An ECI agreement is normally used where the principal wishes to divide the project into two phases: an ECI phase and a construction phase. This article summarises what you will typically find in an ECI agreement.
Background - ECI Generally
As we explain in more detail here, ECI (or 'Early Contractor Involvement') engagements can be structured in different ways. An ECI agreement is normally used where the project is divided into an ECI phase and a construction phase. Some principals refer to this type of contracting as a Guaranteed Maximum Price (or 'GMP') arrangement, again depending on how the agreement is structured.
An ECI agreement is focused on the ECI phase, and explains how the project will transition into the construction phase (assuming it goes ahead).
The contractual terms applying to the construction phase will normally be contained in a separate document, which might be attached to the ECI agreement or otherwise left to the parties to negotiate during the ECI phase.
Different people use different expressions to describe these two phases (including 'Design Phase', 'Pre-Construction Phase', 'Construction Phase', 'Works Phase' and so on). However the general intent is usually fairly similar.
What happens during the ECI phase?
The main purpose of the ECI phase is to better educate both parties (the contractor and the principal) about the project, with a view to fine-tuning the scope and cost plan prior to any substantive work beginning on site.
The basic idea is to ensure the principal is not committed to a particular scope, price or contractor until the ECI phase has been completed. An ECI approach also tends to make the construction phase more efficient, because the ECI phase should give the contractor a far better understanding of the project and also reduce the number of risks that might be encountered during the construction phase.
Outside of site investigations, minimal construction work is performed during the ECI phase, if any.
The contractor's obligations during the ECI phase usually relate to design coordination, cost planning (including value engineering) and the performance of site investigations. Sometimes the contractor might be required to place orders for long lead time items, or alternatively identify the need for orders to be placed and help coordinate the placing of those orders on the principal's behalf.
At the end of the ECI phase, the ECI agreement will often require the contractor to make a formal offer to the principal to deliver the project for a fixed lump sum. The principal is usually not obliged to accept that offer, and typically would have an express right to call tenders from other contractors if, for any reason, it is not confident about engaging the ECI contractor to complete the project. (Note that traditional construction management contracts work differently. You can read more about construction management here.)
The balance of this article describes what you would normally expect to see in an ECI agreement.
Perhaps the most important part of an ECI agreement is the part that identifies what, precisely, the contractor is required to have produced by the end of the ECI phase.
The ECI deliverables will put the balance of the ECI agreement in context, and serve to frame the scope of the ECI services.
Examples of typical ECI deliverables include:
- a clear description of the proposed scope of the works;
- a lump sum offer to carry out the agreed scope of works, including a detailed price breakdown and potential value-engineering options;
- a construction program, including a proposed construction methodology and staging plans (if relevant); and
- a report detailing the outcomes of the contractor's site investigations, including any testing.
The scope of the ECI services will be a function of the ECI deliverables.
For example, if the contractor is required to provide a lump sum submission at the end of the ECI phase, the ECI services would typically be defined to include all of the work necessary to produce that submission. This would include activities like:
- coordinating the design team and providing input on the design;
- working with the principal to develop the cost plan, including identifying areas where savings could be made;
- developing a program;
- providing advice around the sensible division of the design into trade packages suitable for subcontract tendering purposes; and
- calling and analysing subcontract tenders.
The ECI agreement will normally contain provisions identifying the standard of care required by the contractor in performing these services. For example, there might be a warranty or undertaking by the contractor to perform the ECI services diligently and with due care and skill.
The principal would ordinarily engage its design and engineering team at (or before) the start of the ECI phase, and they would normally continue to be engaged by the principal throughout the ECI phase.
If the principal's preference is for the contractor to assume complete responsibility for both the design and construction of the project, it would normally seek to novate its design team to the contractor - but not until after the contractor's offer for the construction phase had been accepted. This approach tends to give the principal maximum flexibility.
Site investigations, ordering of lead time items, early works
Some ECI agreements will contemplate the contractor providing more than just advisory services. Whether this is necessary or appropriate will normally depend on the urgency of the project.
Where the contractor starts ordering items, performs work or carries out site investigations during the ECI phase, this will obviously shorten the overall program and also reduce the risk of unexpected site conditions being encountered during the construction phase.
Price, Payment & Adjustments
The ECI agreement will identify the amount payable to the contractor for performing the ECI services, including when and how it is to be paid, and when adjustments will be permitted.
Most ECI agreements contemplate the contractor being paid a fixed lump sum for the ECI services, but this is not always the case. For example, ECI fees are sometimes based on rates. Where a fixed lump sum is used, variations will not ordinarily be permitted unless there is a significant and obvious change in the scope of the overall project.
When tendering for an ECI engagement, contractors are often asked to identify the preliminaries and margin rates that they intend to apply during the construction phase. These rates are then required to be applied by the contractor in formulating their lump sum offer at the end of the ECI phase.
The ECI agreement will normally identify timeframes or dates by which the ECI services are to be completed. Sometimes, and mainly on larger projects, there will also be an extension of time mechanism. Usually the most critical date is the date by which the contractor's lump sum offer is to be delivered to the principal.
Insurance, Indemnities & Miscellaneous
Like most commercial contracts, ECI agreements will contain a variety of 'standard' provisions, such as:
- Insurance. Along with workers compensation insurance, contractors will normally be required to effect and maintain public liability insurance and professional indemnity insurance. Other specialist insurance may sometimes be required depending on the nature of the project.
- Indemnities. Many ECI agreements will contain indemnities from the contractor in favour of the principal, particularly where any work is to be performed on site during the ECI phase.
- Limits on Liability. Many contractors will seek to exclude or limit their liability in connection with the ECI services - for example, by incorporating a liability exclusion for consequential loss, or by limiting their liability to a specific value (usually the value of their services with an exception where insurance is available), or both.
- Termination. Most ECI agreements will contain provisions that will entitle a party to take steps to terminate the contract where the other is in default. Some will allow the principal to terminate the contract at any time, for any reason. (This is commonly referred to as 'termination for convenience'.)
- Disputes. Many ECI agreements will prescribe a formal dispute resolution process (such as expert determination, arbitration or mediation).
- Miscellaneous. In addition to the clauses mentioned above, most ECI agreements will contain standard, 'boilerplate' provisions that can be found in most commercial agreements. Examples include interpretation clauses, a governing law clause and an entire agreement clause. There will often be a range of others.
How to prepare an ECI agreement
There is no standard form ECI agreement currently in use in Australia. In part, this is because different principals seek to structure ECI engagements in different ways. Consequently, although all ECI agreements will have similarities, there will invariably be differences. And because of this, ECI agreements tend to be project-specific.
If you are in need of an ECI agreement, the best place to start is by speaking with a lawyer with specialist construction expertise. If you would like to speak to one of our lawyers, you can contact us here or by simply calling us on one of the numbers above or below this article.