An EPC (engineering, procurement and construction) contract is a contract between a project owner and an EPC contractor where the EPC contractor is responsible for all the activities from design, procurement, construction, commissioning and handover of the project to the project owner. Given that it covers such voluminous and wide scope of work, an EPC contract is considered one of the most complex of contracts.
Advantages of an EPC Contract
1) Transfer of risks to the contractor
EPC contracts are favored by project owners as it makes the contractor responsible for all project activities from the design phase until completion of the project. This leaves the project owner with little to no risk and obligation.
2) A single point of contact and responsibility
As the EPC contractor is responsible from the designing until the completion of the project, the project owner does not need to engage several different contractors for different phases of the project. In the event that issues occur, the EPC contractor shall be responsible. Nevertheless, typically, an EPC contractor will subcontract parts of the works to subcontractors and such subcontractors shall in turn be liable to the EPC contractor.
3) Certainty in time and cost
An EPC Contract usually provides that an EPC contractor must complete a project by a guaranteed date and at a specific price. Failure to do so will usually result in a breach of the EPC contract and the EPC contractor incurring monetary liabilities.
4) Bankability of a project
As a result of the advantages mentioned above, banks generally prefer projects with an EPC contracts as it provides comfort to the lenders that there is less risk to the project and the lenders.
Important clauses in an EPC contract
Disputes arising from an EPC contract are almost inevitable as it is difficult to set out fully the requirements of building a project. Further, disputes under an EPC contract are technical and complex by nature. As such, it is important for the project owner and the EPC contractor to have a well drafted EPC contract and a thorough understanding of each party’s obligations under the EPC contract. The following are some salient clauses in an EPC contract which should be paid special attention to:
1) Scope of work and technical specifications
It is essential that the scope of work and technical specifications be set out in as much detail as possible. There should be no gap nor ambiguity as to whose responsibility certain matters are. For example, does the project owner or the EPC contractor assume responsibility for any plans, designs or technical information provided to the Contractor? Who should be procuring the required permits for the project? The EPC contract should also include the benchmark for the quality of the materials to be used and the standard to be applied by an EPC contractor in performing its obligations under the contract.
2) Milestones, testing and acceptance
Clauses in relation to milestones, testing and acceptance are important to the parties as whether or not payment should be made depends on whether or not requirements under these clauses are met. Parties should ensure that the EPC contract contains clear construction milestones and that they make sense in practice. Further, the procedure for testing and acceptance should be spelt out in the EPC contract, including the consequence of failing a performance test. For example, would there be a retesting, a reduction in contract price or rejection of the project altogether?
3) Liquidated damages
There may be several types of liquidated damages in an EPC contract. The typical ones include delay liquidated damages and performance liquidated damages. A well-drafted EPC contract would clearly set out when an EPC contractor would be liable to pay such liquidated damages as well as when exceptions should apply. There are different considerations for each party, a project owner should consider whether or not the recovered sums would meet third party liabilities whereas an EPC contractor may want to consider imposing a cap for liquidated damages to limit its liabilities.
4) Force majeure
Force majeure used to be considered a boilerplate clause and overlooked previously. However, since the Covid-19 pandemic, it has been proven that it is wise for parties to pay close attention on a force majeure clause. Some considerations include how wide the definition of “force majeure” is, whether a force majeure entitles an EPC contractor an extension of time, and what are the consequences of a prolonged force majeure.
Ending Note
In conclusion, an EPC contract is a useful agreement in a building project. However, it is crucial to ensure that an EPC contract is drafted and reviewed carefully.
If you have further questions or require assistance in navigating EPC contracts, feel free to contact our Partner, Mr. Kevin Richard Nathan (kevin@nzchambers.com) or Senior Associate, Ms. Elise Tam (elise@nzchambers.com).
Authors:-
- Kevin Richard Nathan, Partner
- Elise Tam, Senior Associate