What is an EPC Contract? (Key Features, Examples, and Tips)

Several alternatives are available when it comes to contracting and procurement methodologies for construction projects. One model often used in the energy industry is the EPC Contracting framework. But what exactly is it?

EPC Contracts are agreements in which the Contractor is responsible for the engineering (E), procurement (P), and construction (C) tasks of a project under a single contract. A significant level of risk transfer characterises these agreements, which are typically executed on a turn-key lumpsum basis.

In this article, we will further explore this contracting framework, understanding the pros and cons associated with it, as well as key features and its usability on construction projects.

What is an EPC Contract?

An EPC Contract, also known as an Engineering, Procurement, and Construction Contract, is a comprehensive agreement that consolidates project detailed engineering, procurement, and construction responsibilities under a single overarching contract.

Typically used for complex industrial projects, this contracting framework is commonly implemented by owners that have clear and specific outcomes and functionality/performance requirements for their projects but have not undertaken a detailed engineering yet.

Commonly the EPC Contractor is hired once the project finalises the Front-End Engineering Desing (FEED) Phase and a Final Investment Decision is made by the Owner to proceed and build the new asset (see figure below)

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As the name states itself, in this contracting framework the contractor is typically responsible for the following activities:

Engineering: The contractor bears the responsibility of the development of project’s detailed planning and design based on functionality requirements.
Procurement: The Contractor will also be responsible to procure material, equipment, and subcontractors needed for the project. This involves negotiations, purchasing, and supply chain management to ensure timely delivery.
Construction: The Contractor will lead the construction delivery and be in charge of construction management and will ensure timely completion of the project.

When EPC Contracts are used?

EPC agreements are typically deployed when owners/investors wish to procure a project based on functionality requirements and specific outcomes rather than a set of specific designs and drawings.

From an owner’s perspective, the rationale is transferring risk to the EPC Contractor and leverage its expertise to develop and deliver projects. Therefore, owners should consider contractor’s previous experience and past performance in both the construction sub-niche (i.e. energy, transport, manufacturing plants, etc) and in this contracting framework, given the level of risk transfer and performance requirements.

Usually, these agreements are “turn-key” contracts, which means that once the project is finished, the asset is fully operational and ready for immediate use without further adjustments or involvement from the client (the client only needs to “turn the key” to start operations).

Given the level of design detail when the EPC contractor is involved in the project, the agreements typically set specific performance requirements for the new asset instead of highly detailed drawings. The EPC contractor will then leverage its expertise to proceed with detailed engineering and find the most suitable solution from both technical and commercial perspectives.

Some common examples of project requirements are in the detailed table below by Nices – we have highlighted project requirements in bold to facilitate understanding.

Niche	Brief Description	Example of Project Requirements
Energy Infrastructure	Energy-related projects, particularly power generation, where functionality, performance, and safety are essential features.	Construction of a *100 MW* wind farm.
Infrastructure Development	Large-scale infrastructure projects like airports, metro lines, bridges, etc.	Building a major international airport for 10 million Passengers per year.
Manufacturing Facilities	Factories and plants that require precise equipment installation and operational functionality.	Construction of a chemical plant that can process 100 ton of plastic per year.
Environmental and Remediation Projects	Environmental projects like wastewater treatment facilities.	Delivery of a wastewater treatment facility that can process at least 10m3 of wastewater per hour.

EPC Contract - Examples

Example #1 - EPC Contract - Saudi Aramco NGL Fractionation Facilities in Saudi Arabia

With an investment of more than USD 3 Billion, Técnicas Reunidas and Sinopec Engineering Group were contracted by Saudi Aramco to develop new facilities to fractionate 510 thousand barrels per day (MBD) of Natural Gas Liquids (NGLs) in Saudi Arabia.

The project included two major EPC contracts detailed below:

Package

Description

Estimated Construction Duration

Riyas NGL Fractionation Trains (Package 1)

Consists of two trains, each processing 255 MBD. Incorporates fractionation, treatment, dehydration, and refrigeration units.

46 months

Riyas NGL Common Facilities (Package 2)

Common facilities include feed and product surge storage, chemicals storage, and utilities.

Utilities comprise steam and condensate recovery systems, utility water, plant and instrument air, nitrogen systems, machinery cooling water, drainage, and flare systems.

41 months

Example #2 - EPC Contract - UTE Pampa Sul in Brazil

The UTE Pampa Sul is a 345MW coal-fired powered Thermoelectric Plant in Rio Grande do Sul, Brazil. Engie Brasil has contracted Shandong Electric Power Engineering Consulting Institute (SDEPCI) under an EPC Contract agreement to deliver the project.

Author’s Note: The author worked on this project between 2016 and 2017 supporting the contract and commercial activities for the EPC Contractor. The asset now is under Operation and has been sold by Engie Brasil in 2023 to investment funds Grafito and Perfin Space X.

EPC Contracts - Contracting Strategy

According to this interesting article about EPC agreements, the EPC contracting strategy might vary slightly in accordance with client’s preference and market appetite.

The two models are commonly used:

Turnkey EPC with fixed price
Turnkey EPC with target pricing

EPC Contract - Turnkey with fixed price

In this approach, an EPC contractor will deliver the project, offering a fixed price for the entire scope. Usually, tenderers go through a competitive procurement process and offer a “lump-sum” amount to the specifications detailed by the owner.

EPC Contract - Turnkey with target pricing

The EPC framework might also embed some level of risk-sharing mechanism between the contractor and owner in the contracting strategy. Similarly to the firm price approach, the contractor will go through a competitive procure process to deliver the entire scope of work.

However, instead of a fixed lump sum price tag, a target price is set, which usually contains a risk sharing mechanism (pain-gain), akin to the model used in alliance contracts.

In a nutshell, if the project is delivered below the target cost, parties share the gain; on the other hand, if there are cost overruns, owners and contractor share the losses (typically EPC Contractor’s exposure are limited to a loss sharing liability cap – refer to the picture below for further context)

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EPC Contract - Key Features

Some of the key features of this contracting framework are detailed in the table below.

EPC – Key Features	Description
Outcome / Performance Based	EPC contracts are typically procured focusing on achieving specific project and performance and requirements.
Single Touch Point / Responsibility	A single entity (the EPC contractor or EPC JV Contractor) is responsible for all aspects of the project (engineering, procurement, and construction). This simplifies communication with the client/owner and almost extinguishes interface risks (for the owner)
Risk Transfer – Increased Cost, Program, and Scope Certainty for the owner	EPC contracts are usually procured on a turnkey lump sum basis, offering cost, program and scope certainty to the owner. There is a significant level of risk transfer from the owner to the EPC Contractor.
Use of Performance Guarantees	These contracts normally include performance guarantees of meeting performance and quality standards specified at the time of procurement. It provides assurance that the project will be perform to the satisfaction client’s requirements. In case of non-compliance, the guarantor may be required to rectify the deficiencies or provide compensation as per the terms of the contract. It can be a Parent Company Guarantee (PCG), Bank Bond (i.e. Performance Bond), and other alternatives available on the market.
Liquidated damages and Liability Caps	Given the level of risk transfer, EPC Contractors normally request liability caps to limit their exposure. Typical caps are: • Usually capped at 100% of the Contract Price • Sub-caps of 20% of the Contract Price on delay (They might vary in accordance with jurisdictions, market appetite, and parties involved in the process).
Defect Liability	The defect liability period (DLP) to rectify construction defects usually varies from 12 to 24 months following achievement of practical completion.
Intellectual Property	Intellectual property with regards to technology developed for the project are typically held by the Owner, and the IP use by the EPC contractor without owner’s consent might trigger indemnities.
Force Majeure	Typically, the EPC contractor can be released from some of its obligations in case of force majeure events (wars, strike, riots, floods, etc.)
Termination	EPC Contractors have very limited termination rights, whereas owners usually have broader rights.

EPC Contract - Insurances and Guarantees

In an EPC contract, several types of insurance are typically involved to mitigate risks for the parties involved. These guarantees are crucial to protect against potential liabilities, damages, and unexpected events that may occur during the project lifecycle.

Some of the common insurances policies and guarantees include:

Contractor’s All Risk (CAR) Insurance: This insurance is usually obtained by the contractor and covers risks related to construction, such as damage to the works, materials, and equipment on-site. It often includes coverage for third-party liabilities arising from the construction activities.
Professional Indemnity Insurance: Design professionals involved in the project, such as architects or engineers, might carry this insurance. It protects against claims arising from professional errors, omissions, or negligence in design or advice.
Public Liability Insurance: This insurance covers third-party bodily injury or property damage caused by construction activities (i.e. settlement caused in adjoining properties).
Employer’s Liability Insurance: covers employee claims for work-related injuries or illnesses. It’s usually mandatory in most jurisdictions.
Delay in Start-Up (DSU) Insurance or Advanced Loss of Profits (ALOP): This insurance protects against financial losses due to delays in project completion caused by covered risks. It covers additional expenses and loss of expected revenue during the delayed period.
Performance Bonds or Guarantees: While not insurance in the traditional sense, these financial instruments are often required in EPC contracts. They ensure that the contractor performs the work specified in the contract and compensate the owner if the contractor fails to meet contractual obligations.

The use of other specific insurances and their respective terms can vary based on the nature of the project, its location/jurisdiction, contractual agreements, and the parties’ preferences. It’s crucial for all parties to thoroughly review and understand the insurance provisions in the EPC contract to ensure adequate coverage and risk management throughout the project.

Prons and Cons of EPC Contracts

As with every contracting methodology, EPC contracts come with several pros and cons that are detailed below.

Advantages of EPC Contracts

Some of the key advantages of the EPC agreements are:

Time and Cost Certainty for Project Owners: EPC contracts are typically lump sum agreements with clear and specific liquidated damages and indemnification clauses in case of project delays by the ECP Contractor.
Single point of contact for the Project Owner – This ensures streamlined project management and communication for the owner, which is very important for owners with limited experience in the development and delivery of construction projects (i.e. Asset Operators)
Performance Guarantee: EPC contracts often include performance guarantees, assuring investors that the project will meet specified quality and performance standards.
Increased risk transfer to EPC Contractors: There is a significant level of risk transfer from the owner to EPC Contractors
A robust commercial/legal framework might lead to better financing terms: If project financing is required, partnering with an experienced EPC contractor often leads to more favourable financing conditions, with assurance against defaults attributable to the contractor.

Disadvantages and Risks of EPC Contracts

Limited Flexibility for Changes: Modifying project scope or specifications can be challenging, potentially resulting in additional costs or project delays.
Increased Costs: Given the significant level of risk to EPC Contractors, the EPC agreements tend to have increased costs.
Owner Limited Involvement: Typically, clients have limited involvement in project decisions, which may reduce their control over the process.
Tender comparison/assessment difficulty: Given that projects are normally procured based on performance and output requirements; tenderers might offer different solutions in the bids/proposals, creating significant challenges in “like-for-like” assessments.
Increased and concentrated commercial exposure to EPC Contractor: Owners have significant commercial exposure to EPC Contractors, and distressed projects might lead to substantial commercial challenges (i.e. losses surpassing liability caps.). Further, the quality and expertise of the chosen EPC Contractor might impact on financing costs.

EPC Contract - EPCM Variation

What is an EPCM?

Often, when clients, owners, or investors have more expertise and wish to be more involved in the project development decision-making, they implement the EPCM framework.

The EPCM stands for Engineering, Procurement, and Construction Management; in this case, the EPCM Contractor acts more like an advisor to the owner, helping and supporting the client in making key decisions, such as:

Refinement of Technical Requirements, Scope of Works,
Advice on design development and value-engineering
Support to key procurement tasks to be undertaken
Overall Construction Management during the delivery phase (Cost and Program Control, Financial and Contract management, and many others).

While the EPC Contracting Approach has similar characteristics to a Managing Contractor Agreement, the EPCM uses a framework similar to construction management contracts.

The key feature here is that EPCM has significantly less commercial and legal exposure, given that all engineering, procurement and construction agreements are executed between the owner and the third parties, and the EPCM Contractor acts in an “advisory” role – see typical contracting framework below.

EPCM Contract Examples

Example #1 - EPCM Contract - Balranald Critical Minerals project in Australia - Worley (EPCM Contractor) for Iluka Resources (Owner)

Worley has secured a contract from Iluka to deliver engineering, procurement, and construction management (EPCM) services for the Balranald Critical Minerals project in New South Wales, Australia.

Situated in the Riverina district of southwestern New South Wales, the project primarily centres on the West-Balranald deposit, abundant in rutile and zircon and houses significant quantities of rare earth minerals.

FAQ - EPC Contracts

What "EPC Contracts" stands for?

EPC Contracts stands for “Engineering, Procurement, and Construction contracts”.

Conclusion

EPC Contracts are an interesting contracting approach for owners who wish to procure a project based on performance and output requirements rather than a set of advanced designs and drawings.

Owners typically embrace this approach as it provides a single point of contact, performance guarantees, and robust risk transfer, making them a favourable choice for those seeking well-structured commercial agreements.

However, EPC Contracts have their challenges. They offer limited flexibility for changes, may entail increased costs, and often limit owner involvement in project decisions.

An alternative for clients with robust project and engineering management skills in-house who desire increased control over project development and delivery is the use of EPCM Contracts, given then offer an alternative path, allowing for greater owner involvement.