1.
Prepared by: Dendi Adisuryo of
ADCOLAW Attorneys at Law
An introduction to EPC
Contract – Clause by clause
discussion

2.
ADCOLAW – experience and expertise
 Mining, Energy and Major Projects are core areas of focus for
ADCO Attorneys at Law.
 Work for over 40 major clients since our establishment on 2008
and on projects with a cumulative value of over US$500 million
 Named as one of Asian Leading Lawyers for Natural Resources
for 2013 – recent.

3.
Project Structure
Loan
Agt
Asuransi Co
Operator and
Manager
Pemerintah
Sponsors
BANK / Non-Bank
Fin Inst
IPP
PLN / BuyerShareholders
Agt
Direct
Agreement
Share
Mortgage
Agt
Security
Documents
EPC Company
EPC Contract
O & M
Agreement
Insurance
Policy
PPA
Direct
Agreement
Direct
Agreement
Licensing Matters
Fuel Supplier Fuel Supply
Agreement
Direct
Agreement
Equipment
Supplier
Equipment Supply
Agreement
Direct
Agreement

4.
A key word - Risks
A “risk” is an uncertain event or condition that, if it occurs,
has a positive or negative effect on the project going
concerns

5.
Risks

6.
Types of Construction Contract – Risk Allocation
 Force Account (Ind.: swakelola)
 EPCM (Engineering Procurement Construction
Management)
 EPC (Engineering Procurement Construction)
 BOT / BOOT

7.
EPC – by Definition
A particular form of contracting arrangement used in some
industries where the EPC Contractor is made responsible
for all the activities from design, procurement, construction,
to commissioning and handover of the project to the
“Employer”

8.
EPC + /-
Advantages
 single point of responsibility
 limited interface risk
 fixed price (although some variations to pricing structures)
 potentially fixed schedule (subject to contractual adjustment
mechanisms)
 contractor has design liability
 bankability
 easier contract administration
 single or multiple completion dates for Works or Sections
 caps on liability and limitations on liability

9.
EPC + / -
Disadvantages
 tender process can be long and costly
 prices can be higher – all risks are priced
 limited pool of contractors – competitive pressure may not off-set
the risk pricing
 contractor default has a significant impact
 potentially adversarial relationship
 loss of control – less Owner involvement and potential for
intervention

10.
Splitting EPC Contract
Issues to consider
 rationale (avoiding local corporate taxation on work carried out offshore, IUJK
requirement)
 scope of the onshore/offshore contractor work
 Offsore: design, engineering, supply of plants / materials sourced from outside host county
 Onshore: installation, construction, testing, commissioning, supply materials from host
country
 typical structure (coordination/umbrella agreements)
 how do you avoid liability “gaps” between offshore and onshore contractors?

11.
Splitting EPC Contract
Practical messages
 undertake tax analysis as early as possible to determine best contract
structure for tax efficiency
 (contract split must be driven by tax regime of the deal)
 ensure that technical schedules can be split (if necessary)
 tender process should reflect the split

12.
EPC – Typical and Critical Issues
Why are issues “typical”?
 they represent the balance (levers) between the contract price and the
allocation of risk
 for the contractor, a higher price may mean it is prepared to take more risk
 for the employer, a lower price may mean it must take on more risk
 allocation of risk is critical, even in an EPC contract. Engineering projects are
inherently risky;
 who is best placed to take on the risk?

13.
EPC – Typical and Critical Issues
What are the “typical” issues?
 quality (standards of work or performance):
 warranties and standards of care
 performance testing and under-performance remedies
 time (schedule) and money (costs and finance):
 program, time for completion and delay remedies
 grounds for extension of time and cost
 consequences if things go wrong:
 performance security
 termination (including force majeure)
 limitations on liability and indemnities
 Technology

14.
EPC - Warranties
Typical EPC warranties
 compliance with “Good Industry Practice” and contract requirements, including performance –
 consider specific performance requirements
 “fitness for purpose”, as specified in the Contract – there may be issues in negotiating this
standard as may need to define purposes clearly
 free from defects in design and workmanship
 obtaining required third party IP rights and no infringement
 compliance with laws, relevant codes of practice and ethics (which ones?)
 designed for minimum specified working life

15.
Performance Test
Issues to consider
 matching up the technical schedules in the contract with the language in the conditions (often
different workstreams)
 performance liquidated damages must be a genuine pre-estimate of loss
 performance liquidated damages only achieve so much; difficulties of achieving practical
sanction if plant falls below the minimum standards where rejection is not realistic
Performance testing and damages mechanisms; the EPC contract should include
 testing regimes and performance liquidated damages in respect of key criteria (eg. product
quality, capacity, utility consumption etc.)
 mechanisms to recover performance liquidated damages within specified parameters, but
right to reject or reduce price if performance is below minimum standards
 clear program for testing – whether testing takes place before or after taking-over by Owner
(e.g. on Mechanical Completion or after commissioning or both)

16.
Time and Cost
Contract program and time for completion
 critical issue – importance of completion on time to preserve revenue stream
 program – role, adjustment and legal status under the EPC contract; project to be completed
as a whole or in sections?
 –defects liability period – purpose, effect and extension
Grounds for extending time and cost
 acceleration and expediting – ability to require Contractor to accelerate or expedite and the
consequences of doing so
 extensions of time; allocation of delay risks may be heavily negotiated

17.
Time and Cost
Contract program and time for completion
 critical issue – importance of completion on time to preserve revenue stream
 program – role, adjustment and legal status under the EPC contract; project to be completed
as a whole or in sections?
 defects liability period – purpose, effect and extension
Grounds for extending time and cost
 acceleration and expediting – ability to require Contractor to accelerate or expedite and the
consequences of doing so
 extensions of time; allocation of delay risks may be heavily negotiated

18.
Time and Cost
Delay liquidated damages
 delay liquidated damages for failure to meet Time for Completion for works or relevant section
 daily or weekly rate to be set out in Contract
 setting and claiming - must not exceed a “genuine pre-estimate” of loss (cf. modeling)

19.
Perfomance Security
Issues to consider
 From whom should the security be sought?
 for how much?
 for how long?
Types of security
 advance payment guarantee
 performance bond
 parent company guarantee
 retention / retention bond
 subcontractor indemnities
 …or a combination

20.
Performance Security

21.
Termination Rights
Issues to consider
 termination is a last resort, but if it happens all parties need to understand the
consequences
 the consequences of termination will differ depending on the circumstances
 remember that if termination occurs, handover may be required

22.
Termination
 Termination by Employer for Contractor Default
 Termination by Contractor for Employer Default
 Termination for Employer convinience
 Termination by both Parties for Force Majeure
 Termination by both Parties for certain conditions

23.
Termination

24.
Termination

25.
Termination

26.
Indemnities

27.
Force Majeure
 Broad definition under the ICC so contractual definition is important
 General tests plus non-exhaustive list of events or narrower test (perhaps with specific
 exclusions)
 Consequences for parties‟ obligations – time and cost
 Possible termination for prolonged delay

28.
See you next in clause by clause discussion.....