Baker & O'Brien, Inc.

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EPC Contract Dispute - Underbid, Overbuilt, or Somewhere In Between?

Arbitration, Middle East and Africa

November 1, 2018

Baker & O’Brien was retained to review the project record and opine on the technical aspects of claims for an international engineering, procurement, and construction (EPC) lump-sum turnkey (LSTK) project. The project consisted of a number of neighboring oil production facilities that experienced a 50% cost overrun and 100% schedule delay.  Specifically:

  • The owner claimed that the EPC contractor failed to correctly estimate the work from the beginning and then failed to manage the cost and schedule to meet the contractual requirements.
  • The EPC contractor claimed that the project suffered from owner interference and mismanagement – incorrect site data, change orders, preferential engineering, and approval delays.

To evaluate various aspects of the project timeline, Baker & O’Brien evaluated the logical sequence of events taken along the project execution timeline.  At the commencement of this project, a functional specification was used to conduct a competitive bidding process and award the LSTK contract.  A functional specification is sometimes used in place of a front end engineering design (FEED) by an owner as a bid strategy in an effort to compress the overall duration of the project. 

When using a functional specification, the owner only specifies the critical functional requirements of the facility, e.g., location; the amount and type of feedstocks; the required amount, type, and specifications of products; environmental requirements, such as air and water emission limitations; and potentially certain technologies.

Because of its nature, a functional specification depends on the previous experience and ability of the EPC contractor to perform sufficient design engineering and develop a cost estimate and schedule within an acceptable accuracy range.  This results in engineering output that is less comprehensive than a typical FEED, as it shifts certain front end engineering activities into the EPC phase. 

To evaluate whether this project was “underbid or overbuilt,” Baker & O’Brien compared the functional specification included in the bid package that formed part of the contract with what was actually built in the field.  In addition, we evaluated the proposed scope of work for adequacy and reviewed whether the project change orders explained the variances.