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Chris Duncan and David Strickland, Partners at global prepare the FEED and develop its
law firm White & Case, discuss the best ways to overcome detailed cost estimate for the project
procurement challenges when working on major projects based on an open book cost estimate
methodology agreed between the
parties. This estimate is then used as
wners face a difficult choice on is the case, owners should consider the the basis for the lump sum price to be
how best to procure a major following options for maintaining the finalised and agreed by the parties prior
project. All such projects require level of competitive tension at the EPC to the commencement of the EPC phase.
significant planning before tender stage: Under this option, the tender process
O construction can begin. With to select the FEED/EPC contractor will
such efforts unavoidable, owners must Option 1: FEED contractor not invited occur prior to the preparation of the
carefully navigate the procurement to act as EPC contractor FEED package, meaning that the bids
pathway to ensure a successful outcome. We have known some owners to submitted by each bidder will not
One of the biggest challenges is ensuring propose an arrangement whereby the include a final lump sum price for the
the owner maintains control of the FEED contractor may not submit a delivery of the project. Therefore, the
procurement process, thus allowing the tender in relation to the EPC contract. owner will not be able to compare firm
owner to drive the timeline and ensuring The reason for this is to convince other lump sum prices from each bidder, but
that they enter into contracts on the bidders that the tender process for the will instead make its selection based on
best available terms. This is particularly EPC contract is a genuine, competitive estimated or target prices and unit rates.
important in the context of limited or process. This approach needs to be The main advantage of a ‘convertible’
non-recourse project financed plant, made very clear from the outset when contracting model is that it enables the
given that the lenders will require that selecting the FEED contractor. owner to agree the contractual terms
a significant level of risk and liability is Although this approach maintains the for the project at the outset, when it
passed away from the owner/borrower competitive tension at the EPC contractor is still possible to have significant
and to the contractors under the relevant selection stage, it has a number of competition between prospective FEED/
contracts. drawbacks. For example, the owner EPC contractors. This may result in
In this article, we discuss a number would not benefit from any potential contractual terms and risk allocation
of options available to owners when cost savings or continuity resulting which are more favourable to the owner.
undertaking the procurement from the FEED contractor continuing as
process. Before doing so, we first the EPC contractor. In addition, a ‘new’ Option 3: Parallel FEED contracts
provide some context. EPC contractor would likely charge a One further option involves letting
Often, the front-end engineering contingency to endorse and assume the two or more FEED contracts, each on
and design (FEED) for the plant needs risk of errors in the FEED. a lump sum or reduced fee basis, with
to be completed before prospective each FEED contractor then asked to
contractors can submit bids for The main advantage of a bid for the EPC contract. This retains
the engineering, procurement and competition between the two FEED
construction (EPC) phase of the project. ‘convertible’ contracting model contractors, and allows the owner to
In this case, the FEED contractor will is that it enables the owner take full benefit from any potential cost
have an advantage over other firms to agree the contractual terms savings or continuity resulting from the
when bidding for the EPC phase, as it FEED contractor continuing as the EPC
already has familiarity with the design for the project at the outset, contractor. In addition, this structure
of the plant and the project as a whole. when it is still possible to avoids any contingency a ‘new’ EPC
Owners often require the EPC have significant competition contractor would likely charge in order
contractor to endorse and assume between prospective FEED to endorse and assume the risk of
the risk of errors in the FEED when errors in the FEED. Some owners might
signing the EPC contract, so that the /EPC contractors be wary of the resources required to
EPC contractor bears single point properly manage two separate FEED
responsibility for the design of the contracts. We often hear owners stating
plant. While this benefits the owner If the FEED contractor has no prospect that having two FEED contracts requires
from a risk allocation perspective (and of being retained as EPC contractor, twice the work and cost. Our experience
may well be required in order to secure then it is likely that a specialist design has been different. Due to the benefits
financing) it puts the FEED contractor at consultancy firm would be more willing of competition, owners are often
a marked advantage, as any alternative to take on the FEED rather than a major surprised by the efficiencies gained at
EPC provider will have to build into its EPC provider. The owner may also the working level. FEED contractors
bid the additional cost of reviewing and favour the approach of hiring a specialist often react to the competition by
verifying the FEED. consultant to prepare the FEED, as it is staffing the best engineers and
Depending on market conditions, not in the owner’s interest to rule out a estimators on their project team. Then,
there may be a risk that potential major contractor that would otherwise their business development leadership
bidders (other than the FEED submit a strong EPC bid. carefully manage the team assigned to
contractor) will decline to bid or do the project, given that they understand
so only on unfavourable terms on the Option 2: Convertible lump sum contract they are still in a competitive situation
premise that the FEED contractor will Another option is for the owner to enter with the other FEED contractor. Such
be in the best position to become the into a convertible lump sum contract close oversight leads to a team fully
EPC contractor and/or the tendering at the outset covering both the FEED aligned to provide the owner with the
process for the EPC contract is in effect and EPC phases of the project. During best price, schedule and risk profile,
a benchmarking exercise. Where this the FEED phase, the contractor would while ensuring the plant will ultimately

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