The IChemEForms of Contract An Introduction

Eur Ing John Challenger CEng, FIChemE, FIMechE

Chairman IChemE Contracts Committee

The IChemE Forms of Contract

An Introduction

2020


1. Introduction to the IChemE performance based contracts

2. Pre-contract and Tender Activities

3. The Main Sections of the Contracts

a. The Specification

b. General Condition

c. The Schedules

d. The Life of the Contract

4. Disputes

5. Final Discussions and Questions

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Contract Warning Notice

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• Contracts come in many different

forms

• They are all about words &

structure

• Cooperation & communication

are key.

• These matters cannot be ignored

otherwise discord and dispute is

likely to occur

• Success is borne out of an

intention to cooperate and work

through inevitable difficulties

Slide 4

Performance-based plant contracts

Investment in capital assets to suit business needs

Contracts for professional services, design & construction of a

process or other complex performance-based plant;

Process plant will facilitate a chemical, biological or industrial

process;

More complex than the design and construction of civil/building

works + simple Mechanical or Electrical plant;

Performance-based contracts, are geared to provide a plant

which delivers the required inputs/outputs within defined limits

and product quality.


The IChemE forms of contract:

• Published for the process and associated industries to reflect

best practice within the industry

• Encourage teamwork

• Drafted so that:

• each party understands its obligations & responsibilities

• is structured to be fair and even-handed

• suitable for Professional Services, Design & Construction

• Process technology from Purchaser, Contractor or 3rd party

licensor

• Currently two suites of contracts (UK & International)

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The Background:

• The IChemE Contracts & Disputes Resolution Committees

draft the Contracts and Rules for Dispute Resolution

• The Committees consist of experienced management,

engineering and legal practitioners working in the process

industries

• The first contract was published in 1968 and known as the

“Red Book” drafted specifically for the process industry

• Various other forms introduced over the last 50 years for

application in the UK and International applications

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The History:1964 1968 1976 1992 1998 2001 2003 2007 2017 2018

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Lump Sum

5th Ed 2013

International Forms

1st Ed 2007

Reimbursable

4th Ed 2013

Subcontract

4th Ed 2013

Civil Engineering

3rd Ed 2013

Professional

Services

1st Ed 2017

Target Price

2nd Ed 2013

Minor Works

3rd Ed 2018

Special

Committee

Formed

Slide 8

The IChemE Current Forms of ContractUK Suite:

Form of Contract for Lump Sum Contracts (Red Book) 5th Ed. 2013

Form of Contract for Reimbursable Contracts (Green Book) 4th Ed. 2013

Form of Contract for Target Cost Contracts (Burgundy Book) 2nd Ed.

2013

Form of Contract for Subcontracts (Yellow Book) 4th Ed. 2013

Form of Contract for Subcontracts for Civil Engineering Works (Brown Book) 3rd Ed. 2013

The contracts bring together the special requirements of performance-based process contracts and the different risk/ payment

Slide 9


Multi-jurisdictional forms:

Form of Contract Professional Services (Silver Book) 1st Ed.

2017 [Long & Short Forms apply to UK & international jurisdictions]

Form of Contract for Minor Works Contracts (Orange Book)

3rd Ed. 2018

Contracts include Parts A & B Special Conditions

Part A for projects in the UK

Part B optional clauses

IChemE plans to make all contracts suitable for UK &

international applications

Choice of Contract – Factors to be considered:

• Purchaser’s view of risk

• Purchaser’s desire to be involved

• Status of Project definition & process

• Likelihood of changes

o Purchaser changing requirements

o Changes driven by circumstance/technology needs



Contract Life-cycle - Five principal phases:

1. Pre-contract, tender period & contract finalisation (essential for success)

2. Design

3. Procurement & Construction

4. Completion, Start-up & commissioning

5. Performance Tests and Guarantees

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Essential requirements to set up a Contract

• Effective qualification and tendering process

• The User’s Requirement Brief → SpecificaDon

• Effective Risk Identification, assessment/mitigation

• A defined Scope of Work

• Programme & robust cost estimate

• The Parties Roles, responsibilities and Liabilities

• The Contract Terms and Conditions

• Project Coordination and Reporting

• Clear definition of testing & performance criteria

• What defines Contract Completion

Business

Case

User User

Requirement

Brief

Risk

Identification

If OK follow

tendering procedure

Undertake Risk

Analysis

Establish

Scope

Establish

Contract

Strategy

Pre-contract

Design

Development

Identify Identify

Potential

Contractors

Contractor Contractor

Pre-

qualificationDevelop &

Issue

Enquiry

DocumentsTender/

Proposals

Period

Tender ReviewShort List

Tenderers

Establish Tender

Strategy

Pre-tender Activities

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Post-tender Activities

Seek

Clarifications

Establish

Team

Establish

Negotiating

Team

Try to be fair Try to be fair

& avoid bias

Response to tender

queries

Post meeting

review & actions

Negotiate &

Contract Terms

Confirm & Agree

Technical Content

Draft Contract

Schedules

Issue Draft

ContractIf LIO is

issued pre-

contract

conditional

acceptance

requiredFinalise

Contract

Kick-off

Meeting

Set up Contract

Procedures

Finalise Scope &

Contract Price

PROJECT START

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Contract preparation & drafting

Users will need to spend sufficient time preparing and editing:

• The Scope and Technical definition to enable a fair and accurate competitive tendering to take place;

• The Contents

– The Agreement - based on the pro-forma text*;

– Any Special Conditions

– The Annex

– The Specification

– The 21 (or 6 in Orange Book) Schedules

Structure format & provisions are the similar in all IChemE contracts

Payment related matters are the major differences

Text in Word or pdf available on website.


© IChemE 2016

The Agreement

The top-level contract document

• Names the parties

• Signed by the parties

• Contains key matters:

o The content of the Contract

o An entire agreement clause

o The Contract Price (Red Book & Orange Book if stated)

o The Contractor’s maximum total aggregate liability

o The Contractor’s liability in respect of certain matters

o The amount of the Deductible

o Reference to the order of precedence clause


© IChemE 2016

The Agreement (cont’d)

• Key matters (cont’d)

o The date of the Contractor’s tender

o The date for commencement of the Works

o The Project Manager and Contract Manager are identified

o Bank whose base lending rate applies re interest on late payments

o Level of Profit (Red Book only)

o To whom formal Notices are to be issued

o The governing law

o Seat of arbitration proceedings


© IChemE 2016

Slide 18

Clauses Subjects

1 Definition of terms

2 Co-operation

3,4,11 & 12 Purchaser’s & Project Manager’s Responsibilities

5 Decisions & Contract Coordination

23-28, 34, The site, including ground conditions, clearance, working conditions, materials, deliveries, etc.

8, 20 & 54 Intellectual property, Confidentiality, patents, etc.

9,10 Subcontracting

13-15 & 32 Programme, delays, Permitted Access

Key subjects covered in General Conditions

Slide 19

Clauses Subjects

16,17 & 18 Variations, either instigated by Purchaser or Contractor

19 Contractor’s claims

31 Insurances, bonds, warranties

6,39 & 41 Sufficiency of Contract Price, Contract Price &

Payment

21, 26 & 40 Safety, Health, Environment, Security and Quality (SHESQ) documentation

22, 32, 33,

35-38

Testing, commissioning, acceptance, Taking Over &

Performance Tests, Defects Liability

42-49 If it goes wrong (Disputes, Expert determination,

Arbitration, Adjudication & Termination)

Key subjects covered in General Conditions

Specification – “the what”

• Do not confuse with the Description of the Works (Schedule 1)

• Technical definition of what is to be built including any details of process licences or third party technology

• The Contractor must design and build a system that conforms and operate to the Purchaser’s requirements

• Key Contents include:Technical details agreed between the Parties

Engineering Standards & Codes of Practice

The location and boundaries of the Site

Site battery limits (interfaces)

Sectional completion

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The Schedules – “the how”

• Schedule 1: Description of the Works

• Schedule 2: Documentation

• Schedule 3: Responsibilities of Purchaser

• Schedule 4: Health & Safety

• Schedule 5: Environmental protection & waste disposal

• Schedule 6: Quality assurance and validation

• Schedule 7: Subcontracting

• Schedule 8: Contractor’s named personnel

• Schedule 9: Training by Contractor

• Schedule 10: Parts with limited working life and spare parts

IT IS THE SCHEDULES & THEIR INTEGRATION WITH THE

GENERAL CONDITIONS THAT DIFFERENTIATES THE ICHEME

CONTRACTS FROM ALL OTHER PUBLISHED FORMS

© IChemE 2020


Specification – “the how” (cont’d)

• Schedule 11: Times of completion

• Schedule 12: Liquidated damages for delay

• Schedule 13: Pre-installation tests and procedures

• Schedule 14: Criteria for the completion of construction

• Schedule 15: Take Over procedures

• Schedule 16: Performance tests and procedures

• Schedule 17: Performance guarantees and damages for failure

• Schedule 18: Valuation of Variations and claims

• Schedule 19: Contract Price and payment

• Schedule 20: Contract co-ordination

• Schedule 21: Reports and records

Note: Sub-contract Forms have additional Schedules 22 to cover the Main Contract Conditions

© IChemE 2020


Contract

starts

Construction

starts

Design and

construction

Programme

(13.2)

Documentation

(21)

The life of a performance based contract –

Contract Start & Design


Contract

starts

Construction

starts

Construction

Completion

Certificate

(32.6; 32.8)

Design and

construction

Programme

(13.2)

Documentation

(21)


Construction


Contract

starts

Construction

starts

Construction

Completion

Certificate

(32.6; 32.8)

Take-Over

Certificate

(33.7)

Design and

construction

Programme

(13.2)

Documentation

(21)


Construction Completion & Take-over



Liquidated Damages


Contract

starts

Construction

starts

Construction

Completion

Certificate

(32.6; 32.8)

Take-Over

Certificate

(33.7)

LDs for delay (15)

Design and

construction

Programme

(13.2)

Documentation

(21)

Contract

starts

Construction

starts

Construction

Completion

Certificate

(32.6; 32.8)

Take-Over

Certificate

(33.7)

Pre

p’n

pe

rio

d

Pe

rfo

rma

nc

e

tes

ts(3

5)

Acceptance

Certificate

(36.3)

Design and

construction

Programme

(13.2)

Documentation

(21)

LDs for delay (15)


Performance Testing & Acceptance


Contract

starts

Construction

starts

Construction

Completion

Certificate

(32.6; 32.8)Take-Over

Certificate

(33.7)P

rep

’n p

eri

od

Pe

rfo

rma

nc

e

tes

ts(3

5)

Acceptance

Certificate

(36.3)

Defects Liability Period

(37)

Design and

construction

Programme

(13.2)

Documentation

(21)

LDs for delay (15)

Performance Liquidated Damages


The life of a contract

Contract

starts

Construction

starts

Construction

Completion

Certificate

(32.6; 32.8)Take-Over

Certificate

(33.7)P

rep

’n p

eri

od

Pe

rfo

rma

nc

e

tes

ts(3

5)

Acceptance

Certificate

(36.3)

Defects Liability Period

(37)

Design and

construction

Programme

(13.2)

Documentation

(21)

LDs for delay (15)

Final Certificate.

(38)

Final Certificate


• Poor planning leading to time or cost pressures

• Inexperienced Contractor or Purchaser

• Inadequate Project financing and risk assessment

• Lack of utilities, poor feedstocks or commissioning materials

• Failure to prepare plant for tests, inadequate FATs, etc.

• Poor design, project coordination and record keeping

• Lack of control system and software testing and simulation

• Poorly drafted Schedules and unnecessary Special Conditions

• Completion, Taking Over & Performance Testing

Rarely a problem with the published contractual terms

30

© IChemE 2020

Common causes of Failure & Dispute


Dispute resolution

Range of available dispute resolution procedures:

o The Courts

o Arbitration

o Adjudication

o Expert Determination

o Dispute Resolution Boards

o Mediation

“Non-binding” procedures

“Binding” procedures


The Rules

IChemE publishes the following

o Pink Book – Arbitration

o Grey Book – Adjudication

o White Book – Expert Determination

o Beige Book – Dispute Review Boards

Various other rules published by Nominated Appointing Bodies (ANBs)

o Typically: JCT, NEC, RICS

o International Rules– UNCITRAL, ICC



33© IChemE 2020

Final Discussions & Questions