Introducing the new icheme supply contract
An analysis of a discussion often held by the IChemE’s Contracts Committee
Historically, the procurement and purchase of materials for the process industry has been based on a range of terms and conditions developed either by suppliers, manufacturers, contractors or the end-users. Inevitably, these contracts are often biased in favour of the company issuing the contract or placing the order and this is a situation that is increasingly causing problems either for the supplier or buyer.
There is also the issue of terms and conditions located on the back of order documents which can often contain contractual conditions that may be contrary to those negotiated by the parties or any assumed published form of contract. Such matters can easily be overlooked and can cause significant problems for the recipient of the order as the manufacturer or supply process unfolds. For these reasons, the IChemE Contracts Committee decided that an independent form of contract that followed a balanced approach which neither favoured the supplier or the buyer and that incorporated its long-established principles of co-operation and fairness, was needed.
As a result, the new contract follows many of the long-established principles with which previous users of the IChemE suite of contracts will be familiar. Following the highly successful launch of its engineering, procurement and construction contract, (the Blue Book), the IChemE’s Contracts Committee has continued its planned drafting of a new form of contract. The conditions of contract for supply of materials will be published in 2025.
The Turquoise Book form of contract has been developed for the supply of materials, equipment, and if required, installation and associated activities on new and existing process plants.
The new contract will be known as the Turquoise Book. As was the case with the professional service contract, the committee recognised a missing link in the suite of contracts that had been the core of its publications. The Turquoise Book form of contract has been developed for the supply of materials, equipment, and if required, installation and associated activities on new and existing process plants. It can be used as a subcontract where the far more comprehensive contract forms, whether for ‘lump sum’ (the Red Book), ‘reimbursable’ (the Green Book) or ‘target cost’ (the Burgundy Book) based contracts have been adopted or, if required, for individual procurement of materials for existing sites.
To facilitate the use as either a contract or subcontract, the parties to the contract are titled the ‘supplier’ and the ‘buyer’ to avoid any conflict with the roles used in the existing IChemE contracts such as the main design and build, the service contracts and the subcontract forms.
It is envisaged that this form of contract would primarily be applied to either supply only, or supply with installation, from manufacturers and suppliers of materials and equipment that are of a relatively limited complexity and value or for which the risk to the parties is of a moderate nature. The scope of supply may typically cover a wide range of plant and materials that generally comprise typically standard items or packages of equipment such as pumps, air compressors, tanks vessels, piping materials, electrical equipment, instrumentation and the like.
It should be noted that complex machinery, process and control systems of a high risk or levels of performance testing should be procured under more complex contracts such as the IChemE’s main contract/ subcontract forms. The new contract is primarily for supply of equipment or materials for a manufacturing facility. However, it is often the case that the specialist manufacturers or suppliers are required to carry out installation works, testing and commissioning at the site where the materials are to be installed.
The IChemE has followed, as a basic philosophy, the view that the parties should co-operate to achieve the mutual objective of completing the work successfully rather than regarding the contract as the basis for an adversarial relationship.
Consequently, the suppliers may be required to provide some form of site attendance in order to support such activities for even relatively small items. Therefore, the new contract contains a set of optional conditions which deal with this eventuality. The contract can also be used for ordering and the provision of spare parts, replacement, repair and maintenance of existing equipment or plant materials.
If design is to be included within the supplier’s scope of work, the drafting of a specification will be necessary, in addition to any data sheets and scope of supply for the materials that thoroughly describe such matters as operational parameters and materials of construction.
The new publication is in a handbook form similar to all previous IChemE publications. It contains a set of general conditions of contract, a form of agreement, optional conditions, guidance upon drafting the schedules which form an essential element of the contract and brief guide notes on the contract clauses. It is recommended that all users of this contract should read and take note of the guidance before completing contract documentation for any specific project.
Cooperation
As stated above, the IChemE has followed, as a basic philosophy, the view that the parties should co-operate to achieve the mutual objective of completing the work successfully rather than regarding the contract as the basis for an adversarial relationship. It is clearly in the best interests of the parties that they should deal fairly with each other and with any contractors, subcontractors and third parties in an atmosphere of co-operation in order to achieve successful solutions to problems that may arise during the manufacture, supply and installation (if any), and for the contract as a whole. This is particularly the case in the chemical and process industries because of the reduction of manufacturing, contracting and engineering capacity that exists today.
The contract format
The new form reflects current best practice and contains many features in line with the other forms of contract published by IChemE. The general format of the contract includes the following:
The agreement
The agreement is to be signed by the supplier and buyer and contains a list of all the constituent parts of the contract. It specifically refers to matters such as the defects liability period, insurance deductibles and matters concerning any notices under the contract. It should be noted that since, in common with the approach now adopted by the IChemE, the contract has been drafted for use internationally therefore the legal jurisdiction that is to apply must be stated in the agreement. As is common with international contracts, arbitration is the default means of dispute resolution, although other methods such as adjudication may be used if the jurisdiction permits.
The general conditions of contract
If the materials are subject to any law or legal requirement, international regulatory standards, technical standards or procurement legislation, the parties are reminded that such provisions need to be included in the specifications.
The general conditions of contract have been drafted to reflect the less complex nature of materials supply but reflect many of the requirements of process plant that would necessarily apply. Materials that are required to operate to specific performance, standards and tolerances should be clearly stated. It should be noted that some definitions in the supply contract are differentiated from those in the main contracts and sub-contracts published by the IChemE. For example, any work undertaken is defined as the ‘installation’ not the works.
Optional conditions
If the supplier is to provide on-site services, then optional conditions – part A (installation) will apply. The main topics covered are those which apply specifically to any site work to be undertake, such as supplier’s responsibilities and warranties, confidentiality, commissioning, on-site testing and inspection, ownership of materials. The requirement for appropriate insurance cover when the supplier is on site and inevitably the buyer’s responsibilities in any site activities follow the IChemE general approach in this regard.
The optional conditions of contract – part B (project specific) are included to assist the parties in dealing with specific issues that may apply to their project which are not addressed in the general conditions. This section of the contract’s optional clauses cover such matters as, confidentiality, subcontracting and liquidated damages. It may also be used for including matters that are necessary to comply with any specific local and national requirements that may apply to the project or site at which the materials are to be used. Such matters may include specific tax regimes, duties, bonds and related issues.
The specification
The Turquoise Book includes reference to a specification, this being the detailed technical definition of the materials that the supplier is required to provide. The more precise and detailed the specification of the materials that can be made, the greater the definition of the buyer’s requirements and the supplier’s understanding of its commitments will be. A comprehensive specification will enable the supplier’s bid to be fully and firmly based and will provide the criteria against which the adequacy of the materials and their performance may be evaluated by the buyer.
In most circumstances, contracts for all forms of supply and installation activities contain requirements for the supply and/or the installation to be completed by specific dates. In many cases, completion will be on a sequential or sectional basis.
The specification should include all applicable design standards and codes of practice which the materials are to meet, including any that the buyer provides. It should cover such matters as operational requirements, design data and the design life of specific items where applicable. If the materials are to be supplied and, if required, installed in accordance with guidelines and codes of practice of national or international authorities, these should be clearly stated in the specification.
If the materials are subject to any law or legal requirement, international regulatory standards, technical standards or procurement legislation, the parties are reminded that such provisions need to be included in the specifications. In cases where codes of practice, guidelines or standards are less well defined or where regulatory standards or guides to good manufacturing practice are referenced, the supplier and the buyer must take great care to provide sufficient detail in the specification to avoid any ambiguity in the definition of the standards to which the materials are to be supplied and installed. In particular, where third party inspectorates will eventually rule on the sufficiency and/or suitability for purpose of the materials, then this must be clearly stated in the specification.
The specification should be a document which is complete and internally consistent and which:
(a) Incorporates all technical details as finally agreed including data sheets defining the performance of the materials.
(b) Identifies clearly and unambiguously the engineering standards that are to be achieved.
(c) Where the materials are to interface with existing plant, specifies these interfaces with details of any existing plant and external utility provisions.
(d) Where the materials are to be supplied as part of any modifications or extensions to an existing plant, the specification will need to take particular account of the work to be done in preparing the materials for that plant. This creates a range of additional considerations, in preparing the specification, for example:
(i) The condition of the original plant, which is in effect being supplied by the buyer. (ii) The presence or suspected presence of hazardous materials (e.g. asbestos).
(iii) Any need to maintain production, or plant shutdown.
(iv) The interface between the original plant and the new equipment.
(v) Relevant climatic and other information that may affect the performance of the materials.
The schedules
It should be noted that, like all previous IChemE contracts, the Turquoise Book contains schedules which are an essential part of the contract and are referred to throughout the general conditions. Whilst the specification describes what is to be supplied, the schedules describe how the supply is to be managed and executed. When drafting the schedules, it is important that the parties agree whether there is to be any precedence between them, for example a statutory requirement that may apply to a public utilities company or an international regulatory requirement.
In most circumstances, contracts for all forms of supply and installation activities contain requirements for the supply and/or the installation to be completed by specific dates.
If this is to be the case, it will be important to draft a revision to article 1 of the agreement so that the precedence of the documents is unequivocal. It is recognised that a number of engineering and project management disciplines will usually contribute to the drafting of the specification and schedules. It is therefore recommended that the party drafting the final version of the contract documents should apply a rigorous review in order that duplication and inconsistencies are not included in the final version to be signed by the buyer and the supplier.
Schedule 1: The scope of supply and installation (if any)
A complete and accurate definition of the nature and extent of the supply (and installation of materials if required) is an essential part of the contract, particularly for the control of changes. The more precise and detailed the definition can be made, the greater will be the supplier’s understanding of its obligations, which will reduce the likelihood of the buyer or its contractors to make variations, claims or disputes. Since during the tendering and negotiation process leading up to the contract there may be changes to the initial documentation issued with the invitation to tender, it is essential that a consolidated and updated description of the installation works is included in the contract and that appropriate versions of documentation should be incorporated.
Schedule 2: Key dates
In most circumstances, contracts for all forms of supply and installation activities contain requirements for the supply and/or the installation to be completed by specific dates. In many cases, completion will be on a sequential or sectional basis. There may also be a requirement for delivery or installation to be completed in order to interface with other activities connected with the buyer’s requirements or being carried out by an appointed contractor. These dates, together with those for commencement of the supply (and for any installation), form the basis of the supplier’s delivery schedule or any installation programme. Therefore, schedule 2 (key dates) must very clearly and precisely define the stages of document approval, ordering of components/materials, factory acceptance testing, delivery to site, completion, or of any intermediate milestones, and the buyers’ required key dates.
Schedule 3: Documentation
Therefore, copies of quality assurance control procedures that the supplier will be required to adopt should be issued as part of any tender enquiry documentation.
Whenever possible the essential documentation should be discussed and agreed during the tender negotiations and incorporated into schedule 3 (documentation). The buyer should be satisfied that the information that is to be issued by the supplier will accurately define the status of any design and specification and that it will meet the ultimate requirements in terms of application, installation, operation and maintainability. There will inevitably be a range of documents that are to be provided prior to manufacture or development of the materials and these will include those that are for approval, statutory and equivalent documentation, documentation for information only and all final documentation and manuals as appropriate.
Schedule 4: Quality assurance and validation (if any)
The buyer must advise the tenderers at the pre-contract stage of any specific quality assurance issues that are to apply to the project. For example the buyer may request that the supplier shall compile indexed and cross-referenced records comprising such documentation as drawings, non-destructive and intrusive test records, and material and test certification. Such records shall be subject to review and approval by the buyer in accordance with schedule 4 and the general conditions. Therefore, copies of quality assurance control procedures that the supplier will be required to adopt should be issued as part of any tender enquiry documentation.
In any event, it is expected that each supplier will have in place a quality assurance standard based on the ISO 9000 family of standards.
In the case of specialist materials and equipment, it is anticipated that the supplier may have its own specific quality requirements and procedures which should be agreed prior to contract signature. Such tests will often be in accordance with national or international standards. In any event, it is expected that each supplier will have in place a quality assurance standard based on the ISO 9000 family of standards. In the event that specific third party verification or validation techniques are to be adopted the specific requirements should be stated in schedule 4.
Schedule 5: Pre-installation performance tests and procedures
It is to be anticipated that various inspections, factory tests, precommissioning, commissioning, activities and even operational simulation, may be carried out before the supplier has completed the obligations in accordance with the contract. The inspection and test procedures, limits and tolerances should be stated in as much detail as necessary to enable the parties to fully understand what has to be done both prior to delivery and subsequently on site. Both parties need to contribute to this schedule in order that the supplier’s operational necessities and the specialised knowledge of the supplier are combined to ensure that a thorough inspection and testing procedure will be carried out.
Whilst actual regulations, procedures and rules may be included in full, they could also be incorporated by cross-reference to separate documents.
Schedule 6: Cost elements, rates, charges and payment
There is no prescribed form of payment to the supplier for its performance of the contract. The conditions have been drafted to cover any form of payment from fully reimbursable to fixed lump sum, but this is on the basis that the supplier may be entitled to some form of progressive stage payments. The precise details of the contract price and payments are to be included in schedule 6 (cost elements, rates, charges and payment).
Schedule 7: Health, safety and environmental requirements
If the contract is to include any site activities including installation, then optional conditions part A should be used. The intention of including schedule 7 (health, safety and environmental requirements) is to provide an opportunity to incorporate into the contract all the site-specific health, safety and environmental requirements of the buyer. Whilst actual regulations, procedures and rules may be included in full, they could also be incorporated by cross-reference to separate documents. Any mandatory codes of practice, corporate standards or jurisdictional requirements should be clearly defined, including any requirements for hazard identification and operability (HAZID/HAZOP) studies.
The contract also seeks to assist the parties in drafting agreements that consider the whole range of activities that are likely to apply to the supply and, if required, on-site activities necessary.
Schedule 8: Performance and test procedures (if any)
If optional conditions part A applies, an additional schedule 8 (performance and test procedures) will need to be added as stated in the agreement. The schedule should define in detail the inspection and test procedures, limits and tolerances associated with the performance of the materials as installed. Schedule 8 should also define the roles that the supplier and the buyer are to undertake. Under normal circumstances, and for reasons of insurance and health and safety, on-site performance tests are usually to be undertaken by the buyer (or on the buyer’s behalf), particularly if active chemicals are to be employed.
If the supplier has made specific guarantees in respect of the performance of the materials verifiable by performance tests these should be stated in the specification with the detailed procedures, tolerances and methods provided in schedule 8. It is anticipated that the performance tests to verify the materials supplied and installed by specialist contractors will operate to pre-agreed output and technical requirements. Such tests will generally be undertaken by, or in the presence of specific contractors and shall be in accordance with the requirements defined in the schedule.
The contract also seeks to assist the parties in drafting agreements that consider the whole range of activities that are likely to apply to the supply and, if required, on-site activities necessary.