ARC News   •   August 01, 2022

From the Perspective of a Contractor: Is EPCC Contract Non-Negotiable?

Typically, EPCC contract has always been perceived as a pro-employer contract due to the inequality in bargaining power. Employer undoubtedly possess a higher bargaining power compared to the contractor. Despite the above, does that mean the EPCC contract is non-negotiable?

Premised on the wrong perception that an EPCC contract is not negotiable and treating the EPCC contract as a standard form of contract, many contractors tend to agree with the contents of the EPCC contract in totality without even attempting to negotiate. Such misconception may cause an expensive lesson to the contractor in the event of dispute. As such, contractor should not accept the terms of the EPCC contract in totality unless the contractor is satisfied with the contents of such contracts.

This article intends to debunk misconceptions that the EPCC contract is a standard form of contract and that it is non-negotiable. Pursuant to the above, we set forth below some common clauses that contractor ought to be caution and negotiate with the employer, if need be. However, do note that the clauses set forth below are not meant to be exhaustive.

1. Terms of Payment

Many contractors are of the view that the payment terms set by the employers are fixed and not negotiable. However, this perception may not be true as generally employers are willing to strike a balance with the contractors for the completion of the project. If the payment terms are long (e.g.: 90 days from the receipt of the invoice from the contractor), the contractor may face with tight cashflow and hence unable to complete the project in time, in which this may bring bigger operating loss(es) to the employer thereafter. Hence, employer may be opened for negotiation to achieve a win-win solution to both parties.

2. Technical Requirements

It is not uncommon for employer to impose stringent technical requirements on the contractor such as to fulfill additional tests (which were not specified in the invitation to bid or in the EPCC contract) or to adhere to international standards despite the project is based in Malaysia. Such requirements imposed by the employer would pose risk of uncertainty to the contractor when the employer fails to specify the specific test(s) to be conducted by the contractor, and compliance with international standard may be unnecessary so long as the contractor complies with local regulations.

3. Liquidated Ascertained Damages (“LAD”)

Typically, employer imposes LAD on the contractor if the contractor delays the agreed completion date of the project. As much as LAD is common in the industry, contractor should ensure that a reasonable maximum liability is capped on LAD, failing which the contractor will be exposed to an open-ended liability.

4. Extended Defects Liability Period

In some of the EPCC contracts, employers require contractors to provide extended defects liability period for parts that are replaced during the initial defects liability period. Agreeing with the extended defects liability period would undoubtedly increase the administrative and operation cost of the contractor in the projects. Therefore, such clause should be considered and accepted with caution.

5. Extension of Time

Many contractors would treat the list of events entitling the contractor for extension of time as a standard list of events. However, such perception is inaccurate, and the list of events are often open for negotiation depending on the conditions of each project. For instance, extension of time shall be allowed for any works that are not within the control of the contractor (such as authority’s approval) or any delay caused by the suppliers due to epidemic / pandemic. In short, contractor should not accept the list of events blindly but should negotiate diligently with the employer for additional events that are not catered for in the list provided by the employer.

6. Insurance

It is not uncommon for employer to have a long list of insurances to be procured by the contractor during the construction period. Contractor should be cautious of the list of insurances to be procured and negotiate for insurances that are absolutely necessary. Agreeing to the entire list of insurance imposed by the employer would certainly increase the cost of the entire project.

7. Subcontractors

More often than not, employer restricts the appointment of subcontractors unless the employer expressly consented to such appointment. As subcontracting is common in the industry, the contractor shall negotiate with the employer to allow the appointment of subcontractors at its own discretion provided always that the contractor assume full responsibilities of the works performed by the subcontractors.

To sum up, EPCC contract is NOT a standard form of contract and is tailored to the need of each project. Contractor should not accept the terms of the EPCC contract in its entirety unless and until the contractor is satisfied with all terms imposed therein. Accepting the terms in its entirety without understanding such terms nor putting the efforts in negotiating the terms would place the contractor in a disadvantageous position as some of the requirements imposed by the employer would increase the total project cost, whether directly or indirectly.

This Article is written by Yeo Shu Pin (Partner) of Messrs. Afif Rahman & Chong
Disclaimer: Every attempt to ensure the accuracy and reliability of the information provided in this publication has been made. This publication does not constitute legal advice and is not intended to be used as a substitute for specific legal advice or opinions. Please contact the authors for a specific technical or legal advice on the information provided and related topics.