In Short
- Engineering, Procurement, and Construction (EPC) contracts streamline complex infrastructure projects by centralising responsibility with a single contractor.
- These contracts typically include fixed prices and completion dates, transferring most risks from owners to contractors.
- Key clauses outline the responsibilities of both parties, ensuring clarity in project management and execution.
Tips for Businesses
When considering an EPC contract, ensure it clearly defines the roles and responsibilities of both the owner and contractor. Regularly review project milestones and maintain open communication to avoid potential risks associated with design oversight and cost overruns.
Companies in the wind, water, solar and renewable energy industries have flourished over the past five years as the Federal Government has introduced various incentives designed to promote renewable energy generation and investment. According to IBISWorld, revenue is forecast to grow at 5.2% over the next five years to reach $2.6 billion in Australia. Consequently, many large-scale plants and projects are expected to be built in this period. This article explains what engineering, procurement and construction contracts are and how your business can utilise them on new projects.
What are Engineering, Procurement and Construction (EPC) Contracts?
Many companies in the renewable energy and power sectors commonly use Engineering, Procurement and Construction (EPC) contracts (or turnkey construction contracts) for complex infrastructure projects. This form of contract establishes the relationship between the owner and the contractor to provide professional or technical services.
For owners of projects, EPC contracts allow them to manage risk more effectively and also allow contractors to allocate and specialise in the work they undertake. This model is used where the owner’s concept design is based more on functionality, and they need someone to engineer a solution to produce that functionality.
Many people refer to EPC contracts as turnkey construction contracts as they allow the owner to simply ‘turn the key’ when the project is complete for the system to be fully operational. In addition to delivering a complete facility or plant, contractors must also deliver it for a guaranteed price and date. This guarantee means that the contractor, and not the principal, will incur any additional costs. If the plant is not complete to the specified level upon completion, the contractor may also incur financial liability.
Common Clauses in EPC Contracts
Responsibilities of Contractors
A portion of all EPC contracts is dedicated to outlining the contractor’s duties. These encompass safety measures for site management, equipment provision, and emergency services, if necessary. It is also crucial to ensure that the contract includes provisions for the contractor’s liability over subcontractors and the requirement for regular inspection of subcontractors’ work.
Additionally, this section may state that the contractor must comply with the owner’s financing, but manages all subcontractor and tax payments themselves.
Responsibilities of Owners
Alongside the contractor’s responsibilities, an EPC contract will also contain a section stating the responsibilities of the owner. These include funding the contractor, providing a portion of equipment such as telecommunications or system software, and the owner’s rights, such as accessing the site.
Other Clauses
Other clauses that you may find in an EPC contract include:
- commencement clauses;
- projected timelines;
- warranties;
- provisions relating to liability in the event of accidents; and
- frustration clauses.
One of the defining characteristics of EPC contracts is their distinctive approach to risk allocation. These contracts are structured to shift a substantial portion of the project risk from the owner to the contractor, creating a framework that provides greater certainty and control for project owners and financiers. Additionally, This risk transfer encompasses several critical areas of project execution:
- Design Risk: The contractor assumes the design risk, taking full responsibility for ensuring that the final design satisfies the performance specifications outlined in the contract. This extends beyond mere compliance, requiring the contractor to guarantee that the design will achieve the desired functionality and efficiency;
- Fixed Price Structure: The contractor also bears the brunt of any cost overruns. This arrangement incentivises efficient project management and cost control on the contractor’s part, as they cannot pass unexpected expenses back to the owner;
- Delay Risk: This is firmly placed on the contractor’s shoulders, often including liquidated damages clauses for late completion. This creates a powerful motivator for timely project delivery; and
- Performance Risk: Additionally, the contractor guarantees that the completed facility will meet or exceed specified performance criteria.
Before buying a business, it is important to undertake due diligence, to verify the information supplied by the seller. This guide will walk you through the due diligence process.
Advantages and Disadvantages of EPC Contracts
A significant benefit of EPC contracts is that they allow the owner to engage with just one contractor, who will, in turn, manage all the relationships with subcontractors. This assignment of work can make it easier for the owner/principal to oversee the project and evaluate progress based on performance as the contractor carries out the project. This contract arrangement also benefits contractors who will have more control over the design and selection of subcontractors. While contractors accept more risk with the coordination of the design, they can act more efficiently to lower construction costs.
While principals can benefit from the single point of responsibility for the delivery of the project, they do lose involvement with the design process, adding potential risk if the project’s design is crucial. Principals should ensure they carefully mark out the project’s milestones to avoid overlooking lifecycle costs and scope changes. Also, as the contractor performs the design and construction, the usual checks and balances present during such projects do not exist for the owner.
Key Takeaways
The flexibility, value and certainty that arises out of an EPC contract, compared to other types of contracts (such as work orders, the supply of equipment or construct-only contracts), is a significant advantage in the construction industry. Most EPC contracts provide for a fixed contract price, fixed completion date and a single point of responsibility. Moreover, the parties often include performance guarantees to ensure the facility or plant performs as required in terms of reliability, output and efficiency.
If you are looking to draft an EPC contract, our experienced construction lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
EPC stands for engineering, procurement and construction. This type of contract is useful for complex infrastructure projects in the renewable energy industry and power sector.
An EPC contract sets out the relationship between the principal and a contractor for the provision of professional or technical services. The contract will enter into various subcontracts for the performance of specified work. They will be responsible for the engineering aspects of the project, the procurement of equipment and the design and construction of the project.
EPC contracts are beneficial for the principal because they allow you to engage just one contractor, which makes it easy for you to oversee the project. It also ensures that there is one single point of responsibility, which will make it easier to take legal action if something goes wrong.
As an EPC contract requires the contractor to take on more risk, it may cause an increase in costs to account for their high level of responsibility. It also means that you may lose involvement in the design process.
We appreciate your feedback – your submission has been successfully received.
