Engineering, Procurement and Construction (EPC) and Engineering, Procurement and Construction Management (EPCM) contracts are two project delivery methods commonly used in the mining, mineral processing and power industries. Despite the widespread use of these contract models, there remains a general level of mystification associated with EPCM contracts, and the distinction between EPC and EPCM contracts is not particularly well documented or understood.

In acronym alone, the two contract models appear to be similar. So what’s in an ‘M’?

EPC contracting

Under an EPC contract, the EPC contractor develops the project from its inception to final completion. The principal provides the EPC contractor with technical and functional specifications for the project, and the EPC contractor subsequently designs, builds and delivers the project in an operational state so that it can be operated at the ‘turn of a key’ (resulting in the common reference to EPC contracts as ‘turnkey’ contracts).

EPC contracts are almost always ‘lump-sum’, where the EPC contractor is limited to receiving a fixed price irrespective of the actual cost of performing the work. The EPC contractor generally takes the benefit of any savings (and the risk of any cost over-runs). In addition, in an EPC contract, the EPC contractor usually provides a performance guarantee (subject to agreed liability caps).

An EPC contract provides a suitable framework for projects where significant engineering expertise is required, and the principal does not need to retain design control or flexibility in execution. EPC contracts are commonly used for large scale resource developments, such as oil and gas plant projects.

EPCM contracting – How is it different?

In contrast to an EPC contract, an EPCM contract is a sophisticated project management or agency arrangement where the EPCM contractor:

-  is responsible for the detailed engineering and design for the project; 

-  administers and manages the project as the principal’s agent or representative, including by providing programming and strategic management services; and 

-  is typically responsible for breaking down the procurement and construction work into packages, managing their tender, overseeing the principal’s entry into the trade/supply  contracts and managing those trade/supply contracts on the principal’s behalf to achieve completion of the project.

Unlike EPC contracts, EPCM contracts are almost always ‘cost plus’ (or ‘cost-reimbursable’). The principal pays the subcontractors directly for materials, equipment and on-site works, and only pays the EPCM contractor its actual direct costs (mostly labour) for performing engineering and supervisory services, plus an agreed margin. The margin charged by EPCM contractors varies depending on the risk assumed (which is usually low), the size of the project (small projects usually have higher margins) and supply/demand position in the economy.

An EPCM contract provides a suitable framework where the nature of the project requires continual design development either due to the complex nature of the project (or its interface with other assets or projects) or because the outputs of the project have not yet been finally determined. So long as the principal has the expertise, experience and resources to manage the progress of the project and can afford to retain the cost and time risk of the project, the principal can avoid payment of a hefty premium to put the risk on a head contractor under an EPC contract.

An EPCM contract may be appropriate where the inherent advantages of other procurement models (largely time and cost certainty) are not able in a practical sense to be delivered, perhaps due to lack of market appetite or capability to accept the risk transfer of traditional models. This is particularly relevant where the principal is unable or unlikely to obtain a suitable contractor and price using an EPC contract model.

EPCM contracts are commonly used for the construction or expansion of large scale heavy engineering facilities or manufacturing plants in the petrochemical oil and gas, mining and power sectors, where engineering and project management skills are more likely to be separate to construction and supply capability. EPCM contracts are not generally used for civil projects, except where the project can be delivered by relatively small, self-contained packages awarded to multiple contractors.

So what’s in an ‘M’?

There are, of course, many other differences between EPC and EPCM contracts. The fundamental difference, however, lies in the ‘M’. The ‘Construction Management‘ component of the project delivery method means that the EPCM contractor does not perform construction work and does not usually take full responsibility for delivering the completed project. The principal is able to take a more ‘hands on’ approach, with greater flexibility to modify project specifications and effect changes to the scope of the works throughout the project. However, as with any project delivery method, if you elect to use an EPCM contract model for your project, it should be moulded to fit the needs of the project and the principal to give your project the best chance for success.

A subcontract defines, among other things:

• what a subcontractor is required to do,
• the time within which the subcontractor is required to do it,
• the consequences for the subcontractor if it fails to meet the time obligations,
• the assistance the subcontractor is required to provide to the main contractor to assist the main contractor in administering the main contract,
• the interfacing that is to go on between subcontractors, and
• the events entitling additional time and cost.

The subcontract constitutes both the rule book and the map for the subcontractor; defining what is required and the consequences of failing as well as broadly illuminating the manner in which the subcontractor may go about the task. The rules and the path of each project are different, and the requirements for each subcontractor on each project are also likely to be different. If the subcontractor is not provided with a clear and concise rule book and map, but rather a broad and generic indication of what is basically required, the subcontractor is unlikely to precisely perform as the main contractor would like.

Here are two common but dangerous habits in respect of subcontract drafting:

The ‘pro forma’ subcontract

It is quite common for major contractors to hold one or a number of ‘pro forma’ subcontracts, which are then routinely released to all subcontractors on all projects. There is an upfront time and cost saving benefit to this approach, as one subcontract can be drafted in a manner that seeks to allocate all transferrable risk onto the subcontractor, and the document can then be used repeatedly.

The major, and quite obvious, risks that arise from this strategy are that a pro forma subcontract will rarely, if ever, accurately address the relevant risks in the specific project, will rarely identify the subcontractor’s obligations with sufficiently clarity as to aid the subcontractor’s compliance and delivery, and will not take account of any specific or unusual main contract provisions. Indeed, the time and cost saving of pro forma subcontracts can very quickly be eroded by additional contract administration work and subcontractor supervision that can result form the use of a pro forma subcontract that is inappropriate for a specific project and does not effectively serve its function.

Rather, it may be appropriate to hold ‘draft precedent’ subcontracts, which may have been derived from previous projects and which contain the major necessary clauses and a typically suitable risk allocation. Such a document may represent a skeleton structure, around which the project-specific subcontracts can then be created. This will ensure that the end product is a bespoke subcontract suitable for the project, however the time and cost will be minimised by using a pre-existing base document. This is, of course, substantially different to rolling out the same pro-forma agreement to each subcontractor on each project.

The ‘back to back’ subcontract

Another common but potentially disastrous approach to subcontract drafting is to stipulate that the subcontract is ‘back to back’ with the main contract and the subcontractor is required to comply with all relevant obligations of the main contract. Commonly, this brief form of subcontract will include a copy of the main contract as an appendix.

This is fraught with problems and is, in many ways, a completely unreasonable way to contract with subcontractors. Under this strategy, the main contractor is effectively saying that the subcontractor is required to identify all the obligations that may be relevant under the main contract to the performance of its works, and to then comply with the obligations it has identified. There is a significant risk of the subcontractor failing to identify all of its obligations and consequentially failing to meet these obligations. There is also a risk of disputes regarding the interpretation of the main contract with respect to the subcontract works. In circumstances where the main contract is administered by an engineer, there may be issues with the administration of the subcontract, particularly regarding whether the main contractor has the authority to act as the ‘engineer’ when administering the subcontract.

As with ‘pro-forma’ subcontracts, briefly drafted ‘back to back’ subcontracts risk exposing a main contractor to significantly greater administration hassles and pose a threat to the efficient delivery of the subcontract works. In the event of formal dispute in respect of an insufficiently drafted ‘back to back’ subcontract, there is a high likelihood of greater legal fees being incurred and a longer and more complex process for resolving the dispute that would be the case if a clear and accurately drafted bespoke subcontract had been used.

Subcontractors frequently hold the key to successful project delivery. It is therefore critical that main contractors draft appropriate subcontracts, administer subcontracts successfully and manage subcontractor relationships. The time and cost invested in bespoke subcontracts at the commencement of a project can return big dividends in terms of efficiency and smooth project delivery and can often provide some protection to the main contractor in the event that problems arise on the project.

By Sachin Kerur and William Marshall

We are, of course, speaking of subcontractors. Whether through management contracting or more traditional procurement, subcontractors continue to play a major role in project delivery and are often instrumental in on time and on budget completion. One would naturally then assume that the documentation and management of subcontracts would be a matter of prime importance for contractors and for the industry. In practice, however, the drafting and administration of subcontracts is often given insufficient thought and the management of subcontractors is often poor.
While every project and contract is different, we think there are four strategies that can assist in managing subcontractors and maximising successful project delivery.

1. Bespoke subcontracts – ‘back to back’ is not enough

It is perplexing that contractors will often spend significant amounts of time negotiating and understanding the issues within the main contract, and then seek to engage its subcontractors with an inadequate and imprecise reference to ‘back to back’ obligations. ‘Back to back’ has no precise legal meaning, and seeking to impose a wholesale risk transfer of all obligations in the main contract to each of the subcontractors does little to assist the subcontractor in delivering its works in the manner that is actually required by the main contractor.

The allocation of risk in the main contract is, of course, critically important to the main contractor, as is a detailed understanding of the risks and obligations contained therein. It is equally important, however, that the main contractor allocates appropriate and clear risks to each of its subcontractors in a manner that will ensure the subcontractor understands its express obligations and will be bound to deliver in a manner and at a time that will enable the main contractor to comply with its obligations. The only sure-fire way to achieve this is to draft bespoke subcontracts for each project and, in many cases, for each specific subcontracted scope of works. The issue of subcontract drafting will be addressed in detail in part 2 of this blog series.

2. Subcontractor cash flow fear

All but the largest of subcontractors are susceptible to cash flow risks and are painfully aware of their position in the payment hierarchy. In jurisdictions where ‘pay when paid’ clauses are legal and enforceable (such as the UAE), main contractors frequently utilise such clauses to protect their own cash flow position, to the detriment of the subcontractors. The protection of cash flow is a legitimate and necessary imperative for a main contractor, but it is equally important to discuss issues with subcontractors and to explain the reasons for delayed payment and the likely solutions to the subcontractor’s concerns. This managerial ‘hand holding’ can go a long way to reducing subcontractor fear and subcontractor disputes, delivering an appreciable efficiency gain for main contractors in terms of management and administration time. Maintaining a dialogue with subcontractors is important to mitigating the potential fall out from slow payment.

3. Co-ordination and programming

The role of a subcontractor is often quite simple – deliver a precise scope of work within a precise time. While simple in isolation, the interaction of many subcontractors working on the same site and the issues of overall project deliver can affect the practical ability of the subcontractor to deliver its required works. Problems of access often arise and efficiency is often lost when multiple subcontractors are working in a small area on the same site. These issues increase the risk for subcontractors and can create a hostile atmosphere on site. This in turn creates risks for the main contractor due to potential disputation and a likelihood of more adversarial subcontract management from subcontractors, resulting in more claims and the need for an investment of additional administration and management time by the main contractor.

One solution is, of course, to seek to program the performance of subcontractor’s works in a manner that will minimise the concurrent performance of works in the same part of the site but this is often not an available solution. It is important to ensure there is adequate coordination and communication between subcontractors, ideally at project ‘toolbox’ meetings, so that minor hurdles to project delivery can be resolved before they impact on individual subcontractor’s programmes.

4. Relationships

It may be clichéd, but strong, positive relationships with subcontractors can prove to be good insurance for the main contractor when projects turn bad. The ability of the main contractor to deliver the project often rests in the hands of his subcontractors, meaning that the assistance of subcontractors to overcome project delivery problems can reduce the likelihood of ‘up the line’ disputes for the main contractor. Main contractors should for that reason seek to strengthen relationships with subcontractors. Using the same subcontractors on subsequent projects and developing an understanding of the subcontractor’s business can assist in building such relationships.
Subcontractors frequently hold the key to successful project delivery. It is therefore critical that main contractors draft appropriate subcontracts, administer subcontracts successfully and manage subcontractor relationships. In Part 2, we will consider the use of standard form subcontracts or pro-forma subcontracts and the risks involved in this strategy.

By Sachin Kerur and William Marshall

It is natural, therefore, that parties in contract negotiations would rely on technology to find changes in the document being negotiated, particularly where proposing amendments and developing clauses.

In the past, we would rely on the other side to direct us to amended clauses in a contract or to relay the substance of the proposed or incorporated amendment. In some instances, we would have to read the document from top to bottom to identify each and every change.

Today, thanks to technology, we rely on ‘track changes’ or compare software which raises the question: “What is accepted practice now that we conveniently use track changes?”

Earlier this year, the Queensland Supreme Court considered two important question in the case Thiess Pty Ltd v FLSMIDTH Minerals Pty Limited [2010] QSC 6: (i) what is a lawyer’s duty when making changes to draft deeds; and (ii) when should the Court intervene to rectify a document.

The facts of the case

Queensland Aluminium Limited (QAL) had engaged Thiess Pty Ltd (Thiess) to design and construct three high temperature processing plants, known as calciners, at QAL’s operation in Gladstone. Thiess subcontracted a large part of the design work to FLSMIDTH.

In mid-2003, the calciners, built to FLSMIDTH’s design, were found to have structural problems and by the end of 2004 Thiess had commenced proceedings against FLSMIDTH to recover its overruns and lost bonuses under the head contract with QAL.

In early 2005, QAL, Thiess and FLSMIDTH began negotiations toward a settlement. After months of negotiations, the parties entered into a settlement deed (Main Deed). As part of these negotiations, Thiess and FLSMIDTH agreed to enter into a separate Side Deed that, amongst other things, dealt with the ongoing liability of Thiess and FLSMIDTH and, in particular, reserved Thiess’ rights and FLSMIDTH’s liability in relation to the proceedings on foot.

Initially, the Main Deed between QAL, Thiess and FLSMIDTH included a limitation clause that sought to limit FLSMIDTH’s liability to the limit of the indemnity under the Project Specific PI Policy in accordance with the Consultancy Agreement. The parties believed that this included the primary policy of insurance provided by QBE and the excess policy provided by Liberty.

FLSMIDTH’s solicitors moved the limitation clause from the Main Deed to the Side Deed and at the same time amended it in a material way.

When the amendment appeared in the next version of the Side Deed, the whole of the clause was marked up on the basis that it was a new clause in the Side Deed. The covering email sent by FLSMIDTH’s solicitors identified some of the changes to the document but not the material changes to the limitation clause.

Negotiations between FLSMIDTH and Thiess continued for another five weeks before the documents were finally executed.

After the execution of the deeds, Thiess claimed that the changes to the version of the limitation clause in the Main Deed were intentionally not identified and did not reflect their understanding of the commercial deal.

Thiess consequently commenced proceedings against FLSMIDTH seeking rectification of the Side Deed on the basis of common or alternatively unilateral mistake. Thiess also made submissions that FLSMIDTH’s solicitor’s failure to identify the changes to the Side Deed was intentionally deceptive and misleading.

What the court decided

The judge (His Honour McMurdo J) conducted a detailed examination of:

• all the dealings between the parties and, in particular, of their lawyers, the drafts and correspondence accompanying the amendments; and

• the evidence called by both sides regarding proper practice of solicitors in the process of drafting and redrafting of such documents.

According to the expert called by Thiess, a careful and competent solicitor of good repute would direct their opponent’s attention specifically to such a change within their previous draft of the clause.

On the view of the expert called by FLSMIDTH, that was not required, because a competent solicitor in receipt of such an email would not rely simply on the covering email. They would read its attachment, in this case the draft Side Deed, and it would be sufficient for them to mark the whole of the proposed clause 8, as FLSMIDTH’s solicitors did.

The judge held that the new limitation clause contained a markedly different commercial element to the overall settlement. In those circumstances, Thiess’ solicitor “could have expected” that the amending solicitor would have drawn attention to such a material change.

In addition, the judge found that the drafting of the new clause would have a result that was quite different from that which the parties and their solicitors had been discussing. While the judge excused the amendment to some extent, noting that it appeared that FLSMIDTH’s solicitors were not aware of the effect of the change made, the court acknowledged that it was the continued common intention of the parties that the deeds would not affect the proceedings that were on foot. The court ordered that the Side Deed reflect the initial intent of the parties.

Things to consider

It would seem that the judge in this case excused the masked amendment as misunderstanding of the legal effect. However, had the judge held the parties strictly to the words they had agreed to, the amount Thiess may have been able to recover under the first proceedings would have been significantly reduced.

So, even though ‘track changes’ is convenient, you should always check what you receive from the other side because it will not be an easy process to have an error rectified.

Moreover, lawyers should draw attention to any material change they make. Otherwise, they may fall foul of ethical standards if, unlike in the Thiess case, a judge forms the view they were well aware of the impact of a change and communicated the change in a way that it might go unnoticed by the other side.

This judgment from the Inner House of the Scottish Court of Session is therefore very useful as an indication of the UK Courts’ current approach to causation of delay and extensions of time. Of course, this may not be the end of the story as City Inn still has the chance to lodge an appeal to the Supreme Court.

Key Elements

The dispute centred on a late-running project to build a hotel in the city of Bristol. Shepherd was employed by City Inn to carry out this project under an amended version of the 1980 edition JCT contract (a UK standard form of building contract with Quantities). The adjudications which followed the late finish resulted in Shepherd being awarded a 9 week extension of time (“EoT“) made up of 4 weeks awarded by the Architect and a further 5 weeks from the Adjudicator. City Inn was unhappy with this result and took the matter to the Outer House of the Scottish Court of Session. They applied for various orders including
a declaration that Shepherd were not entitled to an EoT; a reduction of the Architect’s award of 4 weeks EoT; and an order for payment of outstanding liquidated damages for delay.

Shepherd counterclaimed for a further 2 weeks EoT and for consequent loss and expense. The matter eventually proceeded to trial and was heard by Lord Drummond Young.

The main elements of the case were a bespoke clause covering entitlement to an EoT (clause 13.8), and the cause of the delay, taking into account the multiple delaying factors which occurred and the extent of their impact.

On the first issue, Lord Drummond Young found that clause 13.8 could not logically apply to instructions which caused delay just because they were in themselves late. Lord Drummond Young also noted that City Inn had not referred to their clause 13.8 rights until this juncture, and that neither of the parties appeared to take the clause into account when acting.

On the second – and more interesting – issue, causation and delay, Lord Drummond referred back to another contract clause (clause 25) to give his judgement. He said that under clause 25 the architect was to exercise his judgment and fix a “fair and reasonable” completion date. He held that an apportionment exercise may be necessary where there is concurrency or no dominant event.

The parties had been unable to locate an electronic, logic linked version of the original programme and so had to use a basic programme showing the activities and durations of the project. Lord Drummond rejected City Inn’s expert evidence which tried to establish, retrospectively, a critical path which led to the conclusion that Shepherd was not entitled to any EoT at all. Instead, he favoured Shepherd’s expert who said that he had attempted to establish a critical path, but that it was impossible to do so accurately. Lord Drummond preferred this common sense approach and found that, using this analysis, Shepherd was entitled to 9 weeks EoT.

City Inn appealed unsuccessfully with most of the judgment concurring with Lord Drummond’s reasoning. The majority opinion was set out by Lord Osborne, and contains five principles relating to the evaluation of a delay and loss plus expense claim. Of course, the Court was examining these issues under clause 25 of the JCT form. However, I think these general principles would have relevance to most construction contracts and illustrate the likely approach that would be adopted by the UK Courts:

1. For an EoT claim to succeed the relevant event must be shown to be likely to cause delay or have caused delay.

2. Whether or not a relevant event causes delay is a matter for common sense.

3. It is for the decision maker to decide what evidence to use in forming his conclusion. This may or may not include a critical path analysis. What matters is that the evidence used is sound, whatever form it takes.

4. If there is one dominant cause, all other causes will be disregarded. The dominant cause must be a relevant event for a claim to succeed.

5. It is for the decision-maker to apportion the delay to completion of works in a “fair and reasonable way” where there are two (or more) causes of delay, but only one of which is a relevant event and neither is dominant.

Although Lord Calloway dissented from the ‘apportionment’ reasoning, all three judges concurred in the result and on the critical path analysis being relevant but not necessary to decide the outcome of an EoT claim.

Implications for future cases

I should have of course stressed that this was a Scottish Judgment. What this means is that the decision is binding on the lower courts of Scotland but not so on the English courts – although given that it is an appeal court decision it will at least be persuasive in England.

What is most striking is that all the judges leaned heavily towards the arguments for being guided by principles of fairness, reasonableness and common sense. Many of the arguments put forward centred on the true meaning and consequences of events being concurrent. However, Lord Osborne stated that the important question was not whether events were truly concurrent, but rather the effects on the completion date of the events. In a similar spirit, Lord Carloway talks about the Architect applying “professional judgment” and “using his and not a lawyer’s common sense“.

In terms of implications for future cases in the UK, the judgment must not be considered an approval of the use only of common sense and fairness at the expense of a critical path analysis. In this case the critical path analysis presented was not considered sound and so was not used to form the judgement. However, that is not to say it may never be used to determine EoT claims, but rather it is up to the decision-maker as to whether he uses the critical path analysis in his “fair and reasonable” decision-making process.

And what of its implications further afield – in the international arena? I think the judgment and the arguments employed would be useful to anyone involved in disputes on causation and EoT’s where there are concurrent events and particularly where there is no critical path analysis or such evidence is flawed.

FIDIC talks about the Engineer making a “fair determination” whenever required to determine any matter under the Contract [Sub-Clause 3.5] and the provision dealing with extensions of time [Sub-Clause 8.4] refers to an extension of time “if and to the extent that completion……..is or will be delayed by any of the [specified] causes“. So the same arguments about causation, apportionment and concurrency could run under a FIDIC based contract.

Similarly, the NEC construction form NEC3, which treats delay events as “Compensation Events”, requires the Project Manager (who has to act “as stated in this contract and in a spirit of mutual trust and co-operation”) to assess “the length of time that, due to the compensation event, planned Completion is later than planned Completion” [Core Clause 63.3]. Interestingly, in NEC, assessment of the impact of the event includes “risk allowances for cost and time for matters which have a significant chance of occurring and are at the Contractor’s risk under this Contract” [Core Clause 63.6].

And, of course, I cannot sign off without mentioning that Pinsent Masons acted for Shepherd Construction on this case!

So while the past ten years have provided an interesting economic backdrop for players in the construction industry – with the world economy moving from boom to near bust to (hopefully) better times ahead – for most of those years Australia’s construction industry simply surged ahead, even during the global economic downturn of 2008/2009.

Nonetheless, changes in the economy did lead to changes in how projects are delivered in Australia. Which begs the question – how has project delivery evolved in Australia over the past decade and how will the abundance of upcoming construction work across the country be delivered going forward?

The short answer to the first part of that question is that owners and contractors have worked together to develop contracting models that are more sustainable for both parties, by considering movements in the economic climate and the best management of risk allocation.

Ten years ago, the contracting models used for projects were the ‘traditional’ form of contracts – an allocation of risk for an agreed fixed lump sum. Popular contract models included EPC, design and construct, and construct only contracts, with contractors being appointed following a competitive tender process.

This process was costly for all involved. In difficult times, contractors would accept a high level risk with only small contingencies, which led to a claims-focussed culture. In less difficult times, contractors would either accept a high level of risk (with a price tag to match) or a low level of risk and again revert to focusing on claims if any of the owner’s risks came to pass.

By 2003/2004 contractors had become more selective about the projects they bid for, and they began to avoid high risk delivery models. Owners were therefore forced to critically assess traditional procurement processes and to become innovative in order to attract the best contractors and engineering resources.

The most dramatic change to project delivery models came with the development in Australia of “alliancing”.

Alliances involve an owner and one or more service providers (designer, builder, supplier) coming together to work as an integrated team to deliver a specific project under a contractual framework where the commercial interests align with the actual project outcome.

One of the significant drivers for the parties to ensure the project is successful is that most risks and rewards are shared jointly. Put simply, in the first phase of an alliance, the parties work together to finalise a scope of work and prepare a target cost estimate (TCE) of the cost to complete the project. That TCE is locked in, and phase 2 (the actual construction) commences.

During phase 2 the parties endeavour to complete the project for less than the TCE. If they do so, they share in the savings. If they exceed the TCE, then they share in the cost overruns (although, typically, the service providers’ share of risk is capped at their profit, so they always receive their actual costs).

The use of alliances peaked in Australia in about 2006. They are particularly suited for project delivery where the risks are not known at the time the service providers are introduced to the project. In a heated market, however, they were used across a very wide range of projects.

One criticism of alliances, not necessarily well founded, is that TCEs have become ‘too high’ – that is, the parties have ensured that the TCE will never be exceeded. There was also concern that service providers are paid all of their direct costs, regardless of how well (or poorly) the project performs.

With the onset of the GFC in late 2008 the focus of owners shifted. What they looked for was cost certainty that did not involve significant contingencies but equally recognised that, in order to attract the best contractors and engineers, contractors needed to have sufficient involvement with the project to identify risks and price the works accurately.

This balancing act resulted in what is now described as the Early Contractor Involvement model (ECI).

ECI extended the first stage of alliancing from identifying risks and establishing a TCE for the project works to identifying the risks, allocating responsibility for those risks and determining an overall hard dollar figure for the project works based on that risk allocation.

ECI is seen as an appropriate middle ground. The ‘best of both worlds’, it uses a soft dollar approach to the first stage (avoiding some of the difficulties associated with a traditional D&C) and then a hard dollar approach with a traditional lump sum contract at the point where all risks can be accurately identified and priced, creating greater cost certainty through the fixing of the price (potentially with incentives).

In the last year of the decade, and as the market steadies from the effects of the GFC, we see increased use of the ECI model for all kinds of projects – small, medium and large. Like alliancing, it works well where a project needs to be fast tracked, or where the design is complex or where there is significant risk that cannot be quantified at the time of tender.

Although alliancing will remain important in project delivery in Australia, ECI is the way of the future.

After finishing the project 467 days late, Maropakis had sent letters asking for a time extension but failed to turn them into a formal, certified claim. Maropakis then brought a claim against the Navy for the unpaid contract balance, which the Navy had withheld as partial payment for claimed LDs. The Navy counterclaimed for the full 467 days of LDs. The court granted summary judgment on the Navy’s counterclaim, on the basis that since Maropakis had never formally sought (in the form of a certified claim) a time extension, the court had no jurisdiction to consider such a claim in defense of the LD assessment. The trial court agreed, as did the Federal Circuit on appeal.

The Federal Circuit’s ruling on appeal was as follows: “we hold that a contractor . . . must meet the jurisdictional requirements and procedural prerequisites of the CDA [Contract Disputes Act-the U.S. law that requires claims to be certified before they can be litigated], whether asserting the claim against the government as an affirmative claim or as a defense to a government action.” The Court saw no reason to distinguish between affirmative claims and matters of defense to government claims in applying the requirement for a certified claim prior to litigation, at least when the defense would involve an adjustment to the contract terms, as in the case of a time extension.

The dissenting opinion argued in vain that there is a clear distinction between presenting an affirmative claim for relief, where claim certification is required, and simply defending against a government claim, where no affirmative relief is sought.

The simple lesson of Maropakis is that whenever completing a U.S. government contract late, it is vital to submit a formal claim for a time extension so as to preserve your right to dispute a possible LD assessment (which may not come for several years). There are also two broader concerns. First, this is another brick in the wall of recent decisions by the Federal Circuit hostile to the position of Contractors. Contractors should be learning that they are not dealing with a tribunal at all inclined to give them the benefit of the doubt. Second, developments in the law relating to U.S. government contracts frequently spread to the U.S. private sector. Where private contracts require some sort of formalities associated with asserting a claim, the Owner may raise similar arguments, seeking to bar any ability to dispute its later assessment of LDs when the claim formalities were not followed to seek a time extension.

Andrew Ness
Christian Henel

On July 13th 2010 Brazilian Federal Government launched bidding documents regarding the concession regime and procedures for implementation and operation of the High-Speed Rail (TAV – Trem de Alta Velocidade) that will connect the cities of Rio de Janeiro, São Paulo and Campinas. The project, the most ambitious infrastructure project under the country’s Program to Accelerate Growth (PAC – Programa de Aceleração do Crescimento), specifies that the construction, operation, and maintenance will be granted to the consortium that provides the lowest fare for service.

The concession contract establishes the limit of six years to complete the entire stretch Campinas – São Paulo Rio de Janeiro. The final schedule calls for the railway to be completed by 2017, although the Brazilian Federal Government anticipates the line will be partially open before the 2016 Summer Olympics in Rio de Janeiro.

TAV is worth US 20 billion. The Brazilian Federal Government will invest, through a new state-run entity, US$ 1.5 billion in the project and extend loans worth 60% of the total cost by the Brazilian Development Bank (BNDES – Banco Nacional de Desenvolvimento Econômico e Social).

Potential customers in the parcels market can be classified into two main groups:

- existing logistics companies, interested in moving consolidated loads, using rail as part of the chain – principal players in this field are the Brazilian National Post Office (Correios – Empresa Brasileira de Correios e Telégrafos) and Courier Companies; and

- end users, such as businesses, or individuals.

The construction of TAV will create a very large site, which will directly require numerous professional skills and directly or indirectly generate employment upline and downline The commissioning of the railway and, in particular, the development of land traffic and associated commercial zones served by the railway will create jobs in a progressive manner during the first 10 years’ of operation.

It is estimated that the railway will generate around 30,000 jobs throughout the area affected within about 10 years after commissioning. In addition a further 30,000 jobs could be generated by around 2050 in response to more fundamental shifts in the regional economy.

The choice of consortia contractor by the end of 2010

The Brazilian Federal Government will pick the contractor for the TAV in December 2010. Competitors must submit their proposals before November 29 and the winner will be announced on December 16 at the headquarters of Sao Paulo Stock Exchange (BOVESPA – Bolsa de Valores de São Paulo). Term of the concession is 40 years.

The line will be built and run on a concession basis and the government will rank bids based on the lowest fare, with a maximum permitted price of US$ 0.28 per kilometre. That would translate into economy class ticket fares up to US$ 115.00 for the 430 kilometres (270 miles) stretch between Rio and Sao Paulo.

International interest

The bidding is open to both Brazilian and foreign firms. News report that several countries and international companies have expressed interest in participating of the project:

- Austria;

- China (China Railway Materials);

- France (Alstom);

- Germany (Siemens);

- Italy (Ansaldobreda);

- Japan (Hitachi, Kawasaki, Mitsui & Co, Mitsubishi and Toshiba);

- Spain;

- South Korea (Hyundai and Samsung); and

- United Kingdom.

A new company called ETAV

Federal Government also proposed the creation of the Company of High Speed Rail (ETAV – Empresa de Transporte Ferroviário de Alta Velocidade), With the objective of planning and promoting the development of other high-speed rail lines in the country.

ETAV will be linked to the National Agency of Terrestrial Transports (ANTT – Agência Nacional de Transportes Terrestres) and will be also responsible for managing the technology used by the contractor that wins the High Speed Rail bidding process, in addition to monitoring the project’s deadlines.

Speed, locations and planned route

TAV proposal calls for trains to run at speeds of up to 350 kph (217 mph) and the trip between São Paulo and Rio de Janeiro is expected to last 93 minutes. Seven mandatory stations are be built on the line:

- City of Rio de Janeiro downtown area;

- Rio de Janeiro International Airport;

- City of Aparecida, State of São Paulo;

- São Paulo/Guarulhos International Airport;

- City of São Paulo downtown area;

- Campinas/Viracopos International Airport; and

- City of Campinas downtown area.

The planned route will include 90.9 km tunnels and 103 km bridges and viaducts. An extension to Campinas, 70 kilometres from Sao Paulo was planned with the purpose of reaching the heartland of Brazil’s richest manufacturing and farming state.

The planned route is as follows:

This blog considers the issues arising when a person goes and buys a flat or a commercial property from a builder; is it a “Sale”, and can the activity be amenable to a levy of VAT? The controversy emanates from the decision of the Hon’ble Supreme Court in K. Raheja Development Corporation [141 STC 298 (S.C)], wherein, it was held that if the Agreement is entered into after the flat or unit is already constructed, there would be no Works Contract, but so long as the Agreement is entered into before the construction is complete, it would be a Works Contract.

In the K. Raheja case, the facts were that there were two contracts, one for sale of undivided interest in land and another for construction of the flat after the land sold to the buyer. The decision of the Hon’ble Supreme Court has led to a series of demand notices being issued by the VAT Authorities contending that even in case of an Agreement for Sale of a Flat per se, there is a liability to VAT, as the builder is constructing the property on behalf of the purchaser / buyer.

The charging Section under most of the VAT laws provides for a levy of VAT on every Dealer for Sale of goods. The term “Sale” is defined to mean a Sale of goods made within the State for cash or deferred payment or other valuable consideration …” .The term “goods” is defined to mean “every kind of moveable property….” When a builder buys a flat or any other property from the builder, the Agreement is with respect to a Sale of flat per se, which is an immovable property. The obligation under the Agreement is with respect to sale and purchase of flat and the buyer is nowhere concerned with the fact as to how the builder gets the flat constructed.

The Hon’ble High Court in Assotech Realty Pvt. Ltd. vs. State of UP and Another [Order dated 23.03.2007] held that taking into consideration the terms and conditions of the letter of allotment, the petitioner continues to remain the owner of the apartments/flats including all construction until the sale deed is executed and registered in favour of the prospective allottees/purchasers. The payment of installments by the prospective allottees/purchasers does not transfer any right, title or interest in the construction undertaken by the petitioner. Thus, the construction undertaken by the petitioner cannot be said to have been undertaken by it for and on behalf of the prospective allottees/purchasers. The decision has distinguished the decision of K. Raheja (above) on the ground that in K. Raheja’s case there was a separate contract for construction on the undivided portion of land which was already sold to the buyer.

It would also be pertinent to analyse the issue with the help of an example. Let’s say Builder A is constructing a residential property with 20 Flats. The construction of the property is 3/4th completed and no sale has been made for any of the Flats. It is very clear that the activity of construction is carried out by the builder on his own account. The activity has already resulted in creation of some immovable property. At this stage, say 15 flats are sold to the buyer and the buyer enters into an Agreement of Sale with the builder and pays the relevant stamp duty. The buyer makes payment to the extent of completed construction. Can it be said that in respect of the consideration received, there is a liability to VAT?

It is a settled position in law that in respect of Works Contract, the transfer of property takes place by the theory of accretion i.e. at the time when the goods are incorporated into the Works Contract (See State of Andhra Pradesh & Ors. Vs. Larsen & Tubro & Ors [Civil Appeal No. 5239 of 2008] and Builders Association of India and others vs. Union of India and others [(1989) 73 STC 370]. At the point in time when the goods are being incorporated in the Works Contract, there is no buyer in existence.

The fact that the Agreement is entered into either before or after the flat or unit is already constructed is inconsequential in determining whether the activity can be treated as a Works Contract for the purpose of levying VAT. What is required to be analysed is that whether the Agreement / contractual obligation is for a Sale / purchase of Flat per se or is it for construction of a flat as per a buyer’s requirements and specifications. In cases where the Agreement is clearly for Sale of Flat, it is a Sale of chattel as a chattel and being immovable property, outside the purview of VAT. The latter is however a contract of work and labour and hence, will be liable to VAT. Based on the aforesaid finding, the Hon’ble Supreme Court in Larsen & Tubro vs. State of Karnataka [2008 (12) S.T.R. 257 (S.C.)] has held that the decision in K. Raheja (Supra) requires re-consideration.

Therefore, to the extent there is an attempt to levy VAT on Sale of Flat, an immovable property, that attempt is ultra vires Article 366(29A) and Article 246 (2) of the Constitution of India and may be challenged by way of filing of a Writ petition under Article 226 of the Constitution of India. In fact, Writ Petitions have already been filed challenging the levy of VAT on Sale of flats and it will be interesting to see how many more are filed in the future.

By Sujain Talwar and Ritesh Kanodia