EPC contract
An EPC contract is an engineering, procurement and construction agreement under which a contractor takes responsibility for design, procurement, construction, commissioning and handover of a facility, often on a lump-sum turnkey basis, to the project owner. In project finance, the owner is typically a project company formed as an SPV. The World Bank PPP Reference Guide describes the project company as contracting with firms to manage design and construction, usually known as an Engineering, Procurement and Construction, or EPC, contract, and operations and maintenance under a separate O&M contract. FIDIC publishes Conditions of Contract for EPC/Turnkey Projects, known as the Silver Book, a standard form for turnkey EPC contracting.
EPC contract use on bank project finance desks
On PF desks the EPC contract is the primary construction-risk document in the project suite. Credit analysis focuses on fixed price, scheduled completion date, liquidated damages for delay or underperformance, performance security, interface with offtake and supply contracts, and the contractor's balance-sheet strength. IFC notes that project companies hedge construction risk primarily by using fixed-price, certain-date construction contracts, including turnkey contracts, with built-in provisions for liquidated damages if the contractor fails to perform and bonuses for better than expected performance. Because lenders cannot control the construction process, they seldom assume completion risk, which usually remains with the project company, its sponsors, contractors, equipment suppliers and insurers.
Mechanics and risk allocation
Under a classic turnkey EPC structure the contractor accepts single-point responsibility for delivering a working facility that meets agreed performance tests. Price certainty and time certainty are the commercial objectives: variation rights, unforeseeable site conditions, and change-in-law mechanics then become the main negotiation points because each can reopen cost and schedule. Drawdowns under the senior facilities are commonly conditioned on independent engineer certificates confirming progress against the EPC milestones. Completion support from sponsors, and instruments such as performance bonds, sit beside the EPC to cover residual delivery risk. Achievement of commercial operation under the offtake agreement or concession usually depends on successful EPC tests and taking-over.
Boundaries
An EPC contract is not the concession or offtake agreement, and it is not a completion guarantee from sponsors, although sponsors often backstop EPC shortfalls in limited recourse structures. It ends, for construction purposes, when taking-over and performance tests are satisfied; long-term operating risk then moves to the O&M regime.