The EPCM model in China and alternative resolution

By Wang Jihong and Li Lin, Zhong Lun Law Firm
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The EPCM model, a method of project procurement and management, is frequently used in most major international construction projects. However, except for practice and tradition, application of this model remains to consider the law and regulations of the host country. In a recent case relating to a foreign-invested construction project in China, the author found a dilemma when using the EPCM model under China’s legal system.

GAPS IN UNDERSTANDING

During the course of deal structure and pre-procurement discussions and analysis, the author realized that the engineer, the manager and the lawyer held a different understanding, which is normal and acceptable, on the EPCM model. In international construction practice, generally speaking, the EPCM form recognizes that a general contractor undertakes all engineering, construction and procurement with project management in the same period – which means EPC+M.

Wang Jihong Partner Zhong Lun Law Firm
Wang Jihong
Partner
Zhong Lun Law Firm

In this particular project, however, the whole package of EPCM was divided into two different parts, separately. The owner decided to employ one contractor to undertake construction works of the project and to seek another management company to undertake project engineering, equipment procurement and construction management. As a result, the EPCM model in this project was not the traditional one any more. In such a scenario, the applicable form would be turned into C+EP+CM, in which the latter CM means Construction Management.

The owner proposed various ideas on how to use the EPCM model during the demonstration stage. The author considered that although the normal structure of the EPCM model, in a traditional way, is that a general contractor performs engineering, procurement and construction, as well as construction management, it does not prevent the participants of the projects from choosing an alternative method of the applicable EPCM structure in certain cases. In this project, the whole project package was disassembled and construction works, which would be contracted to a construction contractor, became a minor and non-critical part. In such a situation, it seems unreasonable in execution that the project still trisd to adopt the traditional EPCM process.

RESTRICTIONS OF EPCM

Although the detailed contents of the EPCM model can be changed case by case, relying on the owner’s needs and the project features, the requirement of compliance with national and local laws and regulations cannot be ignored in the course of the project’s execution. China’s construction industry still maintains a strict administrative scheme. Hence, the owner, the contractor and the professional consultant, when thinking about the deal structure and construction management method, should pay much more attention to restricted rules and prohibitive provisions under the current law.

In this project, as referred to the EPCM structure itself, if the owner tries to employ a management company to provide all of the works – excluding construction works – and services in one EPCM package, it is essential to identify and rethink the role of the management company, with the scope of ‘CM’, that involves the legal issues of industry market access and entry.

Li Lin Lawyer Zhong Lun Law Firm
Li Lin
Lawyer
Zhong Lun Law Firm

In accordance with article 13 of the Construction Law, construction contractors and designers must be graded, in terms of their qualifications, and may only engage in construction projects within the scope specified for them in terms of their grades, after passing the qualification examination and obtaining the appropriate qualification grade certificates. So, if an independent company wants to undertake all services under the EP+CM contract, it must hold an engineering design certificate as well as a construction management certificate.

However, the potential management company selected by the owner was not equipped with an engineering design certificate, and as a result, it became vital to determine the role of the company in the project.

ALTERNATIVE SOLUTION

After communication with the owner, the author found that the owner’s request of the construction management services and its performance for the project were quite different from the one in practice.

The author suggested that the ECPM company should be defined as a management provider but not an independent management contractor, due to the complexity and miscellaneous restrictions in the current legal environment. Such an alternative resolution not only met the project owner’s special requirements, but also complied with the relevant provisions of China’s laws and regulations.

Following this method, the owner and the management company entered into an agreement for project management, however the design service and construction works was contracted by the owner to the other qualified designer and contractor, or put another way, the signing and execution of a contract between the management company, on behalf of the owner, relying on the management agreement, and the designer and the contractor. This arrangement could deal with legal problems and lead the project going forward.

WANG JIHONG is a partner and LI LIN is a lawyer at Zhong Lun Law Firm

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