6/12/24, 9:00 AM EPC Contract: Meaning, Definition, and Complete Guide

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What is an EPC Contract? Here's What You

Need to Know
Last Updated on 17th October 2023

An EPC (Engineering, Procurement, and Construction) Contract in the

construction industry is a contractual agreement between a project
owner and the contractor. The contractual framework in an EPC contract
enables the owner to transfer the complete risk of design, procurement,
and construction to the contractor. The contractor is solely responsible
for completing the project and handing it over to the owner in a turnkey
condition. This is why EPC contracts are sometimes called turnkey
construction contracts or simply turnkey contracts.

Table of Contents
1. EPC contract meaning How can we help
2. Why is EPC contract so popular? you today?
3. How much control does an owner have in an EPC project?  Back to Top
4. Engineering or designing part in an EPC contract CONTACT AN EXPERT 

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5. Procurement part in an EPC contract

6. Construction part in an EPC Contract
7. Advantages of an EPC contract
7.1. A Single Point of Responsibility
7.2. Fixed Contract Price
7.3. Fixed Completion Date
7.4. Performance Specifications
7.5. Performance Guarantee
7.6. Security
7.7. Caps on Liability
7.8. Rights to suspend the contract
7.9. Flexibility in Ordering Variations
7.10. Force Majeure
8. Limitations of an EPC contract
8.1. EPC projects are expensive
8.2. Owners have less control over the project
9. EPC in Various Industries
10. List of notable EPC companies
11. In a Nutshell...
12. FAQs
12.1. What is an EPC company?
12.2. What is an EPC contract?
12.3. What are various types of EPC Contracts?
12.4. What is an EPC Agreement?
12.5. What is an EPC Tender?
12.6. What is the difference between an EPC contract and
an EPCM contract?
12.7. What are EPC services?
12.8. What is a turnkey contract in construction?
12.9. What is the difference between turnkey and EPC
contracting?
12.10. What is the difference between a lump sum and an
EPC contract?
12.11. How do EPC companies work?

1. EPC contract meaning

Before delving into the intricacies of EPC contracts, let's start with the
basics. EPC is an acronym that stands for Engineering, Procurement,
and Construction. The term EPC represents almost the entire life cycle
of a project. The contractor is fully responsible for the project

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management, from designing to procurement and then executing the

construction phase.

An EPC Contract is a way to mitigate risks without getting involved

much in the project management. EPC contracts are designed
deliberately to shift the construction risk to the contractor. They hold the
contractor accountable for all project operations from the design phase
to the construction phase.

As part of the EPC contracting agreement, the EPC contractor or EPC

company undertakes three important components of a project:

Engineering & Design - where it carries out the detailed engineering

design of the complete facility
Procurement - where the EPC firm procures all the necessary
materials and equipment to execute the design
Construct - where the contractor builds the facility and delivers the Follow
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facility in a ready-to-commission state to the project owner or
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The EPC phase of a project is often known as the execution phase,

which comes after the feasibility study and FEED (Front End
Engineering Design) study phase. A FEED study encompasses the basic
engineering design study, which covers the different stages and
components of a project. A FEED study report is necessary for the
tender and bidding stage when the project owner invites tenders from
EPC contractors.

2. Why is EPC contract so popular?

An EPC Contract is a risk mitigation and management tool in the form of
a project document. In fact, EPC Contracts were specifically conceived
to transfer risk to the contractor. They make the contractor responsible
for all project activities from the design phase through the construction
phase.

Specifically, they make the contractor responsible for all design,

engineering, procurement, construction, commissioning, and handover
activities of the project, leaving the owner with no responsibilities save
for turning the key at project delivery.

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Another reason for the widespread use and acceptance of EPC

Contracts is that they are strongly preferred by project finance lenders.
Project lenders are much more comfortable providing project financing
when construction contracts have fixed prices and required dates for
completion. Less risk to the lender means the likelihood of your project
finance loan being approved increases substantially.

3. How much control does an owner

have in an EPC project?
The project owner or project sponsor generally has little to no control
over the EPC contractor once the contract is signed. However, the owner
can have a presence in the project by appointing a PMT (Project
Management Team) or PMC (Project Management Consultant). The
PMT can have a Project Manager or Construction Manager to oversee
the project proceeds as per the scope of work, and the contract is being
followed. The company that conducts the feasibility study, and
FEED study, and prepares the design and drawing on behalf of the owner
acts as the PMT.

4. Engineering or designing part in

an EPC contract
The Design Duties of EPC Contractors are:

Basic Engineering
Detailed Engineering
Detailed Design
Planning
Construction Engineering
Civil Engineering

5. Procurement part in an EPC

contract
The responsibilities in Procurement are:

Logistics
Transportation
Purchasing

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Invoicing
Receiving the materials

6. Construction part in an EPC

Contract
The functions involved in the construction of a project are as follows:

An EPC Contractor handles the design and construction

management
Electrical Installation
Water Supply
Sanitation and Drainage Work
Carving cupboards and showcases

7. Advantages of an EPC contract

By choosing an EPC contractor, the Project owner has the following
advantages:

1. A Single Point of Responsibility

2. Fixed Contract Price
3. Fixed Completion Date
4. Can Set a Performance Specification
5. Performance Guarantee
6. Security
7. Caps on Liability
8. Has Rights to Suspend the Project
9. Flexibility in Ordering Variations
10. Force Majeure

7.1. A Single Point of Responsibility

The EPC contractors have the responsibility for all spheres of
construction. From designing, procuring, and constructing to
commissioning and handing over the polished project. Suppose
anything goes wrong during the construction of the project. In that case,
the EPC contractors must take care of the liabilities. There are

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Construction Laws that help in the risk mitigation process. Construction

law can also release the tensions related to project finance.

7.2. Fixed Contract Price

The EPC contractors should fix a price for their service. Any cost overrun
or savings will be reflected in the contractor’s account.

7.3. Fixed Completion Date

EPC Contracts must be completed before the guaranteed deadline. If
the contractors fail to meet the deadline, they are predisposed to pay for
Delay Liquidated Damages (DLD). However, if the project owner
interferes with the construction process, the contractors can claim an
extension of time.

7.4. Performance Specifications

The project owner can assign detailed specifications to the construction
company. It enlists all the criteria the contractor needs to meet.
Nevertheless, the construction company can decide how the standards
are met.

7.5. Performance Guarantee

The EPC Contracts will contain certain Performance Specifications to be
met by the contractors. In the event of project failure, they’re liable for
Performance Liquidated Damages (PLD).

7.6. Security
It is usual for construction contracts to include performance security. It
protects the project owners from potential financial losses. The security
can be in advance payment, assurance of the parent company, and bank
guarantee.

7.7. Caps on Liability

The majority of the EPC Contractors would only enter the contract with
limited liability. Generally, an overall liability cap of a hundred percent of
the contract fee is practiced.

7.8. Rights to suspend the contract

Generally, the project company has the right to suspend the construction
contract.

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7.9. Flexibility in Ordering Variations

The project owner usually has the right to order variations to the
construction contract.

7.10. Force Majeure

EPC Contracts can face severe setbacks from Force Majeure events
such as earthquakes, hurricanes, epidemics, and wars. In such
instances, both parties can excuse themselves from fulfilling their
obligations.

8. Limitations of an EPC contract

Like any other contract, an EPC Contract also has some limitations,
albeit fewer in number. The disadvantages of contracting a Turnkey
Contractor are:

EPC Projects are Expensive

Owners will have less control over the project

8.1. EPC projects are expensive

Construction projects under an EPC contract can be costly. This is due
to the high risk faced by the construction contractor. This high cost will
aid the contractor in absorbing the risk. In short, a high contract fee is a
form of risk allocation. So, the project's lender or sponsor should
critically analyze the risks before finalizing any tenders.

8.2. Owners have less control over the

project
The owners of an EPC Project are essentially transferring the power and
authority to their contractors. Any interference by the project company
can cause costly delays. Also, the intervention by the Owners will help
the contracts battle claims against delay damages.

9. EPC in Various Industries

An EPC contract is not limited to the construction industry alone. It is
widely used in diverse industries, including power generation, oil and
gas, renewable energy, petrochemicals, and more. In each case, the EPC

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contract acts as the backbone of project management, guaranteeing the

successful delivery of complex undertakings.

10. List of notable EPC companies

1. Petrofac (Oil and Gas Sector)
2. Samsung Engineering (General Contracting)
3. Hyundai Heavy Industry (Marine Engineering)
4. TATA PROJECTS LTD. (General Contracting)
5. National Petroleum Construction Company (Oil and Gas
Sector)

Check out our 15 Largest Construction (EPC) companies in the world

article to learn more about the largest EPC contractors in the world.

11. In a Nutshell...
EPC contracts can get expensive, and the project owner has less control
over the construction. But it is still one of the best contract types for
awarding projects. So, governments and large-cap companies prefer an
EPC Contract over traditional ones for their construction requirements.

P.S.: Are you a general contractor, construction manager,

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12. FAQs
12.1. What is an EPC company?
A construction company or consortium of construction companies is
approached by a project owner to design and build large complex
structures, especially in the oil and gas, energy, power, and infrastructure
sectors.

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12.2. What is an EPC contract?

An EPC contract is one of the most widely used construction contracts,
especially large and complex construction projects in industries such as
oil & gas, energy, and infrastructure. They have emerged as the
construction contract of choice in project financing that involves major
international development projects.

12.3. What are various types of EPC

Contracts?
EPC contracts come in various forms. However, each category can be
tailored to the specific needs of the project and project owner. Some
common types include lump-sum contracts, cost-reimbursable
contracts, and unit-price contracts. The choice of contract type depends
on the project's complexity and the risk-sharing arrangement among
stakeholders.

12.4. What is an EPC Agreement?

The EPC agreement is the heart of the contract, detailing the scope of
work, project schedule, quality standards, cost estimates, and the roles
and responsibilities of all parties involved. It acts as a legally binding
document that provides the project with a clear structure and
governance framework.

12.5. What is an EPC Tender?

EPC tenders are the initial stages of project procurement where
contractors submit proposals for their EPC services.

12.6. What is the difference between an

EPC contract and an EPCM contract?
The definition of EPCM is Engineering, Procurement, Construction, and
Management. Although it sounds similar to an EPC project, an EPCM
Contract differs greatly from the former.

An EPC Contract handles design, procurement, construction, and

commissioning and hands the project to the end user. In comparison,
the EPCM contractor is mainly concerned with the supervision of the
project.

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On the other hand, an EPCM Contractor is also responsible for the

detailed design and the overall project management.

12.7. What are EPC services?

EPC services include designing, consultation, management, supply,
procurement, and construction. Under an EPC contract, the project
owner or project sponsor hires an EPC company, which then supplies its
own material and manpower resources, including engineers,
consultants, and suppliers. EPC contractors may even hire different
types of subcontractors for specific jobs.

12.8. What is a turnkey contract in

construction?
A turnkey contract in construction is one where the project development
company or general contractor is fully responsible for every aspect of
the project and hands it over to the owner in a ready-to-use state.

12.9. What is the difference between

turnkey and EPC contracting?
Turnkey contracting is an EPC contracting that always includes the
complete scope of project work, right from design to construction and,
often, commissioning of the facility.
On the contrary, EPC contracting may or may not include the complete
project scope. It may either provide the complete service package,
including design or may undertake only the construction part.

12.10. What is the difference between a

lump sum and an EPC contract?
In an EPC contract, the contractor is responsible for design and
technical assessment, whereas, in a lump sum contract, the project
owner may consult an independent consultant for a feasibility study,
FEED study, technical assessment, design, and drawings of the project.
Based on the results, the owner may decide on a project delivery
method and hire an EPC contractor to complete the construction part in
pre-agreed terms and sum.

12.11. How do EPC companies work?

EPC companies work either as part of a project, such as construction, or
act as project managers on behalf of the owner. However, most EPC

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companies work on projects right from their conception to the

completion stage.

CONSTRUCTION CONTRACT EPC CONTRACT

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