Understanding and Negotiating EPC Contracts, Volume 2

Annotated Sample Contract Forms

Howard M. Steinberg

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317005193
• Edition: 1
• Topic: Law
• Subtopic: Construction Law
• Index: Law

Any project which involves an EPC contract is also likely to involve a number of other complicated contracts. The challenge of the parties to an EPC contract is not to try to eliminate risk but rather put into place a narrative structure that enables the parties to predict the contractual result that would obtain if a risk materializes. If the EPC contract does not allow the parties to determine the consequences of an unanticipated situation, they will have to look to an expert, mediator, tribunal, or court to impart guidance or pass judgment.

The sample forms of contract contained in Volume 2 of Understanding and Negotiating EPC Contracts are intended to serve as a guide to demonstrate how risks and responsibilities can be allocated among project sponsors, EPC contractors and the various other parties that may be involved in a project.

Collectively the sample forms in this volume offer an extraordinary resource that provides the benefit of lessons learned and priceless insight into any project being undertaken which can help assure the resilience of any EPC project.

Part A

Sample Form of Letter of Intent for Fixed Price, Lump Sum, Turnkey, Engineering, Procurement and Construction Contract

[Binding][Non-Binding] ¹ Letter of Intent for Turnkey Engineering, Procurement and Construction Contract

This <Binding> <Non-Binding> Letter of Intent is made by and between <<insert name of Contractor>> (the “Contractor”) and <<insert name of Owner>> (the “Owner”).

WHEREAS, the Owner is evaluating the development of a <<insert type of facility>> to be located <<insert location>> as further described in Exhibit A (the “Facility”);

WHEREAS, the Owner and the Contractor have <begun> <concluded> discussions concerning the general terms and conditions of a definitive engineering, procurement and construction contract under which the Contractor <would> <will> design, engineer, procure, construct, commission and test the Facility on a fixed price, turnkey, date certain basis (the “EPC Contract”);

WHEREAS, the terms below enumerated are <some of the>² <all the material> terms to be contained in the EPC Contract; and

WHEREAS, the parties wish to <negotiate> <memorialize their agreement> on <an exclusive> <a non-exclusive> basis regarding the EPC Contract [until the expiration of this Letter of Intent as set forth herein];

NOW, THEREFORE, <for good and valuable consideration>³ <since no consideration has been given or received>⁴ it is <agreed that> <under discussion whether> the EPC Contract will contain the following terms which [do not]⁵ constitute all the material terms of the EPC Contract.

1. Relationship Among Owner, Contractor and Subcontractors

The Contractor may enter into subcontracts (“Subcontracts”) with vendors and subcontractors (collectively, “Subcontractors”) with respect to any portion the Work (defined in clause 2 below) provided that the Owner will have the right to approve (in advance) all Subcontractors furnishing major or critical items of Work and their respective Subcontracts. The Contractor will not be relieved from any obligation under the EPC Contract by virtue of entering into any Subcontract or the Owner’s approval or disapproval of any Subcontractor or Subcontract. The Contractor will assure that each Subcontractor will comply with all relevant provisions of the EPC Contract and will waive in its Subcontract any rights that it may have against the Owner.

2. Parties’ Responsibilities

The Owner will provide the site, [certain equipment as listed in Exhibit B,] all permits to be obtained by it as listed in the EPC Contract and all relevant information within its possession needed by the Contractor to procure all other permits required for the Facility. The Contractor will provide all equipment, materials, permits, labor and services required for the design, engineering, procurement, construction, commissioning and testing of the Facility that are not required to be provided by the Owner (the “Work”). The Work will also incorporate any equipment and materials provided and services performed by the Contractor or any Subcontractor prior to the date on which the Owner gives the Contractor notice to proceed with the Work under the EPC Contract (the “Notice to Proceed”). The Owner will have the right to review and comment on drawings and specifications, and the Contractor will resolve any such comments to the Owner’s satisfaction. No review or comment by the Owner, or the Owner’s failure to conduct any review, will relieve the Contractor from any of its obligations under the EPC Contract.

3. Change Orders, Adjustments and Force Majeure

The Owner may order a change, suspension or termination of the Work at any time. Adjustments will be made to the Contract Price (defined in clause 4 below) and the Deadlines (defined in clause 7 below) only for certain limited circumstances (such as force majeure) but any such circumstances may not be asserted as an excuse for performance to the extent that the circumstances, among other things, were within the asserting party’s control, did not materially affect the asserting party’s performance, or could have been avoided or overcome by the asserting party; provided that the Contractor will [not] be entitled to an adjustment in respect of any site condition [, subsurface, latent or otherwise].

4. Contract Price and Payment

<The Owner will pay and the Contractor will accept a lump sum amount of <<insert currency and amount>> as full consideration for the Contractor’s performance of the Work which <includes> <excludes> all taxes in respect of the Work (the “Contract Price”).> <The Contractor will provide the Owner with an indicative price for the EPC Contract on or before <<insert date>>. [The parties will work together using an “open book”, joint approach in developing a final price for the EPC Contract (the “Contract Price”).] {Once the Contract Price is agreed upon by the parties, the Owner will no longer be entitled, except as specified in the EPC Contract, to further pricing information}. [The Owner agrees not to share this information with any other party without the written consent of the Contractor.]> Not more than monthly, the Contractor may apply for payment on the basis of, and provide substantiating documentation for, the actual work performed in accordance with a milestone payment schedule to be incorporated into the EPC Contract. The Owner will be entitled to withhold from each payment retainage equal to <<insert number>> percent of such payment [unless the Contractor delivers to the Owner a letter of credit equal to such retainage,] which will be paid to the Contractor upon Final Acceptance (defined in clause 6 below) after deducting the cost of any unfinished items of Work. The Owner may also withhold any payment as may be necessary to protect the Owner from loss attributable to the Contractor.

5. Title and Risk of Loss; Insurance

(a)The Contractor will warrant that title to each item of Work incorporated into the Facility will vest in the Owner free and clear of any liens or claims. The Contractor will bear the risk of loss for all Work and have care, custody and control of the Facility prior to the date on which Substantial Completion (defined in clause 6 below) is achieved.

(b)The <Contractor> <Owner> will maintain and pay for[, and will require all of its Subcontractors to maintain and pay for,] customary insurance, including builders all-risk, delayed start up, general and automobile liability, marine transportation, workers’ compensation, employer’s liability and excess liability coverages. Such insurance will have deductibles and limitations of liability, and be provided by insurance companies, satisfactory to the Owner, and will name the <Owner> <Contractor> as an additional insured.

6. Testing, Provisional Acceptance and Final Acceptance

“Provisional Acceptance” will occur when, among other things, the Owner has issued a certificate of mechanical completion of the Facility, all of the performance tests of the Facility have been completed and each of the minimum performance levels of the Facility specified in Exhibit C (the “Minimum Performance Levels”) has been achieved. “Final Acceptance” will occur when, among other things, the Owner has issued a certificate of Provisional Acceptance, the Facility has successfully passed all of its reliability tests (or, if only the Minimum Performance Levels have been achieved, the Contractor has paid all Buy Down Amounts (defined in clause 7 below)) and the Contractor has otherwise completed all Work and other obligations (including punch list items) as required under the EPC Contract (other than warranty obligations). The Owner may refuse to accept the Facility if the Contractor does not achieve each of the Minimum Performance Levels and otherwise meet all the requirements of Provisional Acceptance.

7. Warranties; Performance and Liquidated Damages

(a)The Contractor will warrant, among other things, that:

(i)it and its Subcontractors are capable of performing the Work in accordance with prudent industry practices, all applicable laws and permits and all requirements of the EPC Contract and the equipment manufacturers;

(ii)each component of the Work will be new, free of defects and deficiencies and in conformance with the requirements of the EPC Contract;

(iii)the Facility and each part thereof will be fit for its intended use, capable of operating in accordance with the req...