Currently, in the field of construction, the Investors instead of choosing to sign an Engineering Procurement and Construction Contract (“EPC Contract“) with the Contractor, one of the best options of the main Investor is to sign a Design – Construction Contract (“EC Contract”) in which, the Investors sign an only contract with the Contractor who is responsible for all the work including Project’s construction and design. This form of contract currently brings many advantages to the participants and can limit some disadvantages compared to the EPC contract. However, the use of EC contract still has certain risks, accordingly, in this article, TNTP will mention 05 risks that the Investors may encounter for the Project in this case.
The first: It is difficult for the Investor to make a specific assessment of the Contractor’s ability
For Design – Construction Contract, the Investor will not be able to assess whether the Contractor with whom the Investor signs the Contract will meet the Investor’s design needs for the Project, because the Contractor only provides Project’s detailed design after signing the Contract with the Investor on the implementation of the Project, accordingly, if the Contractor’s design does not meet the Investor’s requirements, The Investor and the Contractor will have to discuss to reach an agreement on the design for the Project, which may prolong the construction process of the Project because the Project can only be implemented if the Design phase has been completed. In addition, in the current market mechanism, many constructions and installation companies, which already have the capacity to carry out construction activities, have carried out the expansion of design activities, so it may arise the case that the Contractor is unable to ensure the capacity for both Design and Construction, resulting in the Contractor not being able to meet the conditions for the EC Contract, which requires the Contractor to be qualified to perform both activities Design and Construction.
Solution: In order for the Investor to be able to limit this risk, the Investor should consider using this Form of Design – Construction Contract when: The Contractor has technological secret that it can be provided with the Contract; or Projects whose Design is greatly influenced by construction technology; or for an uncomplicated Project which the Design and Construction work together without affecting the quality of the Project, for other Projects, the Investor should choose to sign an EPC Contract with the Contractor to avoid risks.
The second: The Investor must accept the higher standby expenses offered by the Contractor
For Design – Construction Contract, the cost of the Project is difficult to predict accurately because the detailed design document is only completed after the Investor has completed the selection of the Design – Construction Contractor. Accordingly, the Contractor, in this case, will face a great risk in meeting the Investor’s requirements because it has not yet been accurately estimated the amount of work to be performed and in this case, to share the risk to the Contractor, the Investor often has to accept a number of reasonable standby expenses to deal with the risks brought out by the Contractor, thereby it leads to a higher cost for the Project;
Solution: In this case, in order to minimize risks for the Investor, in the Contract signed between the Investor and the Contractor, the terms of the Fixed Unit Price must be specified in the Design – Construction Contract, this unit price will not change during the execution of the Project, and at the same time, the Investor must work with the supplier of building materials to be able to accurately determine the actual unit price, avoiding the situation of the estimated number is much larger than the original estimate. However, in the event that at the time of construction of the Project, the price of materials fluctuates greatly, the Contractor, in this case, will face difficulties in construction, leading to the Contractor’s unilateral termination of the Construction Contract.
The third: The quality of the Project is not guaranteed because during the implementation process, the Contractor reduces the quality and function of the product to save the construction cost of the Project.
Because the design and construction units are both conducted by one party, accordingly, during the implementation process of the Project, it will arise the case that the Contractors join hands together to find ways to reduce product quality and performance in order to save costs Construction of the Project which leads to the quality of the Project can difficultly be guaranteed as original plan. Assigning all the work to an implementation unit will happen that the designer often sided with the construction contractor to protect itself, so this is also one of the risks that occur quite popular with Investors.
Solution: In this case, in order to minimize the risk for the Investor, the Construction Supervision unit must be carefully selected by the Investor and must have high construction expertise as well as certain prestige in Project Supervision. Thus, the Investor needs to consider selecting from the Supervision units that the Investor previously cooperated with other Projects and these Projects do not have any problems with the quality of the works of the Project.
In addition, in the Contract signed between the Investor and the Contractor, the Investor needs to ask the Contractor to clarify the materials (including: brand, place of production, technical characteristics, types, uses, regulations,…) will be used to carry out the construction of the Project and at the same time provide sanctions in case the materials are not as committed in the signed Contract.
The fourth: The Investor may lose control in the process of Project implementation
Stemming from the requirement to create the right to be proactive and flexible for the Contractor in organizing the Project implementation, the acceptance and payment in this case is in principle done according to the contract implementation stage or the completed work item. With this principle, the Contractor is proactive in coordinating and inspecting the work on the scene according to the contract performance schedule without being heavily dependent on the regular inspection and supervision of the Investor as well as the time of conducting the acceptance work, thereby reducing the interruption time in the performance of the work. As a result, the Investor may lose control over the process of Project implementation.
Solution: In order to minimize this risk for the Investor, the Investor needs to specify the terms of specific report on the progress of the Project as well as report on the progress of problems arising during the execution of the Project in the Contract so that the Investor can understand the construction progress of the Project as well as have a backup plan in case problems lead to delay in construction progress.
The fifth: The Investor is limited in Termination of the Contract between the Investor and the Contractor
Pursuant to the provisions of Clauses 2 and Clause 7, Article 41 of Decree No. 37/2015/ND-CP dated April 22th 2015 Regulations on construction Contracts, which is amended in Decree No. 50/2021/ND-CP dated April 1st 2021, the Contractor’s violation of regulations on quality and type of construction materials or the Contractor’s failure to meet the Investor’s requirements,… is not one of the cases that the Investor has the right to terminate the Contract. However, ensuring the quality of the Project’s works as well as ensuring the right type of construction materials is one of the most important factors to avoid future risks for the Investor.
Solution: In order to limit this risk, the Investor can add a clause to the Investor ‘s right to terminate the Contract in case the Contractor violates the Contract signed between the Investor and the Contractor to use another Contractor to ensure the quality and duration of the Project.
Above are the contents and legal sharing about the five risks of the Investor for choosing the Design – Construction Contract (EC) form in Project construction. Hope this article was useful to you.
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TNTP and Associates International Law Firm
Lawyer: Nguyen Thanh Ha