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However, engineering, procurement and construction (“EPC”) remains the preferred form of procurement for faclities.
Under an EPC structure, the contractor is responsible for the design, construction and completion of the facility for a fixed contract price and by a fixed time for completion. In other words, on completion the owner is simply required to ‘turn a key’ to start operating the facility, which should satisfy the output requirements as set out in the contract.
EPC contracts are typically used because they are ‘bankable’. Indeed, transferring most of the construction risk to the contractor means that, in a properly drafted EPC contract, the contractor should have limited ability to bring claims for extensions of time and additional cost.
Such certainty is highly desirable from a lender’s perspective as this means that the facility should be completed on time and within budget. If this is not the case, the consequences of time and cost escalations should be borne by the contractor (who is likely to be liable for performance and delay liquidated damages) and not the owner (i.e. the borrower).
Although ‘bankability’ will vary depending on the specific nature of the facility, the EPC contract will typically be required to address the issues listed below.
Other key facility documents
The facility needs to be looked at holistically and there are various other documents, in addition to the EPC contract, usually need to be in place. These documents may include:
It is therefore imperative that the EPC contract is not drafted in isolation. Any EPC contract should, contain specific drafting to address the interface between the EPC contract and the other project documents.
Take home comments
Whilst there are considerable advantages to using an EPC contract (particularly on account of the contractor’s single point responsibility), EPC contracting tends to be an expensive method for the construction phase of procurement as the construction risks which the contractor accepts (which may or may not materialize) are inevitably priced and contingencies are built into the contract price. On the other hand, the owner should not be required to make significant payments to third parties (such as designers) if EPC procurement is adopted on the basis that the contractor offers a convenient ‘one stop shop’.
A sensible approach to risk should be adopted and specific risks should be accepted by the party best placed to manage a risk. For example, the owner may be accept the risk of ground conditions if it has undertaken a detailed site investigation report but, alternatively, the owner may be happy to pass this risk to the contractor (and accept the premium charged by the contractor) if the ground conditions cannot be easily determined.
EPC contracting remains a tried and tested method of delivering facilities, which is likely to increasingly be the case for the foreseeable future.
Al Tamimi & Company’s Construction & Infrastructure team regularly advises on EPC contracts and all other construction related documentation. For further information please contact, Scott Lambert (email@example.com) or Euan Lloyd (firstname.lastname@example.org).
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