An EPC contract is short for engineering, procurement, and construction. This is a contract arrangement commonly used in the construction industry. The bottom line of such a contract is that the general (or head) contractor basically agrees to handle the entire process for a set price. Of course, the contract can still be detailed and specific, but the contractor is generally liable for the installation, obtaining the needed materials, and building out the entire project.
Contractor Has All Risk:
This is certainly a very popular type of contract for the owner of the project. After all, the risk is essentially transferred to the general contractor. This includes responsibility for the design and budget. Once the price is agreed upon, the contractor really has very little recourse to ask for additional time and money.
Having said that, it should be noted that not ALL of the risk is transferred over to the general contractor. They would be entitled to recovery for things like employer default, variations and changes the employer or owner requests, and in the case of a force majeure event.
Higher Prices, Recovery Options:
In order for the contractor to accept a higher amount of risk, they generally demand a higher price to do the work. In fact, the price can be significantly higher. This may also be why EPC contracts are used for government commissioned work, although they are gaining in popularity worldwide. The higher prices also mean the employer will need to have some assurances of their ability to recover damages, should things go wrong.
One of these recovery options is known as liquidated damages. This can be employed if there are time delays and poor performance from the general contractor. In many contracts, the general contractor will insist on the inclusion of a liquidated damages clause, to limit the amount of possible recovery and construction claims in specific circumstances.
Usage Of Subcontracts:
Given the fact that the general contractor will essentially be responsible for completing the entire project, they are likely to employ subcontractors. In most cases, this will mean attempting to enter into these contractual agreements on nearly the same terms as their original contract. The effect is to transfer as much of the liability as possible.
The one element of risk that simply cannot be avoided, however, is how a delay or breach will affect the overall project. If one subcontractor ends up taking much longer or doing a poor job, this could impede the progress of additional subcontractors and slow down the overall project.
Handover & Testing:
Since many of these EPC contracts are used for complicated government projects, there may be an element of testing written in the contract. Only after the project has passed these tests and standards will the project be handed over to the ultimate owner. There may even be additional tests after the project has been handed over to ensure its continued successful operation.
Conclusion:
An EPC contract is a type of construction project arrangement that offers a number of unique conditions and advantages. The owner has the convenience of only dealing with a single company and point of contact, who is responsible for handling everything. Contractors also have the advantage of obtaining higher compensation in return for the added responsibility. Before using an EPC contract, contact the professional attorneys at C&A for your FREE consultation.
