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.
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.
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