In our previous post, we began looking at a recent federal case involving an engineering, procurement and construction contract for a project in Florida. As we noted, EPC contracts are commonly used in construction projects in the power sector, but also in other sectors. Whenever they are used, it is important for all parties to work with experienced legal counsel to ensure their interests are represented in the final agreement and that their rights are protected if the contact is breached in the course of the progression of the project.
EPC contracts need to be clear about project deadlines and the overall timeline, as well as costs and the quality of performance. When used in the power sector, EPC agreements need to clearly deal with several other areas as well: performance testing, guarantees and liquidated damages. Performance testing refers to the tests used to determine whether a project contractor has delivered a functional facility which meets specific performance criteria. The specific performance criteria constitute the performance guarantees.
Different projects will, of course, require different performance testing and will involve different performance guarantees. It is critical not only to clearly identify these aspects of an EPC contract, but also what compensation will be rendered if these terms are not carried out by a party. This is where liquidated damages come in. Liquidated damages are important in EPC contracts because the overall success of a project depends largely on certain performance guarantees being met. Liquidated damages help motivate contractors to deliver on their end of the deal.
Other aspects of EPC agreements that need to be carefully addressed are the details of delay and time extensions, exclusive remedies and fail safe clauses, allocation of risks that lie beyond the control of the parties, and dispute resolution.
Some of the important aspects of EPC contracts mentioned here are, of course, important in any business contract. Those who are contemplating entering into an EPC agreement or any other construction agreement can greatly benefit from working with an experienced legal advocate to ensure they have zealous advocacy in the negotiation process and in the event the project fails and they are challenged in court.
Source: DLA Piper, “EPC Contractors in the Power Sector,” 2011.