Advantages and Disadvantages of an EPC Contractor in an SPC Green energy project (minority investor)
Updated: Mar 30
What is an EPC Contractor?
EPC stands for Engineering, Procurement, and Construction. The EPC contractor coordinates all design, procurement, and construction work and ensures that the whole project is completed as required and in time, budget and quality.
EPC basic function on a construction project could be:
Logistics and transport
Advantages of EPC Contractor
Single point of responsibility: the SPC has a single point of contact regards of any construction problems occurring (DLA PIPER, 2011) (Langhe & Minde, 2018).
A fixed contract price (turnkey contract) with costs overruns being contractors’ responsibility (DLA PIPER, 2011) (Blaiklock, 2014).
A fixed contract and completion date: the contractor is liable for delays in project completion
Performance guarantee: the contractor is liable for any performance issues of the operations of the project, such as the deterioration of WTGs (DLA PIPER, 2011).
Project performance security: security could come in as a bank guaranty of 5-15% of the total contract cost or a parent company guarantee of the EPC contractor (DLA PIPER, 2011).
Defects liability: 12-24 months after project completion the EPC contract is liable for any defects caused due to poor construction of infrastructure (DLA PIPER, 2011).
Minimization of SPC risks (Langhe & Minde, 2018).
Disadvantages of EPC Contractor
Higher contract price as all risk is allocated to the contractor (construction risk premium), which results in an overall higher project capital cost (DLA PIPER, 2011) (Langhe & Minde, 2018).
Few numbers of competent companies have the capabilities and are willing to get into an EPC contract hence the contract price is not competitive and the contractor sets the price (DLA PIPER, 2011).
SPC has no power to intervene if construction has issues as it is solely the EPC contractor to complete the project on time and on budget. If SPC interferes with the day-to-day activities of the construction, it will be easier for the contractor to defeat claims for defects and liquidated damages (DLA PIPER, 2011)
EPC Contractor as a minority equity investor in the SPC
As the EPC contractor has additional incentive to perform well on the project, due to a minority equity position in the SPC, a better project performance demanded by the EPC management will benefit the overall profitability of the venture.
Also, costs could be saved in procurement procedures since the EPC contract is pre-selected due to his early involvement with the project due diligence. Furthermore, lower contract costs could be agreed upon due to the EPC contractor's stake in the SPC, hence a lower risk premium will benefit the bankability of debt service for the first years of operations of the venture.
You may also like:
DLA PIPER, 2011. EPC contracts in the power sector , s.l.: Asia Pacific Projects Update.
Langhe, A. & Minde, P., 2018. COMPARATIVE ANALYSIS OF THREE MAJOR TYPE OF CONTRACTS WITH CASE STUDY. International Research Journal of Engineering and Technology (IRJET), 5(10), pp. 237-240.
Blaiklock, M., 2014. Infrastructure Finance Handbook : Principles, Practice and Experience. London: Euromoney Books