Companies in the wind, water, solar and renewable energy industry have flourished over the past five years as the Federal Government has introduced various incentives designed to promote renewable energy generation and investment. Revenue is forecast to grow at 5.2% over the next five years according to IBISWorld to reach $2.6 billion in Australia. Consequently, a significant number of large-scale plants and projects are expected to be built in this period.
What are Engineering, Procurement and Construction (EPC) Contracts?
Many companies in the renewable energy industry and power sector commonly use Engineering, Procurement and Construction (EPC) contracts (or turnkey construction contracts) for complex infrastructure projects. This form of contract sets out the relationship between the owner and the contractor for the provision of professional or technical services. Under an EPC contract, the principal or owner enters into a contract with the EPC contractor, who will, in turn, enter into various subcontracts with subcontractors for the performance of specified portions of work. They will be responsible for not only the engineering aspects of the project, but also procurement of equipment and design and construction of the facility, plant or project.
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. Under common EPC agreements, contractors have full control of the design, procurement and construction of the project from inception to completion.
Many people refer to EPC contracts as turnkey construction contracts as it allows 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.
It is important to note that EPC contracts differ to EPCM contracts. EPCM stands for Engineering, Procurement and Construction Management. Here, an EPCM contractor takes an administrative and management role in the engineering and design aspect of the project. They manage the project as the owner’s agent and oversees the project.
Advantages and Disadvantages of EPC Contracts
A significant benefit of EPC contracts is that it allows 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 lifecycle costs and scope changes being easily overlooked. Also, as the contractor performs the design and construction, the usual checks and balances present during such projects do not exist for the owner.
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, get in touch with our construction lawyers on 1300 544 755 or fill out the form on this page.