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EPC Contract Drafting

Considerations: Increased Costs and
Extensions of Time
PRACTICAL LAW FINANCE WITH SARAH BISER AND ROBERT RUBIN OF MCCARTER & ENGLISH, LLP

This Note discusses the conditions under which be required to pay liquidated damages for not delivering the project
by the completion date.
the contract price may be increased and the
This Note discusses these provisions and certain key issues the proj-
time to perform may be extended under a lump ect company (and by extension, its lenders) and the EPC contractor
sum engineering, procurement and construction should consider when drafting and negotiating these provisions. For
a discussion of EPC contracts generally and other EPC contract provi-
contract. sions, see Practice Notes:
Most engineering, procurement and construction (EPC) contracts „„Understanding Project Finance Construction Contracts (http://
entered into as part of a project financing are structured as lump us.practicallaw.com/1-422-1870).
sum turnkey contracts. Under this structure, the EPC contractor „„EPC Contract Drafting Considerations: Force Majeure Provisions
receives a fixed fee in exchange for delivering by a specified date a (http://us.practicallaw.com/5-518-2224).
project that has been designed and constructed in accordance with
„„EPC Contract Drafting Considerations: Limitations of Liability
agreed specifications and performance requirements. In a project
(http://us.practicallaw.com/8-518-2208).
finance transaction, the costs of constructing the project have been
carefully calculated and there is generally limited room to increase INCREASED COSTS
the contractor's fee. The project company is also typically a party to
an offtake agreement (for example, a power purchase agreement), EPC contracts typically provide that the contract price may be in-
which requires it to deliver a service or a product by a certain date. creased under a change order delivered according to the terms of the
The failure to meet the start of service deadline may trigger the contract if any of these events occur:
payment of penalties and other damages. As a result, it is critical „„A change in law that adversely affects the EPC contractor's:
that the project's costs are contained and its construction schedule
„„costs of performance;
maintained. However, EPC contracts typically include provisions
„„ability to perform the work according to the agreed schedule; or
setting out the circumstances under which the EPC contractor may:
„„ability to perform a material obligation under the EPC contract.
„„Receive amounts in excess of the contract price.
(See Changes in Law.)
„„Request additional time to perform its obligations under the EPC
contract. „„An act or omission by the project company, the project
sponsor, any lender or any of their affiliates, agents, officers or
Any variation in the contractor's scope of work, the contract price and
representatives that adversely affects the contractor's:
the project schedule generally requires a change order. The bases for
„„costs of performance;
requesting a change order are highly negotiated. Project companies
(the owner of the project) and their lenders want certainty as to the „„ability to perform the work according to the agreed schedule; or
project's costs and completion date and seek to limit the bases on „„ability to perform a material obligation under the contract.
which the EPC contractor can receive additional amounts and/or time
(See Acts or Omissions by the Project Company and its Affiliates.)
to perform under the contract. By contrast, EPC contractors want
to ensure that they will not be required to perform additional work „„The discovery of certain ground conditions (for example,
without additional compensation and time to perform. EPC contrac- contaminants and hazardous conditions) at the project site (see
tors will also want to limit the circumstances under which they may Ground or Subsurface Soil Conditions).

© 2014 Thomson Reuters. All rights reserved.

 EPC Contract Drafting Considerations: Increased Costs and Extensions of Time

„„Suspension of work at the request of the project company or its to the design and construction of the project, depending on the
representative (see Suspension of Work). project and the contractor's scope of work, there may be other
„„A force majeure event (see Force Majeure). contractors that need access to the site.
„„The project is materially damaged (see Damage to the Project). „„The site is being inspected by environmental and other regulatory
agencies.
CHANGES IN LAW
„„Lenders and their technical advisors and government officials are
A change in law (such as a new permit requirement or environmental visiting or auditing the project.
regulation) can have a significant impact on a project's costs and „„In the case of projects that have significant community opposition,
schedule. The project company generally bears the risk of any changes of demonstrations and protests at the site.
in law that may affect the EPC contractor's performance and the costs
of the project other than changes: To limit the likelihood of triggering a change order on this basis, the
parties should:
„„In the tax laws that affect the contractor's profits and losses.
„„Carefully analyze the risk of disruption and, to the extent possible,
„„Of which the parties are aware at the time the EPC contract is signed,
build that into the project schedule and requirements from the
even if not fully implemented. For example, it is not a change of law,
outset.
if a relevant regulatory or legislative authority has been considering
a new permitting requirement, even if the requirement is adopted „„Identify clearly the party responsible for work stoppages and under
or implemented after the contract is executed. what conditions.
However, the extent to which pending legislation or regulatory For example, if the project is one that is vulnerable to picketing or
requirement constitutes a change of law depends on several factors, vandalism, the parties may need to:
including: „„Implement security protocols that limit protesters' access to the
„„The term of the EPC contract. The longer the term of the contract, site (for example, by erecting a fence or establishing one point of
the less willing an EPC contractor may be to accept pending entry to the project).
legislation risk because of the concern that these issues may „„Limit access to the site.
remain outstanding for a long period.
„„Coordinate with the local police to limit these disruptions.
„„The potential impact of the new regulation or legislation. If the
legislation is not expected to impose considerable costs, an EPC The project company, to the extent possible, should also require the
contractor may be willing to accept it. EPC contractor to:
„„The jurisdiction of the project. In certain jurisdictions, it may take „„Provide security for the project.
years for legislation to move from the consideration stage to the „„Manage and supervise any other contractors involved in the project.
adoption stage. In addition, because of political considerations If this is not possible, the project company should at a minimum
(including corruption and general stalemate), the fact that include a provision in the contract requiring the EPC contractor to
legislation or regulation was proposed may not be significant. coordinate its work and access to the site with the other contractors.
ACTS OR OMISSIONS BY THE PROJECT COMPANY AND ITS AFFILIATES Changes in the Scope of Work
The acts or omissions of the project company, project sponsor, lend- While the parties generally try to set out the project's requirements
ers and their respective affiliates, agents or representatives that may before signing the EPC contract, project companies often change the
entitle the EPC contractor to submit a change order include: scope of the project. However, before any change can be implement-
ed, the parties must agree on:
„„Failing to obtain a required permit.
„„The costs of the change.
„„Providing inadequate access to the project site.

„„Changing the scope of work. „„The impact of the change on the project's performance and
schedule.
Permits
If the parties cannot agree, the issue is typically referred to the
The EPC contractor is generally required to obtain all permits required parties' officers or a mediator for resolution. To the extent possible,
for the construction of the project other than those that must be in the EPC contractor must continue working on the project pending
the project company's name under applicable law. Depending on the resolution of the issue.
nature of the permit and its purpose, the failure to timely obtain and
maintain a required permit can have a material effect on the project's GROUND OR SUBSURFACE SOIL CONDITIONS
cost and schedule. Liability for adverse ground conditions at the project site must be al-
Lack of Access located in the contract because cleaning up or fixing a site to ensure
that the project can be safely constructed on it can be expensive and
The EPC contractor may not have adequate access to the site because: time-consuming. EPC contractors generally want to allocate liability
„„There are other contractors involved in the project. Although for these conditions to the project company because:
turnkey EPC contracts are intended to cover all matters related

2 © 2014 Thomson Reuters. All rights reserved.

 EPC Contract Drafting Considerations: Increased Costs and Extensions of Time

„„The project company selected the site and usually conducts DAMAGE TO THE PROJECT
preliminary site analysis to assess whether the site is appropriate
Any damage that happens to the project until title is transferred to
for the project. For example, in the case of a wind project, the
the project company is generally for the account of the EPC contrac-
project company analyzes the proposed site to determine whether
tor. However, the project company bears the risk of damage to the
the location is appropriate for the project (see Practice Note, Wind
project caused by:
Energy Project Development Issues: Preliminary Considerations:
Topography Analysis (http://us.practicallaw.com/9-521-9174)). „„Acts of god.

„„The EPC contractor does not normally have the time before it „„War or acts of terrorism.

begins the work to conduct an extensive analysis of the site. This If the project company elects to rebuild the project it must compen-
is especially an issue if the contractor was awarded the contract as sate the EPC contractor and give it additional time to perform.
part of a public bidding process.
EXTENSIONS OF TIME
By contrast, the project's lenders do not want the project company to
accept this risk because it creates uncertainty as to the costs of the Negotiations for additional compensation often go hand in hand
project and the project schedule. with negotiations for additional time to complete the works. If one of
the conditions discussed above occurs and the contractor is entitled
To address these issues, EPC contracts often require: to submit a change order for an increase in the contract price (for
„„The EPC contractor to acknowledge that it has some understanding example, if the parties agree to change the scope of work), then the
of the project site and that the conditions will not prevent it from completion date for the project usually also needs to be changed.
performing its obligations under the agreement or result in an
Most contracts include a built in cushion (or float) to take into ac-
adjustment of the contract price. To do so, the contractor must:
count delays that might occur. The float allows the schedule to be
„„be allowed to conduct an analysis of the site; and/or maintained despite:
„„have received reports from technical experts regarding the „„Weather delays.
condition of the site.
„„Minor construction delays.
„„The project company to bear the risk of any conditions the
„„Other minor delays caused by a contractor default.
contractor uncovers that are materially different from those set out
in the technical reports. For example, most agreements include a target completion date
and a guaranteed completion date. Generally, contractors are
SUSPENSION OF WORK not required to pay liquidated damages unless the guaranteed
EPC contracts typically give the project company the right to suspend completion date is not met (subject to excepted delays and owner-
work on the project for convenience. In this case, the project company caused delays).
becomes liable for any costs incurred by the contractor as a result WHO OWNS THE FLOAT?
of this suspension. This right is not unfettered, however, as EPC
contracts typically limit the number and length of the suspension. During negotiations for additional time, the parties must agree on
Although the contractor is compensated for the added delays, exces- how to use the float. EPC contractors generally like any additional
sive delays may interfere with other contracts and projects it may time they are granted to perform for a permitted delay to push back
have. As a result, EPC contractors often have the right to terminate the guaranteed completion date. This preserves the float and still
the contract for suspensions that last in excess of an agreed to period gives the EPC contractor time to perform if an event occurs that
(either as a result of one suspension or multiple suspensions). delays the target completion date.
By contrast, some project companies want to preserve the guaran-
FORCE MAJEURE
teed completion date and require the contractor to use the float.
EPC contracts typically allow a contractor to request a change order if Meaning, the time to perform will not be extended for excused
certain events beyond its control occur. These events include: events, unless the event causes the EPC contractor to miss the guar-
anteed completion date. In practical terms, the cushion that is built
„„War or acts of terrorism.
into the project schedule is used for these delays. EPC contractors
„„Act of god. generally resist this approach because:
„„Acts of governmental entities.
„„Although the delay is caused by an excused event, it does not in
„„Blockades and other work stoppages. fact receive any additional time to perform.
„„It results in less flexibility for the EPC contractor to deal with
The mere occurrence of these events does not automatically excuse
performance, however. The parties, depending on the event, must unexpected delays.
take actions to mitigate the effects of these events. For more informa- Many EPC contractors also think this approach is unfair because if
tion on force majeure issues in construction contracts, see Practice no excused event had occurred, they would have had the cushion be-
Note, EPC Contract Drafting Considerations: Force Majeure Provisions tween the target completion date and guaranteed completion date.
(http://us.practicallaw.com/5-518-2224).

© 2014 Thomson Reuters. All rights reserved. 3

 EPC Contract Drafting Considerations: Increased Costs and Extensions of Time

AMOUNT OF TIME TO BE GRANTED

EPC contractors like to receive additional time to perform equal to RELATED CONTENT
each period of delay caused by an excused event. However, depend-
Topics
ing on the event, all the time may not be required. In certain cases,
however, the EPC contractor may be asked to provide of an estimate „„Project Finance and DevelopmentProject Finance and
of the amount of time it requires to perform. Development (http://us.practicallaw.com/8-382-8574)

ALLOCATION OF RISK Practice Note: Overview

„„Project Finance: Overview (http://us.practicallaw.com/7-
In project finance transactions, project sponsors and lenders try
382-7004)
to allocate as much of the construction risk to the EPC contractor
(see Practice Note, Identifying and Managing Project Finance Risks: Practice Notes
Construction Risk (http://us.practicallaw.com/9-382-9356)). They are
„„Advantages and Disadvantages of Project Financing
often successful in doing so by paying the EPC contractor a premium.
(http://us.practicallaw.com/0-382-8846)
However, their ability to allocate this risk to the EPC contractor and
the contractor's willingness to assume this risk depends on several „„EPC Contract Drafting Considerations: Force Majeure
factors, including: Provisions (http://us.practicallaw.com/5-518-2224)
„„EPC Contract Drafting Considerations: Limitations of
„„The nature and location of the project.
Liability (http://us.practicallaw.com/8-518-2208)
„„The construction market.
„„Identifying and Managing Project Finance Risks (http://
„„The contractor's negotiating strength.
us.practicallaw.com/9-382-9356)
For more on these issues, see Practice Note, Understanding Project „„O&M Agreements: Issues to Consider (http://
Finance Construction Contracts: Minimization of Project Company Risk us.practicallaw.com/2-506-2119)
(http://us.practicallaw.com/1-422-1870) and Understanding Project „„Understanding Project Finance Construction Contracts
Finance Construction Contracts: Selecting an Appropriate Contract (http://us.practicallaw.com/1-422-1870)
(http://us.practicallaw.com/1-422-1870).
Checklists

„„Project Finance Checklist (http://us.practicallaw.com/9-

500-4687)
„„Project Finance Construction Contract Structures (http://
us.practicallaw.com/6-422-4338)

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