EPC Contract

EPC Contract

Drafts a turnkey EPC contract establishing rights, obligations, risk allocations, and technical requirements between a project owner and contractor for design, procurement, construction, testing, and commissioning of an industrial facility.

Prerequisites

Gather before drafting:

1. Project description — facility type, capacity, throughput specs, location
2. Party details — legal names, entity types, jurisdictions, addresses, authorized signatories
3. Governing documents — RFPs, term sheets, LOIs, precedent agreements
4. Pricing structure — lump-sum, GMP, cost-plus, or hybrid
5. Schedule — target milestones, NTP conditions, substantial/final completion dates
6. Performance requirements — output capacity, efficiency, emissions, availability guarantees
7. Jurisdiction — governing law, regulatory/permitting regime
8. Insurance requirements — owner's minimum coverage expectations

Contract Sections

Draft all 14 sections in order.

1. Recitals & Parties

• Owner: legal name, entity type, jurisdiction, address, tax ID, authorized rep
• Contractor: same; if JV/consortium — lead contractor, liability structure (joint & several or allocated)
• Recitals: owner's objectives, contractor qualifications, turnkey intent

2. Definitions

Define at minimum:

Term	Criteria
Substantial Completion	Work complete except punch list; testing passed; performance met; regulatory approvals obtained; O&M docs delivered
Final Completion	Punch list closed; all performance tests passed at guaranteed levels; reliability demo done; training complete; final documentation
Contract Price	Fixed amount, inclusions, adjustment mechanisms
Change Order	Written modification to scope, schedule, or price
Force Majeure	Natural disasters, war, epidemics, government action, non-party labor disputes
Defect	Non-conformance with specs, drawings, guarantees, or codes
Warranty Period	Commencement trigger and duration

Include project-specific technical terms referencing industry standards (ASME, IEEE, ISA).

3. Scope of Work

A. Engineering — All disciplines (civil/structural, mechanical, electrical, I&C, process, environmental, safety); conceptual through detailed.

B. Procurement — Major equipment (turbines, generators, compressors, vessels, heat exchangers), bulk materials, spare parts, special tools. Identify owner-furnished items with interface requirements.

C. Construction & Installation — Site prep, civil, foundations, structural, mechanical/piping, electrical/instrumentation, insulation/painting/fireproofing. Reference applicable codes.

D. Testing & Commissioning — Factory acceptance → pre-commissioning → integrated systems → performance testing → reliability demo. Include owner witness rights and acceptance criteria.

E. Ancillary — Permitting (allocate owner vs. contractor), training (classroom + hands-on), documentation deliverables (design basis, as-builts, O&M manuals — specify format/schedule).

F. Exclusions — Land acquisition, off-site utilities to boundary, owner personnel, financing, owner-controlled insurance, owner permits.

4. Commercial Terms

Contract Price: Exact amount and currency. Pricing type (lump-sum/GMP/cost-plus/hybrid). Confirm all E, P, C, testing, commissioning, training, documentation included. Adjustments limited to owner changes, differing site conditions, force majeure, change in law.

Payment Schedule:

Milestone	Typical %	Conditions
Advance payment	5–10%	Advance payment guarantee required
Engineering milestones	Per deliverable	Basic/detailed design completion
Equipment delivery	Per item value	Delivery receipts
Construction progress	Monthly	Joint measurement/verification
Substantial Completion	Major tranche	Less retention
Final Completion	Balance + retention	All guarantees satisfied

• Retention: 5–10%; partial release at Substantial Completion, balance at Final Completion; contractor may substitute bond/LC
• Invoicing: Submit within [X] days; owner review 15–30 days; payment within 30 days of approval; interest on late undisputed amounts
• Taxes: Allocate sales tax, VAT, customs duties, import taxes

5. Schedule

• Commencement: NTP conditions precedent (site access, permits, financing)
• Duration: Calendar days/months from NTP to Final Completion
• Key milestones: Design → PO awards → long-lead delivery → construction start → mechanical completion → commissioning → Substantial Completion → performance testing → Final Completion
• Certification: Contractor notice → owner inspection → completion certificate

Delay Management:

Delay Type	Time Extension	Cost Recovery
Force majeure	Yes	No
Change in law	Yes	No
Government permit delays	Yes	No
Owner-caused delays	Yes	Yes
Owner scope changes	Yes	Yes
Differing site conditions	Yes	Yes

• Notice: prompt written notice + cause + critical path impact + time request
• Delay LDs: Daily/weekly rate for late Substantial Completion; cap 5–15% of contract price
• Early completion bonus (optional): per day/week ahead of schedule

6. Performance Guarantees

Guaranteed Parameters (select applicable):

Parameter	Value	Reference Conditions	Test Standard
Output capacity	[kW/units]	ISO or site ambient	ASME PTC
Efficiency/heat rate	[%/BTU/kWh]	Fuel spec, ambient	ASME PTC
Emissions	[g/unit] per pollutant	Operating conditions	EPA/regulatory
Availability	[%]	Defined period	Contract formula

• Include correction curves for reference conditions
• Test protocol: timing, duration, valid runs, stability criteria, instrumentation, data recording
• Retest rights: optimization period; max retests specified

Performance LDs:

Shortfall	LD Formula	Cap
Capacity	$/unit below guarantee	[X]% of contract price
Efficiency	PV of increased operating costs	[X]% of contract price
Emissions	Cost of additional controls	[X]% of contract price

• Rejection threshold: shortfall exceeding [X]% → owner may reject facility

7. Change Management

• Formal written change order required before work begins (emergency exception with retroactive approval)
• Contractor proposal within 10–20 business days: scope, cost breakdown, markup (10–20% OH&P), schedule/CPM impact, effect on guarantees
• Pricing: lump-sum, unit price, T&M, or cost-plus
• Owner review: 15–30 days
• Disputed changes: contractor proceeds under directed change order; pricing resolved via dispute resolution
• Cumulative changes exceeding [X]% trigger renegotiation or termination-for-convenience rights

8. Indemnification & Liability

Contractor indemnifies Owner for: bodily injury/death, property damage, regulatory violations, IP infringement, environmental contamination, breach.

Owner indemnifies Contractor for: owner negligence/willful misconduct/breach; defects in owner-furnished items.

Exceptions: Claims from sole negligence of indemnified party. Joint negligence: comparative fault.

Procedure: Prompt notice → indemnifying party controls defense → cooperation → settlement limits.

Liability caps:

• Consequential damages mutually excluded (exceptions: gross negligence, willful misconduct, confidentiality, IP, environmental)
• Aggregate cap: contract price (or [X]x); uncapped: indemnity, IP, willful misconduct, fraud

9. Insurance

Coverage	Minimum Limit	Requirements
CGL	$10–50M per occurrence/aggregate	Additional insured; primary & non-contributory
Workers' Comp	Statutory per jurisdiction	Employers' liability $1M
Auto Liability	$1M CSL	All owned/hired/non-owned
Professional Liability (E&O)	$5–25M per claim/aggregate	Claims-made with 3–5 year tail
Builder's Risk	Full replacement value	Specify owner vs. contractor placement
Marine Cargo	Full shipment value	If international; origin to site
Pollution Liability	Project-appropriate	If environmental risk
Umbrella/Excess	Project-appropriate	Above primary policies

All policies: owner as additional insured, waiver of subrogation, 30-day cancellation notice, certificates before work starts.

10. Warranties

• Scope: All work free from defects in materials, workmanship, and design
• Period: 12–24 months from Substantial Completion; restarts for repaired/replaced items
• Materials: New unless specified; suitable for intended purpose
• Pass-through: Assign all manufacturer/supplier warranties to owner
• Defect correction: Written notice → repair within 24 hours (urgent) to 10 business days (non-urgent) → costs on contractor
• Self-help: If contractor fails to correct, owner may correct and charge contractor
• Security: Bond or LC, 5–10% of contract price; released on warranty expiration

11. Termination

Trigger	By	Notice/Cure	Contractor Gets
Cause (abandonment, schedule failure, insolvency)	Owner	Written + 10–30 day cure	Work performed only; liable for excess costs
Convenience	Owner	Written notice	Work + materials + demobilization + OH (no profit on unperformed)
Owner default (non-payment, suspension, breach)	Contractor	Written + cure period	Work + costs + anticipated profit on full contract
Extended force majeure (>6 months)	Either	Written notice	Work + costs (no anticipated profit)

12. Dispute Resolution

Tiered process:

1. Negotiation — Senior executives, 30 days
2. Mediation — Mutually acceptable mediator, 60 days
3. Binding — Arbitration (ICC/AAA; 1 or 3 arbitrators; specify seat/language) OR litigation (exclusive jurisdiction/venue)

• Governing law: [Jurisdiction], excluding conflicts-of-law. Exclude CISG if international.
• Fees: Each party bears own OR prevailing party recovers
• Jury waiver: Include if parties prefer bench trial

13. Administrative Provisions

• Notices: Written; delivery/courier/certified mail/email; effective on receipt
• Assignment: Contractor needs owner consent; owner assigns freely to affiliates/lenders
• Boilerplate: Entire agreement, amendments in writing, severability, non-waiver, mutual confidentiality, force majeure (notice + mitigation)

14. Execution

Signature blocks: entity name, signature, printed name, title, date. Add notarization/witness if required by governing law.

Pitfalls

• Confirm pricing structure before drafting commercial terms
• Mark uncertain statutory/regulatory citations with [VERIFY] for the specific jurisdiction
• Scale insurance minimums to project size and risk profile
• LD rates must reflect reasonable pre-estimates of actual damages to be enforceable
• Performance guarantees and test protocols are project-specific — confirm with user before finalizing
• For JV/consortium contractors, explicitly address lead designation and liability allocation
• Flag gaps in provided information — never assume critical business terms
• Verify internal consistency of cross-references, defined terms, and exhibit/schedule references
• For international projects: address currency, CISG exclusion, arbitration seat, language, import/export compliance