5 Features of EPC contracts

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<5 Features of EPC Contracts>

EPC contracts are the most common form of contract used to undertake construction works of large scale and complex infrastructure projects in the global power industry. Under an EPC contract, a contractor is obliged to deliver the complete facility to a developer who needs to only turn a key to start operating the facility. EPC contracts tend to deal with issues with greater sophistication than other types of construction contracts. This is because an EPC contract is designed to satisfy the lenders’ requirements for contract’s bankability. EPC contracts provide organisations with an opportunity to adopt for a risk transfer to be able to attain some level of advantage in this competitive industry. These contracts are incorporated time and time again due to structure and features it provides to both the project owner and the contractor. Here are 5 Features of ECP contracts:

• Fixed completion date
• Fixed contract price
• A single point of responsibility
• Caps on liability
• Performance guarantees

Fixed completion date

Under the EPC contract, the contractor is obligated to complete the facility in the agreed timeframe. If there is any failure in doing so, the owner is entitled to claim the damages from the contractor due to the delay. There will usually be an agreed cap on this amount. In some cases the contractor might be liable for liquidated damages.

Fixed contract price

This means that the contractor will be liable to bear the cost anything over the agreed amount. The contractor usually has a limited ability to claim additional money which is limited to circumstances where the project company has delayed the contractor or has ordered variations to the works.

A single point of responsibility

It is the responsibility of the contractor to handle for all design, engineering, procurement, construction, commissioning and testing activities. Therefore, in the case of any issues arising at the time of the project cycle, the project company need only look to one party. The contractor will be liable for any defects and will fix the problem or provide compensation. 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. If the contractor consists of more than one entity, it is important that each entity is jointly and severally liable to the owner.

Caps on liability

EPC contractors, most often, will not enter into contracts with unlimited liability. Therefore, EPC contracts for power projects cap the contractor’s liability at a percentage of the contract price. The percentage is variable depending on the project, however, an overall liability cap of 100 percent of the contract price is witnessed to be quite common.

Performance guarantees

The project company’s revenue will be earned by operating the power station. Therefore, it is vital that the power station performs as required in terms of output, efficiency and reliability. Therefore, EPC contracts contain performance guarantees backed by performance liquidated damages (PLDs) payable by the contractor if it fails to meet the performance guarantees. It often happens in that contractors have separate contract for performance but it can be an issue when it doesn’t match with the EPC, therefore it good to have it in the EPC contract.

With the increasing size and complexity in the nature of projects, the conditions of construction contracts also tent to become more complicated, which consequently contributes to an increase in the number of disputes in addition to the existing ones. Due to their wide recognition, standardized contract forms can eliminate the number and frequency of claims besides time and cost overruns.

<Blog – What is the Contractual Structure of EPC Contracts>

<Managing International EPC Conracts in the Global Power Industry 28-30 Sept 2020 KL>