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

Starting of project-introduction

Staring of a project-Introduction”

The process through which the expected final product is achieved successfully in terms of time and finance with the co ordination and effect of group of resources can be called as the implementation of the project. The project can vary from product to product depending on the production of the final product. Whatever the product produced at the end it require a standard procedure which we call as project implementation procedures. To conceive a project the accurate estimation of the finance and resources are most essential. The final user of the product in the project is normally called as the owner of the project. The resources required for completion of the projects are deployed either by one company or group of companies are called as contractors of the project. The co ordination between the owner and the contractors during the implementation of the project including either in supply of technical knowhow required for the project or validating the technology supplied either by the contractors or themselves are called as project consultants. These three parties form important roles in the implementations of the project. To carry out the works of individual parties they sure require some mechanism through which their companies earn money. Hence all the companies make their own estimates in achieving their goals without slipping their responsibilities and make profit for the company. It is quite obvious the success of the project not only depends upon the accurate estimate of the owner but also the correctness of the estimates of their working partners like contractors and consultants.       

Owners Estimate: The cost estimates of owners/project consultants/and contractors varyfrom every ones point of view.. The cost estimate of the owner is of normally on a macro basis. Based on the previous experience of the cost incurred in other projects of the same nature and capacity, is considered as basic element for the cost estimates ,taking in to considerations of the escalation factor as per index , duration when the old project was implemented and the present one. Any project can be compared with the human body. Like we have different parts of the body even project have various elements starting from conception till production of the  end product. From inception the feasibility study whether the project is viable in terms of profit and run on long run. Followed by financial and check up of required inputs followed by rough estimate of the project. Many of the projects stops at this stage due to various reasons like UN availability of required in puts. Further progressing projects continue with project work like process engineering/design and engineering .Supply chain management group forms and construction in continuation with testing and commissioning. Even though there are many activities in a project the construction activity plays an important role since it falls on the tail end of the project .Whichever losses and finance for the company is to be managed by the construction group hence its role in project is most important

Even though many micro activities are involve in completion of a project it is worth it to list here the major activities which forms the prime part of a project. It may be an industrial project or others the following steps need to be full filled
1. Feasibility study

2. General estimation of the project

3. Financial tie ups

4. Development of HR and required team to carry out his project

5. Scheduling of the project

6.Tie up  with process engineering company

7.Tie up with design and detailed engineering company

8.Find out major eligible equipment manufacturers

9 Development of infra structure activities

10 To start on site work

11.Testing and commissioning

These are the major heads of activities required to complete the project in macro level. The details of which i shall explain in some other post While a company decided to go ahead with a product the location of the factory wherein the product is produced plays a very vital role. To start with the place must be easily approachable. Connected with near by cities by road/water or air. The infra structure facilities like electricity to operate the plant at competitive cost /one or few of the raw materials required to produce the end product is available either there itself or in the nearby locality. Ample empty space required for the construction of the factory including the place for future expansion. Availability of local force while construction of the factory and for further maintenance of the factory. Availability of construction hiring equipments in the nearby towns. Even though the above cite facilities are very much necessary  ,leading financial institutions and Banks for transaction on day to day basis throughout the starting and till completion of the project are also most important matter to be considered.

                                           To name a project is common for the procedure to identify the  production end products. But in industry it is differentiated by the name of the end product. For Example   power production industries call this project as Power plant project.  Production of chemicals are called chemical plants.  Manufacture of  petrochemicals are called as petro chemical project.  Like  wise other products like cement ,steel, textile, IT are named with their name as projects.

                                           Thermal power plants are most essential need in growing countries to fulfil their power requirements. Mostly Thermal power plants are constructed where sufficient quantities of coal are available in the place itself or in the nearby vicinity where from it can be easily transported. Depending upon the availability of other commodities and inputs the location of the Thermal power plant is decided. Even though there are other sources of power production Thermal power plants are widely used considering the cost of coal is cheaper. Except for few countries the coal cost is very much comparable with other fuels like Diesel/Naphtha etc. In countries like India wherein petrochemical fuels are of scarcity they wholly depend upon thermal power plants. Otherwise the construction cost and maintenance of Thermal power plants over a period of time works out to be most efficient compared to Diesel and other fuels. Countries like China  had already constructed and operating the power plants more than 1000 MW, countries like India still operate with 650 MW maximum . In recent past few 800 MW Thermal plants are under construction. Owing to the large requirement of power up to 30 million MW in future India has plenty of opportunities or the power companies from India and other countries to involve themselves in the development of India