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PROJECT MANAGEMENT
How to Get the Most Out
of EPC Contracts
Engineering, procurement, and construction (EPC) contracts are agreements in
which a contractor is given major project responsibilities under a single contract
established with an owner or developer. A significant level of risk transfer characterizes
these deals. This article will help you decide if an EPC contract is right for your project,
and if so, how best to manage the details.
Ryan Cross
W
ith long material lead times and
a persistent construction labor
shortage that is impacting the
utility industry, some power project developers
and owners are turning to engineering,
procurement, and construction
(EPC) contracts-which transfer some (if
not all) design and construction risk to a
contractor-as a solution.
For those looking to reduce cost overruns
and project delays, EPC contracts
may seem like a cure-all: simply demand
X, Y, and Z by a target date; set a few
project milestones; and leave the rest
to a third-party. Yet, many are deploying
them hastily, with limited foresight and
scant experience-a move that can jeopardize
partnerships and cause the very
same cost overruns developers and owners
seek to avoid.
In what follows, I'll outline key reasons
why developers or owners might want to
leverage an EPC contract, a few guiding
principles that lead to successful EPC arrangements,
and other contract types that
power industry players should consider.
When an EPC Contract Makes the
Most Sense
In an EPC contract, the contractor typically
assumes risks associated with design,
procurement,
including
workplace
and
accidents,
construction,
labor
and material shortages, critical schedule
milestones, and other factors that can
impede project success. The tradeoff
is that the developer also delegates, or
turns over authority of,
decisions and cannot make wholesale
changes to a project without amending
the original contract (through what are
called change orders). The cost of those
change orders is often higher than if
they were included in the original project
scope, due to the time and effort to rework
or replace completed work.
With a few caveats, this can be an
attractive prospect, especially for developers
who lack the financial brawn to
shoulder unexpected expenses or the internal
expertise to see a project through
to completion-a situation in which giving
up some oversight is actually a wise
decision. The cost certainty this model
can provide also allows developers
to lock in financing and negotiate the
contract's payment schedule, thus enabling
them to manage their cash flows
throughout the project.
Another common use case is a utility
interconnect involving a third-party independent
power producer. For instance,
let's say you're a transmission owner
building high-voltage transmission lines
for a large solar farm on a strict deadline.
If missing that deadline results in steep
financial repercussions, you can draw up
an EPC contract that requires completion
by a certain date and shifts responsibility
for late fees to the contractor.
How to Successfully Manage an EPC
Contract Project
Once developers have decided on an
EPC contract, they should consider the
following rules of thumb to effectively
collaborate with their contractors and
streamline project completion.
Reduce Your Level of Engagement.
critical project
Developers shouldn't expect an EPCbased
project to operate the same way
as other projects on their dockets. If
they maintain a similar level of involvement,
they'll have to draft change orders
for every alteration, which can run
up expenses and cause project delays.
Developers should instead capitalize on
the benefits of an EPC contract, namely,
a partial hands-off approach that can
save them time, labor, and resources on
a looming deadline.
Developers may also consider investing
in the development of design or construction
standards that can be provided
to EPC contractors prior to contract negotiations.
These standards not only
give the developer peace of mind that a
project will be designed and constructed
as they intend, but they can also help
the developer limit their involvement
throughout the design process, since
they will have already provided the appropriate
direction.
Use EPC Contracts to Mitigate
Risk-Not Transfer All of It. While it
may sound great on paper to shift all project
risk to the contractor, this approach
comes with a substantial premium.
That's because a contractor must factor
in all known and unknown contingencies-what
lies beneath the project site,
for example, or worse, the possibility of
another pandemic-and will price those
factors into an EPC contract accordingly.
To strike better deals, developers
should consider shouldering some responsibility
for unforeseen circumstances
that are outside of contractors' control.
For example, a developer may consider
negotiating into the contract a price for
certain materials (steel, copper, etc.) if
there is a substantial change in the quantities
required. This can give a contractor reassurance
that, if there is a change, they
will be able to recoup the cost of the ad1.
What is a cost-plus contract? Courtesy: Actalent
28
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