What is an EPC Contract?
The full form of EPC contract is ‘Engineering, Procurement and Construction contract’. EPC contracts are the form of contracts that establish a contractual framework between client and contactor in which all the design and construction risk is transferred to the contractor. EPC contracts are mostly being used in the construction industry, power and energy sector today. This type of contracts is often called as turn- key contracts as the contractor makes everything ready for the client and hands over a set of keys to the client so that the client may come and operate the project. The client seeks tenders on the basis of performance based specifications and there is almost no opportunity for the client to intervene during the derigs or execution face of the contract. EPC contacts are generally adopted for infrastructure, power or similar kind of projects where the aesthetics of the design is less important as compared to the performance and cost of the project. The client seeks EPC contracts when he/she does not have expertise to solve a particular problem and he/she depends on external agencies/contractors for providing the solution. We will learn more about EPC contract in this post.
Obligations of Contractor in an EPC Contract
The EPC contractor is responsible for entire execution of the project right from design, procurement of material to construction and final delivery of the project. Main activities for which the contractor is responsible are as follows:
Engineering or Design
- Basic Engineering
- Detailed Engineering
- Detailed Design
- Construction Engineering
- Receive the Material
- Construction Management
- Electrical Works
- Water Supply
Obligations of the Client in an EPC Contract
The client is responsible for the following activities under the contract:
- Land acquisition
- Providing access to the site for the contractor
- Facilitate contractor for taking approvals from various govt. agencies
Features of an EPC Contract
The main features of an EPC contract are as follows:
Fixed Contract Price
The EPC contacts have a fixed price. This means that once a price is quoted by the EPC contractor, it cannot be changed either by contractor or the owner. The contractor quotes the price taking into consideration all the potential risks during the execution of the project including the design risk. If there are any cost implications later on due to site conditions or any other circumferences, the contactor has limited liability to claim for the compensation.
Fixed Completion Date
In EPC contracts, the contractor has to complete the project within the stipulated timeframe as agreed in the contract. If there is any delay on the part of contractor, the client is entitled to claim the damages in the form of ‘Liquidity Damage’. There is usually an agreed cap on that amount. In most of the construction contracts, it is usually 0.05% per day subjected to maximum 10% of the contract price.
A Single Point of Responsibility
In these contracts, contractor is the single entity who is responsible for almost everything, be it design, procurement, construction, commissioning or testing activities. All the activities revolve around the contractor. If the contractor is a consortium of more than one entity, then it is appropriate to mention in the contract that all the entities are jointly or severally liable to the client for the execution of the work.
EPC contracts require contractor to submit a performance guarantee to ensure that the work will be executed as per the scope mentioned in the contract. If the contractor makes default on their part, then the owner is entitled to get the defects rectified on the cost of contract and he/she may hold the performance security till the rectification of all defects. The performance guarantee is generally 5% of the contract price or as agreed in the contract and the contractor is responsible to make the performance guarantee valid till the completion of the project or for the duration as stipulated in the contract. If the contractor does not maintain performance security as per the provisions of the contract, then it is treated as a breach of contract.
Caps on Liability
The contractors generally do not enter with unlimited liability in the EPC contacts. The liability of the contractor is generally defined as a percentage or the contract price. In most of the EPC contracts, it is generally fixed as 100% of the contract price. This is also called professional liability and the contract is generally required to submit the insurance as per the contract to cover the professional liability.
Defect Liability Period
There is a provision of defect liability period in EPC contract, which means that the contractor is liable to rectify any or all defects during this period. The defect liability period generally commenced from the date of completion of work or date of final payment whichever is later. The duration of defect liability period normally ranges from one year to four years or as agreed mutually between the parties. In most of the cases, some amount (generally 5% of the payment of the contractor) is retained from the bills of the contractor and is only released after defect liability period is over, subjected to rectification of all the defects by the contractor.
It is sometimes called ‘Exceptional Event’ also. Force majeure events are the events which are referred to a ‘acts of God’ and are beyond the control of the parties under the contract. If any such event occurs which is making it impossible to fulfil contractor’s obligation under the contractor, then he/she is relieved from the obligation without the imposition of any penalty. This provision applies to the owner also.
Disadvantages of EPC Contracts
Like EPC contracts are advantageous in many ways, they have some disadvantages also, which are mentioned as below:
EPC Contracts are not Cost Effective
EPC contracts are expansive due to the fact that the contractor takes into account all the risks to be borne by him/her while quoting the price of the work. This high cost is supposed to absorb the potential risks to be faced by the contractor.
The Client has Less Control over the Project
All the power and authority is transferred to the contractor in EPC contracts. Every decision is taken by the contractor during the execution of contract. The client cannot interfere in day to decisions of the work. Any intervention by the owner may help contractor to claim against delay damage.
EPC contracts relieve the owner from the arranging the activities like planning, basic engineering, detailed engineering, procurement of materials, etc. and transfer most of the project related risk to the contractor. But at the same time, EPC contracts have some disadvantages also like, these contracts are costly because contractors normally quote high price of work to accommodate for the project risk. In EPC contracts, the control of the owner is less as compared to the other forms of the contracts and the day to day intervention of the owner helps contractor to claim damages for the hindrances caused by the owner. The EPC contracts are used in the situations where the performance is more important as compared to the aesthetics of the design and where the expertise of the contractor is required to solve the problem.