An engineering, procurement and construction (EPC) agreement usually represents to largest capital expenditure of the project company. It is the agreement between the project company and the contractor to design, construct and deliver to the project company the infrastructure of the project. The BOT infrastructure project is usually delivered on a turnkey basis, which means that the contractor is responsible for the detailed design through civil engineering to supply, install and test the infrastructure before handing over to the project company.
The EPC agreement usually imposes on the contractor obligations the project company has in relation to the design and construction of the project under the concession contract. Lenders are normally prepared to lend up to a fixed monetary limit (also called facility), but at the same time they need to be assured that the facility provided is sufficient to complete the construction of the infrastructure, most EPC agreements are provided on a fixed price and fixed time basis.
Another feature of the EPC agreement is that it normally contains back-to-back obligations with project company's concession agreement with the government. The project company is in effect "sub-contracting" its obligations to design and construct the facility to the contractor. It is not technically accurate to say that the project company has transferred the design and construction risks to the contractors, because the government would have a claim against the project company under the concession agreement if the design and construction of the facility were not properly completed (even if this is the contractor's fault).
(a) Key Issues
The following are key issues to consider in EPC agreement:
• Project design. The responsibilities for project design usually lies with the contractor. The government through the concession agreement should have a right to review and approve the project design. Though it should be clear in the concession agreement that any fault in the project design remains the responsibility of the project company (who may in turn pass this obligation to the contractor).
• Scope of work. Usually a contractor is engaged to construct the infrastructure on a turn-key basis, though of course whether it does so or not is the concern of the project company.
• Contract price and payment schedule. This would need to be consistent with the financing agreements.
• Completion Schedule. This would need to be consistent with the concession agreement.
• Key dates. The EPC agreement would set out key milestones in the project design and construction. They usually include dates for design completion, mechanical completion and final acceptance.
• Performance tests. The government should be involved in the acceptance tests to ensure that the project performs in accordance with the specifications in the concession agreement.
• Guarantees, warranties and indemnities. The EPC would provide certain guarantees, warranties and indemnities in relation to the facility. These guarantees, warranties and indemnities are usually limited in time, and by the time of transfer of the facility to the government these guarantees, warranties and indemnities. Nevertheless the benefits of any guarantees, warranties and indemnities applying once the facility is transferred to the government should also be assigned to the government.
• Limitation on liability. This in affect deals with the allocation of risks between the contractor and the project company.
• Liquidated damages. If the contractor fails to complete the project in time, it is likely to be liable to pay "liquidated damages" to the project company for this failure. This liquidated damages is a pre-estimate of costs as a result of delay in completion, rather than a "penalty".
• Change orders. This will need to reflect the right of the government to change orders under the concession agreement.
• Defaults and remedies. What events constitute default and what are the consequences of default?
• Force majeure. This deals with circumstances in which the contractor would be excused from performing its obligations under the EPC agreement. They should reflect the concession agreement.
• Termination. The events that lead to termination, and the consequences of termination needs to be dealt with.
(b) The FIDIC "rainbow"
The "Red Book", "Yellow Book", "Orange Book" and "Silver Book" are widely used jargons to refer to standard forms EPC agreement developed by the FIDIC (Federation Interriationale des Ingenieurs-Conseils or the International Federation of Consulting Engineers). The contractors engaged in construction work commonly use these FIDIC standard forms documents.
The "Silver Book" is a recent standard form EPC agreement which have been developed specifically for BOT projects. Perhaps the most commonly used FIDIC standard form is the "Red Book", which can be adopted to civil engineering works. The "Yellow Book" is more suitable for supply of mechanical and electrical work, and the "Orange Book" for design-build and turnkey contracts.