Key Features of Consideration of EPC Contracts
The increasing demand for energy has led to an intensification of competition – not only between organisations within the same sector (i.e. coal power generation), but also from the growing alternative energy markets. The rise of ‘clean’ energy has led to a concerted, yet diverse technological development within fields such as wind; tidal and solar power generation facilities. Given these factors, organisations seek different ways in which to achieve a sustainable competitive advantage relevant to one another.
One response to this has been to adopt a form of ‘risk transfer’ via outsourcing to make another party the ‘bearer’ of risk – i.e. appointing a contractor company that offers a ‘one-stop shop’ solution – to undertake the whole scope of a project by being the main contractor and subsequently managing the entire range of sub-contractor agreements to ensure that the deliverable in question is met in its entirety for the client/end user.
These types of contract are often referred to as EPC (Engineering; Procurement and Construction contracts), whilst another common name for them is Turnkey contracts. If the contract can be executed successfully, the contractor stands to benefit, whilst if there are problems and delays, it is the contractor who may find themselves liable for bearing these costs. Unfortunately, given the scale and scope of this species of commercial contract and the often complex project management challenges associated with them, there is a significant likelihood that most of the ambit of contractual and operational misfortune in terms of breach; delay; quality issues; HSE compliance and local content issues (to name but a few) will manifest at some point during the project’s timeline.
Global Power Industry
Currently for the power industry, the increased concern about energy supply and demand continues to grow globally. This in turn leads to an increased demand for new build combined-cycle and other power plants, leading to demand for plant, materials, equipment and expertise as well. Contractors are now able to pick and choose the projects that carry the least risk but the most profit. The shift in bargaining power in the parties involved allows contractors to negotiate contracts in their favour.
At a glance, some key features of consideration of EPC contracts include:
- Single point ownership/responsibility
- A fixed completion date
- A fixed completion price
- Types of costs for an EPC project contract
- Procurement responsibilities
- No/Limited technology risk
- Output guarantees
- Liquidated damages for both delay and performance
- Security from the contractor and/or its parent
- Large caps on liability
- Restrictions on the ability of the contractor to claim extensions of time and additional costs
- Single point ownership/responsibility
The contractor is responsible for all design, engineering, procurement, construction, commissioning and testing activities. The contractor is also responsible for providing compensation and solutions when a problem occurs. As a result, if the contractor is a consortium comprising several entities, the EPC contract must state that those entities are jointly and severally liable to the project company.
- A fixed contract price
This means that any risk of cost overruns and cost savings is held by the contractor. However, the main overall risk lies in the definition of the specification upon which the contract is based. If the specification is not well developed and concise, the quality and performance of the completed development may be compromised.
- Types of costs for an EPC project contract
There are three types of contract – a guaranteed maximum price contract, a cost-plus contract or a unit price contract. A contract with guaranteed maximum price (“GMP”) is where the contractor performs all the work and provides all the materials for a lump sum price. A cost-plus contract where the contractor is paid the actual costs of the labour and materials for the work plus a percentage of that cost as the contractor’s fee. Lastly, a unit price contract where the contractor is paid a set amount for each unit of work completed.
- A fixed completion date
EPC contracts include a guaranteed completion date that is either a fixed date or a fixed period after the commencement of the EPC contract. If this date is not met, the contractor is liable for liquidated damages. Liquidated damages are designed to compensate the project company for loss and damage suffered as a result of late completion of the power station.
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Managing International EPC Contracts in the Global Power Industry is a 3-day training course. This course can furnish delegates with a thorough understanding of the key components and their interactions of an EPC contract and will provide focus on the key project management issues required for successful project delivery. Attention is on open dialogue and collective problem solving relative to case examples and class exercises. This course has been designed to provide an immersive, value adding experience to delegates who attend.
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