Lessons on claim management in international EPC project

Author: release time: 2020-12-22 browsing number: 0

In December 2020,the minutes of the 9th claim negotiation meeting for a hydropower project in Kenya and the final claim amount confirmation form signed by the Employer and the Engineer was issued,which marked the finalization of extension claim after more than  nine negotiations in one year.Under the guidance of  "Secondary Management" strategy to implement  "Bold Claim and Careful Proof", the tasks and goals set in the initial stage have been basically achieved. 

As a project contract manager and one of the participants of claim work,lessons were shared on the international EPC project claim management based on the case study of  deferred claim work of a power station in Kenya.

1、 Background for the  claim

When the site was handed over, the actual land acquisition  was not completed by the Employer, including  20% land for civil construction, and  that of the transmission line had not even been commenced yet. As the landlords are all tea farmers  from the Employer part , resulting in the optimistic on the land acquisition.This misjudgment of the Employer foreshadows the delay and claim of the project in the later stage.

2、 Preconditions for claims management

On the basis of the fact that international EPC projects usually adopts FIDIC Silver Book as the general terms of the contract, familiarity with the FIDIC contract conditions and the special terms  is a prerequisite for the contract manager in claim management.Special attention shall be paid to  "Article 2 the Employer", "Article 8 Commencement, delays and suspension", "Article 13 Variations and adjustments", "Article 14 Contract price and payment", "Article 16 Suspension and termination by contractor" and "article 20 Claims, disputes and arbitration". At the execution stage, it shall be sorted out monthly according to the actual situation and contract conditions, with issues that may lead to claim shall be notified to the Employer in the form of official documents.

The sorting out of claims based on contract conditions is the proper meaning of "secondary management" emphasized by the leaders of the company. It is a process of feedback and improvement of "primary management"

3、 Basis for claims management

Document management is the basis of claim management. This can be done in two ways:

Firstly, at the initial stage of the project, the Contractor shall consult and finalize the project communication agreement with the Employer pursuant to "Article 3 The employer’s Administration" and "Article 4 The contractor", so as to ensure the effective and smooth communication and lay the foundation for the  claim proof later.Besides currently common issues on  the communication protocol not determined with the Employer against the contract conditions, the project communication representative not appointed and authorized, which often leads to communication beyond authority or ineffective communication without  feedback, there is a trend of  excessive e-mail replacing written letter as well. The application of e-mail is efficient but difficult for quote. Email therefore shall be recommended for routine communication or  sending scanned document. Written letter shall be always the first choice for all official documents.

Secondly, an integrated document management system shall be set up, with signing acknowledgement, timely coded, scanned and archived.

4、 Claim points

EPC project is a turnkey project. The contractor shall be responsible for all of the activities ranging from engineering, procurement, to constructions based on basic specifications provided, and the project risk is mainly borne by the contractor. Compared to traditional construction project, the common claim points such as change, addition, price adjustment and measurement claim are less involved in EPC project. 

Based on the poverty situation in Africa as a whole, the shortage of funds caused by project financing difficulties, the late payment of project funds and even the failure of payment often occur, and the existence of extremes of common people to land assets against  "small government, large market" under private ownership make it difficult in land acquisition, and therefore another common claim point.

In addition,the extension of project duration and cost increasing due to new government decrees is also one of the common compensable claim points.

5、 Collection of claim information

Information collection shall be  one of routine work of claim management. It mainly includes collection of project claim events and processing schedule,  instruction price of construction and equipment cost from engineering and industrial associations, new government decrees, inflation indexes, as well as the Employer’s operation status. Sufficient information collection is the basis for preparing claim documents and discovering claim points, which is of great significance for formulating claim strategy and realizing claim target.

6、 Preparation and submission of claim documents

In this stage the claim ideas and strategies shall put into practice.

When compiling the claim documents,The reasons for the claim shall be specified:

1.the background and reasons of the claim.

2.The basis of the claim contract  

3. The contractor's claim(mainly the cost and the construction period).

The ultimate purpose of claim for construction period is cost, cost claim is the ultimate purpose of all claims，which can be subdivided into claims for direct costs and indirect costs. Direct costs mainly include personnel and equipment costs, project and company management costs. Indirect expenses mainly include the financial cost of claimable expenses, the extension cost of quality guarantee and reasonable profit.

The most important thing in submitting claim documents is  the timeliness.When the contractor is aware of the occurrence of the claim, the Contractor shall, in accordance with the requirements of Article 20.1  contractor’s claims, a claim notice shall be given within 28 days and  a formal claim document shall be submitted within 42 days.

7、 Claims negotiations

Claim negotiation is usually adopted for  disputes between the Employer and the Contractor to be settled amicably. In the negotiation stage, the main work of both parties shall focus on the Employer’s audition and refutation of the Contractor’s claim documents, as well as the Contractor’s interpretation and  quote demonstration to such audition and refutation. This stage is a great test for the Contractor’s routine  document management and preparation work. Without  strong supporting documents on the key data such as the quantity and price of personnel and equipment from the Contractor, the claim of the contractor will be greatly discounted or even rejected.

In addition, claim negotiation is a process of "giving up" and "gaining in".According to the situation of the project, setting the bottom line, grasping the degree of progress and compromise, and paying attention to the rhythm and strategy of negotiation are also of great significance to the realization of the claim target.In addition, claim negotiation is a process of giving up and getting. It is of great significance to the realization of claim objectives, setting the bottom line, grasping the degree of enterprising and compromising,focus on the rhythm and strategy of negotiation according to actual situation.

8、 preliminary summary

Claim management of international EPC project is a long-term, dynamic and systematic process.Under the guidance of  "secondary management" strategy, project contract management personnel should "boldly claim and carefully provide evidence", be familiar with the contract conditions, predicting the project claim events, collecting the claim information and documents to ensure that our reasonable claims are followed up and get rewarded.

The  claim of EPC project  is not just a one-way claim from the Contractor to the Employer. In project contract management, our attention  should always paid to the claim from the Employer to the Contractor, mainly on quality and duration.