INTRODUCTION: Doing Business is very challenging, Clients / Owners are finding all the best ways to minimize their Cost and Schedule of building Energy Sector Plants. Novation of Contracts / Purchase Order to EPC Contractor is one of the best techniques in the Energy Sector to reduce cost and minimize schedule risk.
Building a large Plant required a Budget of Billions of Dollars, and a Major cost component (Appx 20-25%) associate with Critical Project Long Lead Items. These long lead items comprise large sums of money, substantial cost & schedule risk, huge liabilities. The Engineering & Procurement process of these Long delivery items sometimes takes months or a year to negotiate. So Owner prefers to finalize these Contracts during the FEED stage, It helps the Owner to negotiate the best market rate for critical Long lead items and on a later date Novate these Long Lead Items to EPC Contractor to execute.
WHAT IS NOVATION In EPC INDUSTRIES? : Novation is a process by which Contractual rights and obligation transferred from Owner to EPC Contractor or it is a transaction by which, with the consent of all the parties concerned, a new contract is substituted for one that already exists.
Innovation process, we discharge the original contract between the Owner & Supplier / Manufacturer and substitute it with a new contract between the Supplier / Manufacturer and a new incoming party (EPC Contractor). The incoming party (EPC Contractor) must perform the contractual obligations (under the new contract) that were formerly owned by the outgoing party (Owner) under the original contract.
It is a triparty agreement between the original parties (Client & Supplier) and the new party (here is EPC Contractor). A novation usually takes the form of a deed called Deed of Novation.
Pictorial re-presentation of Novation Process:
Due Diligence of Main Contract: Due diligence involves the following critical area of Contractual obligations:
Here we clearly specify the responsibilities, liability, and Risk of the original Supplier / Manufacturer and the new EPC contractor at the pre-novation stage, It is often supported by indemnities. We also review representations and warranties with respect to the power of the original contractor and new EPC Contractor to enter into the deed of novation.
DEED OF NOVATION:
This is the final stage where the triparty Agreement gets signed among the Owner, Supplier (or Manufacturer), and EPC Contractor.
- Deed of Novation clearly defines the responsibility of the EPC Contractor to be performed for the successful execution of the contractual obligation with Supplier/ Manufacturer.
- It also explains Suppliers to whom they have to approach for any breach of Contract.
- It also ensures that the proper due diligence has been performed before novation by EPC Contractor.
- It ensures ethics and probity maintain the innovation process.
- It also informs at what point will the new contractor take over from the existing contractor:
Here in this Article, the Authors constantly emphasize and reiterated the novation process. In Novation Owner transfer the rights & obligations to the New EPC Contractor. The intent of the parties is required to be quite explicit. The intention of novation and consequently discharge of contract must be deduced. Owners reduce their risk associated with Cost & Schedule by doing novation of project long-lead items.
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