Our team has experienced a wave of instructions recently on projects utilising an IChemE standard form contract. This is the first in a series looking at the different forms of contract within the IChemE suite and their suitability for use on various projects.

The Institution of Chemical Engineers (IChemE) is a multi-national professional institution for chemical, biochemical and process engineers. IChemE has published two suites of contracts designed for use on a range of complex process plant projects - one suitable for the UK market and another for international use. Each contract contains a model form of agreement and general conditions, supplemented with detailed guidance notes to assist in preparing a contract.

The main IChemE contracts that we will consider are 'turnkey' contracts, which are 'result/performance based' rather than a traditional construction contract, which is 'work based'. While the forms of contract were designed for use in the process industries, (such as petrochemicals and food production), given the performance based nature of the contracts, we are now increasingly seeing them used in other infrastructure projects (which may have previously adopted FIDIC or NEC standard forms). These contracts will:

  • have detailed testing requirements to ensure the completed plant operates to manufacture the products required; and
  • contain minimum performance parameters for the plant (such as the quality or quantity of the product manufactured).

The current UK editions of the IChemE suite of contracts are:

  • The Red Book (Lump Sum), Fifth edition, 2013 – this is the form we most frequently see used by clients – it is a lump sum contract that is subject to adjustment only for specific events. The contractor takes the risk of cost overrun but will, as a result, likely factor in contingency to its price. The purchaser must have a detailed specification and minimum performance requirements upfront (which are not necessarily required under a 'target cost' or 'reimbursable' form of IChemE contract);
  • The Green Book (Reimbursable) Fourth edition, 2013 – this is a cost reimbursable contract where the contractor is reimbursed for actual costs incurred (plus a percentage fee to cover overheads and profit) and so the purchaser takes the risk of cost overruns but receives the benefit of cost savings;
  • The Burgundy Book (Target Cost), Second edition, 2013 – this is becoming more commonly used - the target cost is set at the time of making the contract or later during the contract, when the detailed scope of work has been agreed. The contractor is effectively reimbursed for its costs, subject to a pain/gain share mechanism, which is used to incentivise cost control. This is a middle ground between the lump sum and reimbursable models and is definitely gaining in popularity.

Key features

One of the distinguishing features of the IChemE suite is that the three main contracts are all turnkey contracts with the differentiation being in payment methodology.

The following are some of the other key features of these contracts:

  • there is a detailed testing procedure (including pre-installation tests, pre completion testing, take over tests and performance tests);
  • the contractor is under an obligation to ensure the Plant is fit for purpose;
  • they contain more exclusions of liability in favour of the contractor than are typically found in construction or civil engineering contracts, for example:
    • subject to limited carve outs, there is an aggregate cap on the contractor's liability (which includes any defects liability);
    • there is a sub-cap on liquidated damages payable for delay;
    • subject to certain carve outs, neither party is liable for consequential or indirect loss nor for wastage, loss or contamination during its use in the Plant of any process consumable (which is deemed to include feedstocks, chemicals, biochemicals, catalysts and utilities);
    • there is an exclusion of liability in respect of the Plant and for any defects once the defects liability period has expired and a final certificate has been issued;
    • the contractor's liability in respect of loss or damage to property of the purchaser is limited to the lesser of the deductible (which is specified) or the value of the claim plus any cost the contractor would have incurred to replace / rectify a defect;
  • there is a requirement that the purchaser provides construction all risks insurance;
  • there is a one-year defects liability period which is adjusted in certain circumstances, being:
    • if the Plant cannot be used because of a defect or because the contractor is putting it into a condition to pass a take-over procedure or performance test;
    • the defects liability starts afresh in respect of any parts of the Plant that the contractor makes good during the defects liability period; and
    • where any part of a Plant has a limited working life that is less than the duration of the defects liability period the defects liability period is reduced to reflect the working life;
  • the purchaser takes the risk of any unforeseeable site conditions;
  • no provision is made for collateral warranties, performance security, prohibited materials, professional indemnity insurance or interface requirements with other contractors (unsurprisingly given the turnkey nature).

Given many of these provisions are considered to be 'contractor friendly', we are generally always engaged by clients (who are 'purchasers') to prepare a set of 'special conditions' which will amend some of the core terms of the IChemE standard forms, to bring them into line with the client's requirements. The special conditions will also contain any bespoke project specific provisions or obligations as may be appropriate. The special conditions will be accepted by, or negotiated with, a contractor and are included in the contract when issued for signature.

There are international versions of the Red Book, Green Book and Burgundy Book. These contain additional clauses to meet the special requirements of international projects and remove the UK law references.

IChemE is a viable alternative to other standard form contracts such as FIDIC and NEC for use in performance-based infrastructure projects (particularly as compatibility can be achieved throughout the supply chain). We will consider in more detail the risk profile and specific provisions of the IChemE suite of contracts in subsequent articles.

Contributors

Jane McMonagle

Partner

Kate Morrison - Senior Associate
Kate Morrison

Senior Associate