INSIGHTS: Articles

Ten Best Practices for Negotiating EPC Contracts

By Judah Lifschitz and Daniel A. Kapner

The most skilled and successful contract negotiators achieve results not simply by communicating effectively and understanding the dynamics of negotiations. Rather, they arrive at the negotiation table fully prepared and take objective and measurable steps to maximize their negotiating position. 

Especially in the context of engineering, procurement and construction (EPC) contract negotiations—where projects are large, complex, and involve numerous and significant risks—achieving optimal results requires a well-prepared and well-executed game plan. 

There are two fundamental certainties in contract negotiations. Each party wants a good deal, and each party wants to shift as much risk as possible to the other side. The contractor wants to maximize its profit, receive payment fully and on time, and avoid key risks such as delays. The owner is looking to get a quality project at the lowest reasonable cost, in a timely fashion and within budget. Because their fundamental self-interests compete, an EPC contractor and an owner will maximize their positions by arriving at the negotiation table with a clear definition of the reasonable goals and objectives needed to be achieved and a comprehensive understanding of the project risks, strengths and weaknesses of each party, and the legal mechanisms by which an EPC contract distributes risk among the contracting parties.  

The starting point for any contract negotiation is early planning and due diligence. After producing a detailed checklist, one should identify the contract provisions that will best serve its interests and develop a clear strategy for how to negotiate their inclusion.  

Because projects and contracts differ, project participants should avoid the somewhat natural tendency to rely too heavily on a form contract or past agreement. They should develop language and strategies for negotiating important provisions that may provoke debate, such as the EPC contractor’s standard of performance, payment terms, changes, delay damages and consequential damages. A party that enters into negotiations without having prepared will be at a significant disadvantage.

In addition to early planning and due diligence, a contracting party should consider the following.

  1. Control the document. The party that prepares and revises the drafts has an advantage. Words should be selected carefully and thoughtfully. A party that drafts the language has abundant advantage over a party that merely comments on the language.
  2. Select the most appropriate contracting model. It is important to thoughtfully select an appropriate EPC contracting model (e.g., whether or not to “wrap”) and the appropriate pricing model (e.g., fixed, firm or target pricing).
  3. Establish a realistic budget. Disputes frequently arise because the budget was unrealistic. If a contractor underestimates its cost or an owner underestimates the budget, the likelihood of disputes increases dramatically.
  4. Establish an achievable schedule. The project schedule must be realistic and achievable. EPC contracts that include overly aggressive and unachievable schedules are destined for trouble.  
  5. Vet project teams. The quality of the team members cannot be overlooked as a factor affecting the success of a project. Disputes often arise because of interpersonal conflicts, ineffective management skills, divisive personalities and poor communication practices. Thus, it is in each contracting party’s interest to identify and agree on their respective project teams before the project commences.
  6. Define the scope and division of responsibilities. There must be a clear definition of the scope of work and a clear matrix of the division of responsibilities. Hazy descriptions of scope and undefined divisions of responsibility are sure to result in added cost and project delays.
  7. Identify technology risks/mitigation. EPC projects involve complex systems and equipment. Each EPC contract participant should identify any technology risks associated with the project and ensure that strategies for mitigating or managing those risks are reflected in the contract. 
  8. Know the regulatory requirements and restrictions. It is critical that the contracting parties identify and understand applicable governmental and regulatory requirements and develop a compliance program. 
  9. Obtain financial, performance and security guarantees. The contracting parties should ensure that the content of any guarantees (e.g., parent guarantees, performance and payment bonds, lien waivers or letters of credit) are negotiated and agreed to upfront. The sufficiency and validity of these instruments is important and should be finalized as a part of any EPC contract.  
  10. Plan for the unexpected. There is no such thing as a negotiation without surprise. The more preparation and due diligence performed, the better the result. It’s that simple. 

Judah Lifschitz is principal and co-president of Shapiro, Lifschitz & Schram, P.C., Washington, D.C. For more information, email Daniel A. Kapner is a member of the Shapiro, Lifschitz & Schram’s construction law, litigation and trial, and power and energy groups.

This article originally appeared in the October 2015 issue of Construction Executive magazine.