PROJECT FINANCE- EPC CONTRACTS

EPC CONTRACTS - ENGINEERING, PROCUREMENT AND CONSTRUCTION CONTRACTS

EPC Contracts are project finance documents that establish a contractual framework between owner and contractor that transfers all design and construction risk to the contractor. Their efficacy in managing risk makes EPC Contracts the construction contract of choice for project financings.

Overview of EPC Contracts

Engineering, Procurement, and Construction Contracts or EPC Contracts are construction contracts that enjoy almost universal inclusion in project finance documents, They have emerged as the construction contract of choice in project financings that involve major international development projects. The increasing popularity of EPC Contracts is not due to the turnkey delivery method, which is the reason most often cited, although turnkey delivery is an appealing feature in EPC Contracts.

While much of the discussion focuses on the turnkey delivery of completed construction projects, attributing their unparalleled acceptance to turnkey delivery is a simplistic view of EPC Contracts and, more broadly, project finance documentation.  The biggest reason for their overwhelming acceptance is the transfer, to the extent contractually possible, of all of the design, engineering, and construction risk from the project company who owns the project, to the EPC contractor that builds it.

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 all the way through the construction phase. Specifically, they make the contractor responsible for all design, engineering, procurement, construction, commissioning and handover activities of the project, 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.

Advantages and Disadvantages of EPC Contracts

For the project company, the most important advantage gained from using EPC Contracts is the almost total assignment of design and construction risk to the EPC contractor.

Another significant advantage of EPC contracts is that it establishes a structure whereby the project company only contracts with and engages only one contractor, who in turn manages all the relationships with subcontractors. This assignment of work makes managing the project considerably easier for the project sponsor. Project sponsors oversee the project and evaluate progress and performance as the contractor carries out the project.

EPC Contracts also centralize all of the control over the design, development and construction in the hands of the EPC contractor. This contract arrangement is an advantage to contractors who have more control over the design, product selections and the selection of subcontractors and suppliers. So, while EPC Contracts do assign more risk with the coordination of the design, EPC contractors are in a position to exercise a great deal of control to efficiently lower construction costs.

While principals can benefit from the single point of responsibility for the delivery of the project, they do lose involvement with the design process, adding potential risk if the project’s design is crucial. Principals should ensure they carefully mark out the project’s milestones to avoid lifecycle costs and scope changes being easily overlooked. Also, as the contractor performs the design and construction, the usual checks and balances present during such projects do not exist for the owner.

EPC Contracts Key Takeaways

Allow yourself to daydream for a minute and picture yourself at the Urban Land Institute annual gala accepting the award for the best project financing deal of the year. They compare your deal to the most successful project financings ever. None of those successful deals began with construction cost overruns, a blown construction schedule or construction defects. The importance of EPC Contracts to successful project financings becomes clear in that simple vision.

In Project Finance Documents we provided a great deal of information about project documentation along with an outline summarizing how EPC Contracts and other project documents serve specific standalone roles. But they are also integrated into the complex package that comprises the project documentation. As the preferred construction contract, EPC Contracts are critical to the success of countless large-scale international construction projects. They are also a very important part of integrated project documentation.

EPC Contracts have emerged as the construction contract of choice for major international development projects and project financings. Under EPC Contracts, the project company enters into the contract with the EPC contractor. The primary purpose of using EPC contracts for major construction projects is to transfer essentially all of the project design and construction risk from the project owner to the EPC contractor. Because the primary reason for using EPC Contracts is to affect the transfer of as much risk as is practicable from the owner to the contractor, they severely limit the scope and circumstances under which contractors can make claims for additional time and money. The contractor performs all of the project design work the specifies what is to be built, including the standards which must be achieved and the performance requirements of the finished project in a separate document.

EPC Contracts and rest of the project finance documents are also the first part of your deal that lenders see, so they have a tremendous bearing on the approval of project finance loans. Changoo & Associates partner funds draw on decades of project finance expertise to conceive and create the project documentation for your deal as part of our integrated project finance services.

That we offer integrated project finance services should convince you that Changoo & Associates Funding is the strategic partner you need to make your development projects successful. We provide unparalleled project finance solutions ranging from simple project loan placement to complex mezzanine financing structures, and international construction and development consulting services for project financings ranging from $20 million to over $2 billion worldwide.

Contact us at [email protected]. We can start putting your project financing deal together today,