Energy Construction: Classification of Contracts [Gaille Energy Blog Issue 55]
- Posted by scottgaille
- On November 20, 2017
- 0 Comments
Construction agreements bring to bear both tangible materials and intangible services to achieve an end product—the facility. As such, many of the same terms and conditions used in construction agreements also appear in procurement and services contracts. Procurement agreements are used primarily for purchasing and leasing tangible goods, materials, and equipment—whereas services agreements are used primarily for securing intangible skills.
The following figure provides a simple classification of industry agreements according to three functions: (i) works; (ii) services; and (iii) goods.
As the figure shows, the industry has created many variations of construction, services, and procurement agreements to meet its needs. The overlapping circles represent how the functions often overlap within any agreement (e.g., a purchase order may also include installation services).
- Construction Agreements. Construction agreements require a contractor to construct a facility designed by the owner (the “Sponsor”) using materials mostly procured by the Sponsor.
- Engineering, Procurement, and Construction Agreements (“EPC”). EPC agreements—as the name implies—add two categories of contractor responsibility: (i) engineering—the contractor is responsible for the detailed engineering and design of the project; and (ii) procurement—the contractor is responsible for tendering, purchasing, and coordinating substantially all materials.
- Engineering, Procurement, and Construction Management Agreements (“EPCM”). Whereas an EPC agreement places more responsibility on the contractor, the contractor under an EPCM agreement does not undertake the construction itself. Rather, EPCM contractors act as managers of the construction—hence the “CM” of EPCM. The EPCM contractor is usually an engineering firm charged with providing professional services to the sponsor, particularly the management of engineering, procurement, and construction. In addition to the fees for its services, the EPCM contractor also may receive a bonus if, for example, the ultimate cost of the project is less than its target price.
- Service Orders. Service orders typically are fill-in-the-blank documents used for small projects. The front of the service order identifies the contractor, the start date, the termination date, a description of the services, the price for the services, and a cap on the total amount of payment under the order (“not to exceed $x”). On the back of the service order are boilerplate terms and conditions that usually are not subject to negotiation.
- Service Agreements. Higher-value or riskier service arrangements may be subject to stand-alone agreements with more extensive provisions tailored to the specific needs of the parties.
- Purchase Orders. The front of the purchase order identifies the vendor, the date of the purchase, the delivery date, the delivery location, the shipping terms, a description of the goods, equipment, or materials, a reference to attached or incorporated specifications, pricing, payment terms and timing, liquidated damages for late delivery, and a cancellation schedule including amounts payable for cancellation of the order at various points by the Sponsor. On the back of the purchase order are boilerplate terms and conditions that usually will not be negotiated by the Sponsor.
- Purchase Agreements. Higher-value or riskier procurements may be subject to stand-alone agreements with more extensive provisions tailored to the specific needs of the parties. For example, pipe purchase agreements entail the manufacturing of steel pipe for natural gas and oil pipelines.
- Standing or Master Agreements. Standing or master agreements are designed to establish the terms and conditions for multiple projects over a period of time when the nature and scope of the work needed for the projects is unknown at the outset. Rather than negotiate a series of independent construction or services agreements—one for each scope of work—the standing or master agreement provides standard terms and conditions applicable to all future work. The bulk of the terms do not need to be renegotiated with each transaction. The parties only need to focus on the commercial terms for the specific work being commissioned. Whenever a new project is needed, the Sponsor provides a release order that summarily describes the scope of work, specifications, schedule, and pricing. The contractor is then required to comply with both the release order itself and the more detailed provisions of the standing or master agreement.
- Master Construction Agreements (“MCA”). MCAs are utilized for engaging a contractor for a series of smaller construction jobs, none of which justifies a full construction agreement. Each time the Sponsor wishes to commission a new project, it issues to the contractor a release order that describes the construction needed.
- Master Services Agreements (“MSA”). The MSA functions similarly to the MCA, in that it provides both (i) a framework for the Sponsor’s issuance of a service order and the contractor’s acceptance of the service order, and (ii) terms and conditions that apply to any service order released under it.
- Master Purchase Agreements (“MPA”). The MPA is the procurement equivalent of the MCA and MSA. It establishes common terms and conditions for future purchases. When the Sponsor needs to procure goods covered by the MPA, it can do so more expeditiously because the purchase order’s terms and conditions have already been agreed to by the vendor.
- Hybrid Agreements. Certain agreements used in construction and procurement are difficult to characterize as works, services, or goods. One example of a hybrid agreement is a concrete coating arrangement (after the purchase of the pipe from a vendor). Pipe destined for marine environments usually is concrete coated for purposes of providing ballast and stability. While industry practice varies, a stand-alone installation of concrete coating on pipe (that is owned by the Sponsor) seems more in the nature of works—that is, construction. The Sponsor is looking to the concrete coater to deliver an integrated whole that requires it to accept and handle the Sponsor’s materials (pipe), procure the feedstock for the concrete, and execute the installation of the concrete onto the Sponsor’s pipe. As such, the best starting point for a concrete coating agreement is usually a construction agreement, as the responsibilities, liabilities, and indemnities being assumed by the contractor are similar.
Construction Energy Development offers a further description of the typical provisions utilized in various construction and procurement agreements.
About the Gaille Energy Blog. The Gaille Energy Blog discusses issues in the field of energy law, with weekly posts at http://www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).