Posted by : Srinivasan on March 12th, 2019 in Procurement Process and Contracting
Designation : Advisor Project & Contract Management
Most Engineering Procurement Construction (EPC) turnkey projects are exposed to a number of uncertainties/risks. The market situation however generally does not support full provision for all evaluated risks in the financial calculations.
Most project owners and investors prefer a single (techno commercially capable & experienced) contractor to execute their entire project on a turnkey EPC basis so as to have clear single point accountability for performance, project cost and risks. Since such turnkey projects require a wide variety of skills, equipments etc, the EPC contractor has to sub contract several portions of the work. The EPC contractor is thus liable to the project owners for non performance of his sub contractors. Many of the sub contractors do not accept all the terms of the main EPC contract. Thus while project owners have single point accountability, the EPC contractor is burdened with substantial risks. Even major EPC companies are hesitant to undertake large contracts all by themselves on account of the high risk exposure. Consortium contracts provide a way forward in such situations.
What is a consortium?
Two or more companies jointly undertake a large contract, as a consortium towards with the owner. They nominate one amongst them as leader to provide single point accountability to the client. The partners to the consortium accept “joint and several liability” towards the owner as though each of them has signed the EPC contract. The owner is thus able to exercise rights on any of the partners for damages/ non performance without the need to check/establish which partner is responsible etc. The Leader is a single point contact with whom the owner signs the contract and interacts on all matters related to the contract. Most clients accept this arrangement as they too could benefit from a lower risk provision in the contract price. Consortium agreements are project specific and are closed as soon as the project is completed and the contract with the owner is closed out.
The contractors forming the Consortium (partners), sign amongst themselves, a consortium agreement (owner is not a party to this agreement but receives with the bid an undertaking signed by all partners confirming the consortium formation and nominating the leader) wherein they set out their respective scope, share of the contract price, indemnities etc so that amongst the consortium partners, each is only liable for its own non performance. Unlike in a subcontractor – Contractor relationship, the consortium partners accept all the main contract terms. Further the partners join the leader in all meeting with the owner and are thus able to put forth to the owner (in the presence of the leader), their views on matters that relate to their respective scope. Many owners also agree to pay each partner directly their respective invoices thus ensuring prompt payment to the partners. In short the partners to a consortium share the scope, contract price and risks from a large EPC contract.
Choice of consortium partners & leader
As the risks associated with large EPC contracts is substantial, consortium partners take great care to check all aspects of each other’s abilities and experience prior to forming a consortium. Consortium partners generally make exclusive agreements for a project i.e. a partner to one consortium bidding for a project is not allowed to join any other consortium bidding for the same project. Competitiveness and other strategic issues like client’s preference also need to be considered. First time partners undertake due diligence checks of one another before tying up to bid for a project. Consortium agreements need be signed, contract bid price agreed along with each partners share of the price as well as the scope of work before bid submission. The leader amongst the partners has to be acceptable to the customer. The leader often includes a leadership fee in his share of the contract price. In many projects, consortium partners comprise companies from different countries. This poses cultural questions as well.
Consortium Team roles/rules
Each consortium partner needs to nominate a project manager for its scope of work. The consortium leader too has to nominate a project manager for its own scope in addition to a Project Director (PD) to lead the consortium. Certain functions such a project time schedules, project quality requirements, engineering concepts/interfaces etc need to be integrated and also need to have uniformity. Thus personal handling some of the above key functions need to report to the Project Director. As the PD is not permitted to make any commitments without the partner concerned prior acceptance, he needs to take great care to ensure that all partners are able to present their issues to the owner and make timely decisions so as not to hamper progress. Under certain circumstances, the PD is permitted under the consortium agreement to instruct a member to carry out certain tasks and the concerned member is required to comply with such instructions. The leader has also the task of maintaining contemporary records of all delays etc and updated schedule as these are needed for apportioning of delay Liquidated Damages amongst partners in case the project is delayed due to reasons that do not entitle the contractor to an extension of time.
Consortium Partner vs. Sub contractor
A partner to a consortium bidding for a project is assured of an order for his scope once his consortium bags the award whereas a sub contractor has to compete later amongst other sub contractors. Further, a consortium partner can, for the same scope, get a better price/margin than a sub contractor as he has taken on more risks and the accompanying opportunity. A consortium partner has more rights than a sub contractor as they have access to represent matters to the Owner for his scope.
Key issues to be taken care for success of a consortium contract
• Consortium team partners need to share techno commercial information proactively at all times. This requires mind set change to go away from sub contractor status. Higher management of the members forming the consortium need to encourage and facilitate such openness.
• While each consortium partner optimizes his costs, they need to ensure that the contract with Owner fulfilled. Leader has to be on guard.
• Members should support each other in all meeting with the Owner and other external parties.
• The share of contract price (scope share) should be balanced to ensure that each partner has a reasonable share of the scope and price.
• In case the consortium members are from different countries, (this is many times necessary for technical and/ or financing reasons) members need to handle the cultural issues. Management style differs from West to East.
• Experiences from consortium contracts
• Consortium partners generally have claims and counter claims amongst themselves. Thus sharing of liabilities arising from owner contract often needs to be settled prior to or during closing the owner contract.
• A consortium partner who performs his obligations on time is an inspiration to other members to perform as well- thus parties who are members of a consortium generally perform better than if they were sub contractors.
• The leader and each partner take care not to let down one another and support each other’s techno commercial betterment from the project.
• Sometimes, the consortium partners set up a consortium office for the key project team members of each party. This promotes good team work and supports quick and coordinated response to owner. The consortium office costs are shared by the partners.
• Working in a consortium is a unique learning experience as one gets to understand the work processes/procedures of other organizations.
• Relationships with team members of partners built while working on a successful project generally last a lifetime.
Consortium contracts are beneficial to both Owners as well as contractors. A proper consortium mind set together with a competent consortium leader is a key factor for success of such consortium projects. Project risks and opportunities are shared amongst the members thus risk mitigation is central to all members. Team members of Consortium project teams have the opportunity to experience unique working atmosphere. Large projects would benefit immensely with the consortium approach.