Toast in Burgundy

The way that process industry contracts have been drawn up has changed a great deal in recent years. In addition to the two long-established types of contract, lump-sum and reimbursable, new types of 'target cost' contract have become increasingly popular.

A new publication from the Institution of Chemical Engineers, the Burgundy Book, aims to make these contracts easier to draw up.

Target cost contracts continue the trend of 'partnership'-type agreements between operator and contractor, by combining features of lump sum and reimbursable contracts. In purely lump sum agreements, the contractor agrees to carry out the project for a fixed fee, bearing the cost of any overruns or other mishaps. These tend to take a long time to negotiate, because contractors attempt to set a fee that includes contingencies for anything they think might go wrong.

In purely reimbursable contracts, the operator agrees to pay the contractor for all the goods and services it provides, including corrective costs from design and construction errors. The operator gains the benefits of any cost savings in engineering, but bears the risks of overruns.

Target cost contracts are more complex, where the contractor is reimbursed the cost of the project subject to the application of a formula which allows the contractor to share in any savings made, sometimes called the 'gain share', or to contribute towards additional costs, known as the 'pain share'.

The all-important formula will vary from project to project depending on the type of plant and other circumstances. As the Burgundy Book says, 'the management of a target cost contract often requires more skill and experience than is the case with either the reimbursable or lump sum forms'.

This is where the Burgundy Book comes in. Part of a series including the Purple Book, which provides guidance for all known forms of contract, the book explains the procedures for arriving at a detailed target cost as the basis for an effective control during the contract. The contracts in the Burgundy Book have legal force, with Roger Button, of Shadbolt & Co Solicitors, on the IChemE Working Party.

'Although target cost contracts will still have their difficulties, preparation of the contract itself should become simpler, and claims fewer and easier to resolve,' he says.