5 Best Practices for Negotiating EPC Contracts

Estimated reading time: 5 minutes

 

When managing Engineering, Procurement and Construction (EPC) contracts, it is important to be able to negotiate effectively through taking measurable steps to improve your negotiating position to have the upper hand. Especially for EPC contracts, where projects are complex and huge in scale, achieving optimal results requires a well-prepared comprehensive negotiating strategy.

In every project, it is necessary to have good contract management in place; otherwise it can have negative consequences for all stakeholders involved. It will also affect the success of the project in terms of project timeline, project costs, project quality, safety aspects and more.

Essentially, each party comes to the negotiation table wanting the most benefits with minimal risks. The contractor, for example, looks forward to maximising profits and getting the best payment terms with no delays. The owner, however, is looking to get a good quality project and the lowest cost, delivered on time and on budget. As these two interests are clashing, it is important to come prepared with clear goals and objectives in mind. It is also important to have a good understanding of various project risks and costs, as well as legal terms, before signing the contract.

Here are the 5 best practices for negotiating EPC contracts:

1. Manage the contract
2. Type of contracting and pricing model
3. Establish a realistic budget
4. Establish a guaranteed completion date
5. Identify all types of potential risks

 

1. Manage the contract

Take control and manage the contract by being the party that is involved in the preparation of the contract. It is important that the contract has undergone thorough checks before signing it. Important matters such as key provisions require careful attention and detail. This includes project time and schedule, delays, completion milestones, delay damages, technology, the contractor’s standard of performance, and price and payment.

 

2. Type of contracting and pricing model

It is important to select an appropriate EPC contracting model and pricing model (e.g., Fixed, Firm or Target pricing) accordingly. As each model carries its own risk implications, it is pivotal that both parties understand and evaluate the model which fits best. A Fixed Price is a model for the entire EPC scope, a Firm Price refers to a fixed price that is subject to escalation for certain price increases, such as an increase in the cost of steel, and Target Price refers to a cost-reimbursement model established through an open book estimate process.

EPC contracts are popular for power projects, especially in the cases where the contractor fully understands all legal aspects of the contract. Split EPC contracts are more common in Middle East and South Asia, where the EPC contract is split into two or more separate contracts. When there are two or more contractors, an EPC wrap-around agreement or guarantee is needed.

 

3. Establish a realistic budget

It is common for EPC projects to experience budget issues, usually by cost overruns with construction. Construction is the largest portion of an EPC contracts, and costs usually creep at the end of the project. Hence, agreeing on a realistic budget by both parties is key and it always helps to include a buffer of 10% when allocating budget. Establishing a realistic budget is critical to a successful and dispute-free project.

 

4. Establish a guaranteed 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.

 

5. Identify all types of potential risks

EPC projects involve complex systems and equipment. Each EPC contract participant should identify any technology risks associated with the project and ensure that strategies for mitigating or managing those risks are reflected in the contract. It is also important to consider all the applicable regulatory requirements and restrictions, and develop a compliance program.

 

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Managing International EPC Contracts for the Global Oil & Gas Industry is a 3-day training course held from 18-20 September 2019 (Kuala Lumpur) and 10-12 November 2019 (Dubai). This course will furnish delegates with a thorough understanding of the key components and their interactions of an EPC contract and will address issues relative to dispute resolution. Become familiar with the importance of ‘scoping’ an EPC project correctly and have awareness of the key features and contractual provisions of an EPC contract. Focus is on open dialogue and collective problem solving relative to case examples and class exercises.