Major Plant Construction Contract Drafting for Major Plant Construction – How it's Done

| Author / Editor: Dipl.-Ing. Jürgen Hahn* / Anke Geipel-Kern

When two parties sign a contract for a major plant construction, the first step in the implementation of a project is done. But how the execution of such project contracts should ideally be designed in order to minimize risks for the subsequent project?

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Signing a contract is the first step of a major plant project.
Signing a contract is the first step of a major plant project.
(Sources: istockphotos)

The first and most important step in the implementation of a project is to put the contract into full force, to be done by the contractual parties. Time for Completion of the Works start to run for the contract parties from here. For the contractor, among other things, the implementation period for the delivery of his services starts; he must present an acceptance-ready plant to the employer within a certain defined deadline.

Depending on the drafting of the contract-based payment milestones, the employer is obliged to make a payment to the contractor within a defined period. If the obligations of the parties are not coordinated mutually, risks may occur for both parties.

If a contract comes into full force as soon as the two parties sign the contract, this looks good for both parties at first sight. One saves a lot of administrative operations; the project can be pursued further. So far so good. What happens however, if the contract parties are not so resourceful/willing as they expected each other to be initially?

Non-conditional setting into force

An example from a project contract which came into effect on the date it was signed by both parties: The employer failed, irrespective of whether or not deliberately, to make the advance payment for the project to the contractor in time. The implementation period for the contract started with the signing of the contract. To keep pace with his schedule, the contractor must start his basic engineering, issue long-term orders, reserve staff.

All this from his own resources, without receiving the initial payment from the employer. This is a risk for the contractor; depending on the capital cover, he can face distress conditions rather fast, because with the coming into effect of the contract, he must deliver his services to the employer.

It is therefore clear that this circumstance also poses a risk to the employer... read more on page 2!