Engineering, Procurement & Construction Contracts
The infrastructure works today needs amalgamation of various technical fields. This in turn have a complex situation where a Project may be dependent on various factors such as investigations, analyses, buying of the materials and on field executions in various engineering fields namely Civil, Mechanical, Electrical and Instrumentation.
In such a scenario getting the vendor, supplier and expert contractors needs an enormous co-ordination effort. Also, issue and management of many numbers of contract, purchase orders, material supply orders etc., also a take a lot of time and effort which will influence the schedule and quality of the Projects.
The EPC Contract concept helps in such complex projects, so that one contractor takes care of all the co-ordination and expert sub-contracting, vendor and supply activities and completion/commissioning of the project. So, the Promoter or the Employer can concentrate more on the management of one EPC contractor rather than managing many contractors and vendors or suppliers’ services needed for the execution and completion of the Projects.
EPC contract -Description
The letters EPC stands for Engineering, Procurement and Construction. The EPC Contractor in totality need to take care of Engineering requirements with all the detailed design, drawing needed for the project and takes care of Purchase of material, equipment or specialized suppliers or vendors needed for the project. Also takes care of all the construction and execution works as needed in all the field of engineering required for the project such Civil, Mechanical, Electrical etc., and specialized sub-contractors as needed for the execution works. So, it is important that the EPC contract get all the technical, commercial, and legal terms correct in the one contract which takes care of all the activities under Engineering, Procurement and Construction.
Single point Responsibility
The EPC contractor is responsible for all the works of the project and hence will be the single point responsibility for all the contract works and transaction to the promoter/ employer. The EPC contractor may or will subcontract and engage other contractor, however the EPC contractor is responsible and accountable for the completion of the works as agreed and will be single point responsibility to the employer for the work of sub-contractors, vendor and suppliers engaged by the EPC contractor to complete the project.
Milestone basis Progress
Since the EPC contractor is engaged from the start to completion of the project, the total contract activities can be segregated into various set of activities and can be linked to a particular milestone & that milestone can be linked to a major work under the EPC contract. The contractor’s billing or payment will be based on the milestone completion basis for better control over the project.
The contractor payment terms are very specific and fixed in EPC contracts. The payments are linked to the Milestone performance of the EPC contractor and a kind of retention on bill payments till the contractor execute the work perfectly helps in better supervision and control over the Contractor.
Fixed Time Schedule
The EPC contract will have a prescribed time limit for overall completion of the project and the EPC contractor must adhere to this time limit to get the payment for their financial requirement. Also, the contractor may face penalty such as Liquidated Damages (LD) and other deduction if they do not meet the agreed time limit under the Contract.
High degree of Control
The employer will have a high degree of control over the project in EPC contract due to single point of responsibility. The EPC contractor handles completion/commissioning of the project and the employer will have only to deal with the EPC contractor with a well-defined commercial and legal conditions suitably drafted in an EPC contract.
Limited Risk for the Employer
Most of the EPC contracts offered by the employer, based on experience and the performance bank guarantee by the EPC contractor, reducing the risk of the employer. Also, the contract terms will be very specific with the contractor’s scope of work. The linking of roles and responsibility of the contractor with financial terms reduces the risk of the employer in case of a non-performance by the EPC contractor.
Free from Cost variation
All the EPC contracts are free from cost variation unless specifically mentioned in the contract, as the EPC contract is offered at a fixed price, free from market price variation agreed mutually by both the contractor and the employer. Hence the price is agreed by the EPC contractor after much analyses of the risks involved.
High degree of risk to the contractor
In the EPC module the contractor will have a high risk because they will be solely be responsible for all the aspects and activities of the project. The onus is on the contractor to manage and execute the works arranging all the requisite for the satisfactory completion of the work in agreed terms and conditions.
In the long term and complex contracts of infrastructure and construction industry, the EPC contract play a vital role in the contract management. The person related to these industries to understand about the EPC contract and implication for the same. FIDIC covers EPC form of contract. In India, the concept of EPC contracts is gaining popularity among the private and public sector works and will continue to gain popularity in days to come.