An EPC (Engineering, Procurement, and Construction) Contract in the construction industry is a contractual agreement between a project owner and the contractor. The contractual framework in an EPC contract enables the owner to transfer the complete risk of design, procurement process, and construction to the contractor.

The contractor is solely responsible for completing the entire project, bear the risk of delays, additional costs, site preparation, electrical and instrumentation and handing it over to the owner in a turnkey condition. This is why EPC contracts are sometimes called turnkey construction contracts or simply turnkey contracts.

EPC Contract Meaning

Before we dive deep into EPC contracts, let's start with the basics. EPC is an acronym that stands for Engineering, Procurement, and Construction. The term EPC represents almost the entire project lifecycle. The contractor is fully responsible for the whole project management services, from designing to procurement and then executing the construction work.

An EPC Contract is a way to mitigate risks without getting involved much in the project management. EPC contracts are designed deliberately to shift the construction risk to the contractor. The contractor is responsible for delivering all project operations from the design phase to the construction phase.

As part of the EPC contracting agreement, the EPC contractor or EPC company undertakes three important components of a project:

• Engineering & Design - where it carries out the detailed engineering design of the complete facility

• Procurement - where the EPC firm procures all the necessary materials and equipment to execute the design

• Construct - where the contractor builds the facility and delivers the facility in a ready-to-commission state to the project owner or sponsors.

The EPC phase of a project is often known as the execution phase, which comes after the feasibility study and FEED (Front End Engineering Design) study phase. A FEED study encompasses the basic engineering design study, which covers the different stages and components of a project. A FEED study report is necessary for the tender and bidding stage when the project owner invites tenders from EPC contractors.

An EPC Contract is a risk mitigation and management tool in the form of a project document. In fact, EPC Contracts were specifically conceived to transfer risk to the contractor. They make the contractor responsible for all project activities from the design phase through the construction phase. 

Specifically, they make the contractor responsible for all design, engineering, procurement, construction, commissioning, and handover once project is completed, leaving the owner with no responsibilities save for turning the key at project delivery.

Another reason for the widespread use and acceptance of EPC Contracts is that they are strongly preferred by project finance lenders. Project lenders are much more comfortable providing project financing when construction contracts have fixed prices and required dates for completion. Less risk to the lender means the likelihood of your project finance loan being approved increases substantially.

How much control does an owner have in an EPC project?

The project owner or project sponsor generally has little to no control over the EPC contractor once the contract is signed. However, the owner can have a presence in the project by appointing a PMT (Project Management Team) or PMC (Project Management Consultant). The PMT can have a project manager or construction manager oversee the project proceeds as per the scope of work and the contract being followed. The company that conducts the feasibility study, and FEED study, and prepares the design and drawing on behalf of the owner acts as the PMT.

Engineering or designing part in an EPC contract

The Design Duties of EPC Contractors are:

• Basic Engineering

• Detailed Engineering

• Detailed Design

• Planning

• Construction Engineering

• Civil Engineering

Procurement part in an EPC contract

The responsibilities in Procurement are:

• Logistics

• Transportation

• Purchasing

• Invoicing

• Receiving the materials

Construction part in an EPC Contract

The functions involved in the construction of a project are as follows:

• An EPC Contractor handles the design and construction management

• Electrical Installation

• Water Supply

• Sanitation and Drainage Work

• Carving cupboards and showcases

What does an EPC Contract include?

The EPC Contract ensures that the contractor is responsible for the entire project. The epc contract includes the following:

Design Director

A design director is to be hired within 20 days from the commencement of the contract and shall be responsible for surveys, data collection, investigations, and preparing preliminary designs for the projects based on the constructability. It is done by the project authority, which shall choose from the panel of three qualified firms proposed.

Safety Consultant

A safety consultant is hired by the Project Authority from the panel of three qualified firms proposed. One shall be chosen as the safety consultant. Safety Consultant performs safety audits and ensures highest standards during the workflow of designing phase.

Proof Consultant

Proof check consultant develops systems along with the design director based on the complexity of the project. These systems will reduce the time and within budget required for final designs and construction drawings. The proof consultant will also check detailed calculations, design-build, and project drawings that the design director has approved.

Authority Engineer

The authority engineer performs the roles and responsibilities agreed upon in the contract and is usually hired within 15 days of the date of the EPC contract.

The authority engineer has full access to all parts of the site, which includes materials procured and used, inspecting the production, manufacturing, monitoring the significant changes in the construction site, testing the quality of the materials used.

Advantages of an EPC contract

By choosing an EPC contractor, the Project owner has the following advantages:

1.    A Single Point of Responsibility
2.    Fixed Contract Price
3.    Fixed Completion Date
4.    Can Set a Performance Specification
5.    Performance Guarantee 
6.    Security
7.    Caps on Liability
8.    Has Rights to Suspend the Project
9.    Flexibility in Ordering Variations
10.    Force Majeure

A Single Point of Responsibility

The EPC contractors are responsible for all spheres of construction. From designing, procuring, and constructing to commissioning and handing over the polished project. Suppose anything goes wrong during the construction of the project. In that case, the EPC contractors must take care of the liabilities. There are Construction Laws that help in the risk mitigation process for complex projects. Construction law can also release the tensions related to project finance.

Fixed Contract Price

The EPC contractors should fix the price of their service. Any cost overrun or savings will be reflected in the contractor’s account.

Fixed Completion Date

EPC Contracts must be completed before the guaranteed deadline. If the contractors fail to meet the deadline, they are predisposed to pay for Delay Liquidated Damages (DLD). However, if the project owner interferes with the construction process, the contractors can claim an extension of time.

Performance Specifications

The project owner can assign detailed specifications to the construction company. It enlists all the criteria the contractor needs to meet. Nevertheless, the construction company can decide how the standards are met.

Performance Guarantee

The EPC Contracts will contain certain Performance Specifications to be met by the contractors. In the event of project failure, they’re liable for Performance Liquidated Damages (PLD).

Security

It is usual for construction contracts to include performance security. It protects the project owners from potential financial losses. The security can be in advance payment, assurance of the parent company, and bank guarantee.

Caps on Liability

The majority of the EPC Contractors would only enter the contract with limited liability. Generally, an overall liability cap of a hundred percent of the contract fee is practiced.

Rights to suspend the contract

Generally, the project company has the right to suspend the construction contract.

Flexibility in Ordering Variations

The project owner usually has the right to order variations to the construction contract. 

Force Majeure

EPC Contracts can face severe setbacks from Force Majeure events such as earthquakes, hurricanes, epidemics, and wars. In such instances, both parties can excuse themselves from fulfilling their obligations.

Limitations of an EPC contract

Like any other contract, an EPC Contract also has some limitations, albeit fewer in number. The disadvantages of contracting a Turnkey Contractor are:

•    EPC Projects are Expensive
•    Owners will have less control over the project

EPC projects are expensive

Construction projects under an EPC contract can be costly. This is due to the high risk faced by the construction contractor. This high cost will aid the contractor in absorbing the risk. In short, a high contract fee is a form of risk allocation. So, the project's lender or sponsor should critically analyze the risks before finalizing any tenders.

Owners have less control over the project

The owners of an EPC Project are essentially transferring the power and authority to their contractors. Any interference by the project company can cause costly delays. Also, the intervention by the Owners will help the contracts battle claims against delay damages.

EPC in Various Industries

An EPC contract is not limited to the construction industry alone. It is widely used in diverse industries, including power generation, oil and gas, renewable energy, petrochemicals, and more. In each case, the EPC contract acts as the backbone of project management, guaranteeing the successful delivery of complex undertakings.

List of notable EPC companies

1.    Petrofac (Oil and Gas Sector)

2.    Samsung Engineering (General Contracting)

3.    Hyundai Heavy Industry (Marine Engineering)

4.    TATA PROJECTS LTD (General Contracting)

5.    National Petroleum Construction Company (Oil and Gas Sector)

Conclusion

EPC contracts can get expensive, and the project owner has less control over the construction. But it is still one of the best contract types for awarding projects. So, governments and large-cap companies prefer an EPC Contract over traditional ones for their construction requirements.

Discover New Opportunities with Our Global Project Tracker

Are you a general contractor, construction manager, project manager, or construction management firm seeking your next big project? Our Global Project Tracker offers access to 200,000+ projects across construction, infrastructure, EV, energy, and power sectors. Stay ahead with insights into current developments and find the perfect match for your portfolio.

Explore Opportunities Now!