Mastering EPC Contracts for the Global Power Industry

Engineering, Procurement, and Construction (EPC) contracts have been instrumental in the delivery of infrastructure projects across the globe.

An EPC refers to an arrangement where the contractor is responsible for all the design, procurement, and construction activities related to a project. In essence, the contractor is obliged to deliver a completed project, ready for operation at a pre-determined price and by a fixed date. The project owner, therefore, has some assurance regarding the final cost and delivery date of the project.

They represent a comprehensive solution that enables project owners to engage a single entity to deliver an asset, taking on the responsibility of all activities from design to procurement, construction, and commissioning. EPC contracts are particularly prevalent in the global power industry, where they have been employed to deliver power stations, electricity grids, and other related infrastructure.

The basis of an EPC contract is that the contractor takes on most of the project risk. The contractor is usually a consortium of companies, each bringing a different set of skills and expertise to the project. If the project fails to meet the criteria outlined by the project owner, the contractor bears the financial consequences.

Scope of Work

A well-drafted contract can go far in preventing disputes and ensuring the smooth execution of the project. It defines the rights, obligations, and responsibilities of the parties involved.

One of the most critical provisions in an EPC contract is the scope of work. This outlines what needs to be completed by the contractor. It must be defined precisely to avoid disputes down the line. It typically includes design specifications, materials to be used, construction methods, and performance standards.

The contract should also clearly state the total contract price and payment milestones and conditions. It should also provide for contingencies like cost overruns and changes in the project scope.

The third provision, risk allocation, determines who bears the risk for various events that may occur during the project. It typically includes a force majeure clause, which absolves the parties from liability for unforeseeable events beyond their control.

Supplier in an EPC Project

Selecting a supplier for an EPC contract is a strategic decision that requires careful consideration. The chosen supplier will have a significant impact on the success of the project, so it’s essential to get this decision right.

One strategy for supplier selection is to evaluate potential suppliers based on their technical and financial capacity. This means assessing their track record in delivering similar projects, their technical expertise, and their financial stability.

Another strategy is to conduct a competitive bidding process. This involves inviting multiple suppliers to submit bids for the project, then selecting the supplier who offers the best value for money.

Access to Grid

One of the first considerations before entering into an EPC contract is the location of the project. It should be located close to an existing grid infrastructure to minimise the cost and complexity of connecting to the grid.

The grid needs to have sufficient capacity to accommodate the power output from the project. If the grid is already at capacity, it may be necessary to upgrade the infrastructure, which can be costly and time-consuming.

Finally, regulatory requirements can vary from country to country, and they can have a significant impact on the feasibility of the project. Therefore, it’s essential to understand and comply with these requirements when planning a power project.

Fuel Specifications

Crucial to power project EPC contracts, fuel specifications define the type and quality of fuel that will be used to generate electricity. This could be coal, natural gas, oil, biomass, or a renewable source such as wind or solar. The choice of fuel will depend on the technology used in the project, the availability of the fuel, and the environmental impact.

The quality of the fuel is another important specification. This includes parameters such as calorific value, moisture content, and impurity levels. It can significantly impact the efficiency of the power generation process, which affects the lifespan of the equipment.

Lastly, the contract should specify the supply arrangements. This includes the source of the fuel, delivery schedule, and price. The fuel supply arrangements need to be reliable and cost-effective, to ensure the long-term viability of the project.

Commissioning Regime

Commissioning is the final step in the EPC contract process. It involves testing the completed project to ensure that it meets the performance criteria specified in the contract, ready for operation.

This outlines the testing procedures, schedule, and roles and responsibilities of the commissioning team. It also includes the acceptance criteria, which define the standards that the project must meet to be considered ready for operation. There shall be functional tests, performance tests, and safety tests. They need to be documented, and the results need to be formally recorded.

Once the tests are completed and the project meets the acceptance criteria, the project owner can take over the project. This is known as the handover process, and it marks the end of the EPC contract.

Conclusion

By developing the above skills and knowledge, project owners can successfully manage EPC contracts and deliver successful power projects. This will not only benefit their organisations but also contribute to the development of the global power industry.

Further recommendations:

Informa Corporate Learning are leaders in training, knowledge, and performance improvement, servicing up to 30+ industry sectors. Our Energy & Utilities Portfolio boasts one of the most well-designed, robust training programs in Singapore featuring Managing International EPC Contracts in the Global Power Industry, A Practical Guide for Market Entrants – Hydrogen Economy, Floating Wind & Hydrogen Masterclass, and A Practical Guide to Hydrogen and Carbon Capture & Storage. See our Energy & Utilities courses. For more information, please email [email protected]