Three Things Power & Energy Companies Should Know about EPC Contracts

Any business that has performed a major construction project knows just how time-intensive it can be. There are hundreds of choices to be made throughout the process, from deciding what materials to use and which vendors to contract with to technical decisions involving construction and engineering specifications. For many, the project would be best served by establishing a framework that shifts the design, engineering, and construction responsibilities—and liability—onto a single, qualified entity.

            Now consider the construction of a power plant. Power and energy (P&E) projects are tremendously complex. Not only must the plant be built in accordance with certain quality standards, but the project also must meet various energy output requirements and emissions standards, and comply with governmental regulations. Given the immense complexities of constructing such projects, a contractual framework that provides a streamlined, turnkey solution has become advantageous for P&E companies. Such a solution exists in the form of the EPC contract.

            EPC contracts are agreements that provide the engineering, procurement, and construction of a project. They have become an industry standard agreement for the building of P&E plants. In essence, such agreements provide power and energy companies with a single point of responsibility—the EPC contractor—that manages all aspects of the project. They also define the relationship between the P&E company and the EPC contractor, spelling out such important details as timelines, liability, and remedies.

            If you want to learn more about EPC contracts, Judah Lifschitz and Daniel Kapner will be presenting a EUCI continuing education course entitled “EPC Contracts for Power and Energy Projects” on Jan. 27 and 28, 2015, at the Houston Marriott West Loop by the Galleria in Houston, Texas. For more details or to register, download the EUCI course brochure here or register online. In the meantime, the following are a few key takeaways about EPC contracts in the P&E space.

What are EPC contractor responsibilities?

While there is no such thing as a boilerplate EPC contract, in its most typical form, the EPC contract requires that the EPC contractor is responsible for:

• Engineering: The design of the entire power plant, including:
  
  • Initiation
  • Implementation
  • Planning and programming
  • Estimating and valuation
  • Design
• Procurement: The purchase, installation, performance, and warranty of all equipment, such as turbines, generators, and cooling towers
• Construction: The actual construction of the power plant, including:
  
  • Schedule
  • Quality assurance
  • Startup and commissioning
  • Warranty

Is there a single, standard EPC contract?

EPC contracts can take many forms, including the incorporation of variant structures and pricing models. The most encompassing structure—the one that places the most responsibility on the EPC contractor—is the “full wrap,” in which the plant owner tasks the EPC contractor with handling every aspect of engineering, procurement, and construction.

            In some instances, plant owners might wish to use an alternative to the “full wrap” structure. For example, if the plant owners already have in their possession some of the equipment to be installed in the facility—thereby eliminating the need for the EPC contractor to procure such equipment—adjustments to the EPC contract can be made to accommodate.

            Pricing structures can vary as well, depending on the needs of the plant owner. The most predictable pricing model for P&E companies is a fixed price, in which the EPC contractor is engaged for a single, fixed price for the entire scope of work. Alternatively, P&E companies might choose to go with a less predictable structure that provides for additional flexibility, such as a firm price model, in which the agreement specifies a fixed price for the project’s entire scope of work, yet contains room for adjustment for escalation should certain criteria be met. Additional pricing models beyond fixed and firm are possible as well.

What are some of the general provisions of an EPC contract?

EPC contracts are complex, multi-faceted documents that attempt to assign responsibilities and allocate risk accordingly to all parties. For projects as large in scale as power and energy facilities, contracts are lengthy, with dozens of provisions that parties must consider. Here are the main parts of an EPC contract. Note that the respective details of each provision are not exhaustive.

• EPC contractor obligations: Specifies what is required of the EPC contractor
• Standard of performance: Provides criteria regarding standards for equipment and labor
• Owner obligations: Specifies what is required of the plant owner, e.g., financing, payment, permits, cooperation, etc.
• Price and payment: Defines which price structure to employ and payment arrangement details
• Project time, schedule and completion: Details regarding target date, completion milestones, early completion bonuses, etc.
• Mechanical, substantial and final completion: Establishes criteria for “mechanical,” “substantial,” and “final” completion and specifies performance tests
• Delay and performance liquid damages: Defines the types of project delays and specifies liquid damages for failure to meet certain agreed-upon terms, including minimum performance guarantees
• Changes: Specifies the process whereby parties may request changes to the work and the responsibilities of all parties should a change occur
• Warranty: Specifies EPC contractor and OEM warranty obligations
• Disputes: Establishes a mechanism for dispute resolution arising under or relating to the EPC contract and requires the EPC contractor to continue work during the dispute resolution process
• Limitation of liability: Limits the liability of one party to the other
• Other remedy-granting clauses: Specifies other conditions in which parties would be owed certain remedies, e.g., suspension of work
• Suspension, termination, and default: Grants parties rights to suspend or terminate work and specifies consequences if either party defaults

As you can see, EPC contracts are highly complex, yet advantageous, agreements. While the time and cost to develop an EPC contract does add to the front end of the project, the downstream savings may more than make up for the initial investment, granted the power and energy company selects knowledgeable counsel to assist in designing the contract.

Have more questions about EPC contracts? Please reach out to Judah Lifschitz directly at lifschitz@slslaw.com.