EPC or turnkey construction contracts enable construction works of large-scale and complex infrastructure projects, where a contractor is obliged to deliver the complete facility to a developer who needs to only turn a key to start operating the facility.
Engineering, procurement and construction (EPC) contracts are the most common form of contract used to undertake construction works of large-scale and complex infrastructure projects. Under an EPC contract, a contractor is obliged to deliver the complete facility to a developer who needs to only turn a key to start operating the facility. Hence, EPC contracts are sometimes called turnkey construction contracts. In addition to delivering a complete facility, the contractor must deliver that facility for a guaranteed price by a guaranteed date and it must perform to the specified level. Failure to comply with any requirements will usually result in the contractor incurring monetary liabilities.
Most international projects today are procured on the basis that one contractor assumes total responsibility for the design and execution of the works, including all engineering, procurement, and construction, so that the contractor effectively provides a fully equipped facility ready for operation at 'the turn of a key'. Generally with an EPC contract, the client has less say over the project design and the contractor takes more risk.
On an EPC project, the client may seek tenders based on performance specification and then have no input into the design, other than if variations are instructed. Payment can be on a lumpsum or cost reimbursable basis, or some other basis, but generally the client would be likely to seek a fixed price, lumpsum agreement where the responsibility for cost control is taken by the contractor. This gives the client a relatively risk-free arrangement, with one point of responsibility and cost certainty. They can therefore operate the contract with the minimum resource. The client's main risk lies on the specification upon which the contract is based. If the specification is not well developed and concise, the quality and performance of the completed development may be compromised. Generally, EPC contracts are used on engineering and infrastructure projects, or industrial projects, where the aesthetics of design might be considered less important to the client than performance and cost certainty. EPC contract is divided into two separate contracts - onshore and offshore. The responsibilities of the offshore contractor are limited to the supply of design and engineering services 'offshore' (i.e., outside the country where the project is located) and the supply of offshore plant, equipment and materials ('equipment').
Contracting methods in power plant construction can be classified into two:
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