doing now, the infrastructure market will continue to experience blow-outs.
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