EPC Contracts: How good are they?

 

EPC stands for Engineering, Procurement, and Construction. An EPC contract, also called a turnkey contract, is an agreement between a project principal/owner and a contractor where the contractor is responsible for the completion of the project and handover to the principal.

An EPC contract covers the entire lifecycle of a project. Therefore, as the name suggests, the EPC contractor or the contracting company is responsible for handling the engineering design, procuring the necessary materials, building the facility, and delivering it to the principal/owner.

Why are EPC contracts preferred?

EPC contracts are an excellent risk mitigation tool as the contractor is responsible for everything in the project. An additional benefit of EPC contracts is that lenders are more likely to finance a project if there are fixed timelines and prices.

What are the advantages of an EPC contract?

• A single point of responsibility: An EPC contractor is responsible for taking up all the work in a project, including designing, procurement of materials, commissioning, and handing over the finished project. Hence, the principal would only need to convey any issues to the contractor. Furthermore, the contractor will be responsible for any defects and rectifications to the agreed-upon project expectations.
• Fixed prices and dates: EPC contractors submit and adhere to a fixed price and completion date for all the phases. Any cost overruns or delays will have to be compensated by the contractor.
• Performance guarantee: EPC contractors provide performance guarantees to the principal backed by performance liquidated damages which are payable by the contractor for any losses or damages suffered due to the contractor’s actions.
• Limited involvement in the project: With EPC contractors assuming full responsibility, principals do not need to get involved in all the aspects of decision-making for the project, and the contractor is responsible for the appointment of subcontractors and completion of the project with quality and efficiency.
• Security: EPC contracts protect principals from potential financial losses due to the transfer of project responsibilities, financial undertakings, and project completion to the contractors.

What are the disadvantages of EPC contracts?

• Less involvement: The principal only oversees and approves certain aspects of the project. Therefore, it allows the principals limited participation and intervention in the project.
• Reduced flexibility: EPC contracts are not very flexible once the scope of work is decided. Change in the scope of work may result in extra charges for the principal.
• Higher costs: As the nature of payments in EPC contracts are usually lump-sum or fixed price, the principals may have to shell out a high initial cost to contractors. The contractors charge a premium on the services to account for uncertainties.
• Complex documentation: Principals enter into complex agreements that require proper and thorough understanding and negotiation.

In conclusion, EPC contracts are popular as they provide a single point of responsibility, certainty, and efficiency. The drawbacks are present but could be minimal if the right EPC contractor is selected. Shapoorji Pallonji’s EPC division has consistently been one of the best EPC contractors in the world and has completed large-scale turnkey projects over the years.

You can read more about SP EPC at www.shapoorjipallonji.com/company/SPEngineeringProcurementAndConstruction.

Originally published at http://realestateandepc.wordpress.com on November 22, 2023.