Engineering, procurement and construction contract

 

Out of the different contracts the Engineering procurement and construction contract (EPC)follows the  most common project finance  path. In the EPC contract the contractor is entrusted with the  obligation  to build and deliver the project facilities on a turnkey basis. In these type of contract the contract is awarded to a well established and resourceful contractor who has thorough knowledge about the project on a lump sum fixed price . The price is based on acceptance of a certain specifications, and with certain performance warranties. In the EPC contract the completion date of the project and the effective date of the contract plays very vital role.Is quite complicated in terms of legal issue, therefore the project company and the EPC contractor need sufficient experience and knowledge of the nature of project to avoid their faults and minimize the risks during contract execution.

The terms EPC contract and turnkey contract are interchangeable. EPC stands for engineering (design), procurement and construction. In the Turnkey contract the owner of the project provides some basic agreed facilities and rest of the remaining works of the projects are to be carried out by the contractors and hand over the project to the owner in such a way that l it will need to be done by the owner  to do is turn the key and the facility will function as intended. Alternative forms of construction contract are a project management approach and alliance contracting. Basic contents of an EPC contract are:

·         Description of the project

·         Price

·         Payment

·         Completion date

·         Completion guarantee and Liquidated damages:

·         Performance guarantee and LDs

·         Cap under LDs

Decription of the project: Every project is described prior to fixing of the price of the project cost. In case of Thermal power plant the capacity of the plant to be produced in terms of MW and how many units, what are all the major systems to be provided in place . further project description narrates what is the specification for major equipments ,process guarantees, time of completion are specified

600 MW Thermal Power Plant

Price on EPC contracts are decided as single lump sum price for completion of the entire project.. Since EPC contracts are voluminous in nature with long duration from  date of beginning to date of commercial operation of the project the price is divided as design and engineering component price,cost for supply of the materials with specified terms and for civil and site services a separate price.. The price is always linked with certain important deliveries of equipments and in case of site services with completion dates of major mile stones.

Payment : Even though price is fixed separately for  design and engineering, supply of equipments ,civil and site services the contractor must be provided with free access to collect the money on completion of certain activities. In order to facilitate this the payment terms are framed in the contract when the payment must be made to the contractor and what percentage of money to be released. It is further discussed among the contractor and owner and billing break up is agreed. Based on which the contractor gets his money on completion of the obligations

Always the payment done by the owner to the contractor is safeguarded by an agreed project completion schedule with starting date or effective date of the contract and completion date of the contract. Theses two mile stones are most important and all the other intermittent activities can be adjusted to achieve the final date. The schedule thus prepared is called project schedule and being followed by every one of the project to achieve the final date of completion in a successful way.

In the contract agreed between the owner and the contractor it is very clearly mentioned the liquidated damages not in form of penalty to be paid by the contractor to the owner in case if the contract is not fulfilled as agreed. However the penalty is applicable only it is legally proved by the owner that the obligations mentioned in the contract are not properly carried out. Normally in power projects the liquidated damages are imposed for the performance of the equipments supplied by the contractor in terms of heat rate to be met by the contractor along with auxiliary power consumption. Another type of liquidated damage is for the delay in completion of the project due to the fault of the contractors .

There is always a cap agreed and mentioned  in the contract for the delay and performance in terms of money which is prefixed while siging the contract