Introduction

Working on an EPC Contracts represents higher risks for Contractors. They have to face all the circumstances as-they-occur during the Project execution, with few exceptions, and still achieve the expected outcome or intended purpose. The freedom and opportunity to optimize the Project, can (partially) offset the higher risk exposure for the EPC Contractor.

Important aspects for EPC Contracts

In a previous post, we have talked about what makes an EPC: “EPC or not EPC, that’s the question”

The following are important aspects in an EPC Contract to enable EPC optimization:

  • The specification should only be functional with a maximum of 50 to 100 pages and, ideally, far less.
  • The Employer/Owner should only describe what is expected as outcome from the Project after the Contract has been successfully executed.
  • The functional specification should not be prescriptive for methodology, specific supplies or detailed characteristics when not directly linked to the expected outcome.
  • The Lender Technical Adviser (LTA) and Employer’s/Owner’s Engineer should avoid to interfere, in a too detailed manner, in the project.

Freedom of EPC Contractor to optimize

With the above aspects and approach, the EPC Contractor has the freedom to optimize the project while still remaining responsible for reaching the overall goal and the expected outcome(s).

Often, Engineering companies, working as LTA or Owner’s Engineers, are not so familiar with the EPC philosophy or would like to have a greater role in overseeing the project. Still, they must accept that, in an EPC Contract, the most influential engineering role is embedded within the EPC Contractor’s organization (often fulfilled by a designated engineering subcontractor) and not as the Owner’s engineer or the LTA.

The Owner’s representative is sometimes reluctant to accept substantial EPC optimization, anticipating objections form the Owner or the Lenders. Obviously, the Owner cannot have both a maximum risk transfer and no proper transfer of responsibility, in this case to optimize the Project.

Conclusion

EPC Contracts are an excellent way of working on certain projects. The parties should do the necessary efforts to make them work in an efficient and balanced way. The Contractor has greater responsibilities but also the right to optimize the EPC scope of the Project.

The freedom to optimize should equally be available to a designated subcontractor of the EPC Contractor (e.g. the technology provider) when subcontract conditions are substantially back-to-back with the main contract.

You can find other articles on EPC on this blog by clicking here.

AfiTAC.com is the blog on commercial and contractual subjects for the Project Businesses (Construction, Infrastructure, Oil & Gas, Power & Renewable, Water Supply & Sanitation, etc). Its objective is to stimulate reflection, learning, convergence to balanced contracts and positive dispute resolution. You can subscribe to our newsletter by writing to “newsletter@afitac.com”. You can also connect to our LinkedIn page. Engagement with the readers is what keeps us going. So, don’t hesitate to exchange with us by commenting here below, liking our publications on LinkedIn and writing to us “info@afitac.com”.


Jan Bouckaert

Jan Bouckaert is a FIDIC Certified Adjudicator (President's list) with 25 years of worldwide experience in negotiation of complex construction, renewable energy, power and infrastructure projects. He is also specialized in contract management, project controls and alternative dispute resolution. During Jan’s career path, he lived in France, Belgium, Egypt, India and Portugal and worked for GE Renewable Energy, Alstom Hydro, Besix/Six Construct. He is a Civil Engineer from the University of Leuven (Belgium) and has an MBA from ISEG (Portugal). He speaks fluently English, French, Portuguese and Dutch. Jan is the founder of AfiTaC, a company giving advice on international tenders and contracts., and Managing Director of Proove SAS. Be welcome to connect on LinkedIn: https://www.linkedin.com/in/afitac/

4 Comments

Liaqat hayat · 9 August 2019 at 16 h 39 min

I have similar experience with EPC contracts provided things have not been left ambiguous in employer’s requirement description at tender stage nor after review of design within three months after commencing of work at site so that all non-clarities are sorted out from contractual angle

"EPC or not EPC, that's the question" - AfiTaC.com · 18 February 2019 at 10 h 29 min

[…] The Contractor has the possibility to optimize the project as long as the results are in compliance with the functional specifications and they achieve the performance guarantees. For more information about the freedom to optimize in an EPC Contract, click here. […]

Rehabilitation and EPC philosophy, are they compatible? - AfiTaC.com · 24 February 2019 at 21 h 29 min

[…] received a very interesting question on a recent article regarding EPC. “Can we apply the EPC philosophy on rehabilitation projects of, for example, power […]

Réhabilitation et philosophie EPC, sont-elles compatibles ? - AfiTaC.com · 25 February 2019 at 18 h 32 min

[…] reçu une question très intéressante sur un article récent concernant les contrats EPC. “Peut-on appliquer la philosophie EPC aux projets de réhabilitation, par exemple de […]

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