Construction Issues:

EPC Contracting and

FIDIC Silver Book
Francis Ho
Senior Associate, King & Spalding LLP
Email: fho@kslaw.com
Tel: +971 2 652 3426
Mob: +971 50 557 0446
An Update on Real Estate Laws in
the UAE and Saudi Arabia
Radisson Blu Media City Hotel,
Dubai, UAE
31 January 1 February 2010

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 EPC Contracts
Engineering, procurement and construction contracts are most
common form of contract used in major international infrastructure
projects
An EPC Contractor s obligations typically include:
Turnkey responsibility to deliver:
a complete facility
for a guaranteed price
by a guaranteed date
which must perform to a specified level
Because EPC Contracts involve Contractor taking a high level of
risk they are, to some extent, resisted by contractors (partially due
to high insurance costs). That said, they are still the dominant
model because sponsors and lenders prefer certainty they offer

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 FIDIC Silver Book
FIDIC International Federation of Consulting
Engineers
Standard Forms of Contract widely used in international
engineering and construction projects
Range of contracts White, Red, Yellow, Orange and
Silver Books
Silver book Turnkey contract which departs from usual
balance of risk allocation in FIDIC contracts

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 Basic Contractual Structure
of a Power Project
Government
Equity Support Concession Financing and
Agreement Agreement Security Agreements

Sponsors Project Co Lenders

EPC Longterm Fuel Supply

PPA
Contract O&M Contract Agreement

EPC O&M Contractor Fuel Offtaker

Contractor (often a Sponsor) Supplier

Direct Agreement
Note: Contractors often become one of sponsors in large projects now although ordinarily
sell down their interest after financial close as they wish to free up their capital for other
projects 4
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 Bankability
EPC contracts must have risk allocation that satisfies Lenders
Lenders focus on ability (or more particularly the lack of) Contractor to
claim:
Additional costs; and/or
Extensions of time
Lenders also look to Contractor s security (e.g. parent company
guarantees/bank guarantees securing Contractor s performance)
The less comfortable Lenders are with the above, the more equity the
Sponsors will be required to contribute
Lenders will also need to be satisfied with technical risk
Price is a general bankability issue also (but a broader project issue)
Engineering, procurement and construction contracts are most common
form of contract used

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 General Bankability Issues in
Construction Contracts
Fixed completion date (Silver Book Art. 8.2)
Fixed completion price (Silver Book Arts. 4.11 and 14.1)
No or limited technology risk (Silver Book Arts. 5.8, 7.5, 9.1 and 11
etc)
Output guarantees (Silver Book no performance LDs, rather
obligations to remedy defects and/or reduction in contract price)
Liquidated damages for both delay and performance
Security from Contractor and/or its parent (Silver Book Art. 4.2)
Large caps on liability ideally none but often one is negotiated
(Silver Book Art. 17.6)
Restrictions on ability of Contractor to claim extensions of time and
additional costs (Silver Book Arts. 13.1 and 13.4)
An EPC Contract (and Silver Book with amendments) generally
delivers above
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 Key Clauses in EPC Contracts and
Common Approaches (1)
Single point of responsibility Contractor is responsible for all design,
engineering, procurement, construction, commissioning and testing
activities. If EPC Contractor is a joint venture, liability/responsibility is joint
and several (Silver Book Arts. 4.1 & 5 fit for purpose )
Fixed Contract Price limited opportunities for Contractor to claim extra
costs/time. Generally limited to directed variations to works (Silver Book
Arts. 13.1, 14.1 and 20)
Fixed completion date guaranteed date for completion. Failure to meet
this date will attract LDs. In order for these to be enforceable they must be
a genuine pre-estimate of the loss that the project company will suffer if the
power station is not completed on time (Silver Book Arts. 8.2, 13 and 20)
Note: Additionally extension of time clause must provide for an EOT to be
granted where Contractor is delayed due to act/omissions of owner/project
company (Silver Book Art. 8.4(c))

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 Key Clauses in EPC Contracts and
Common Approaches (2)
Performance Guarantees: Project Co s revenue will come from revenue
from project. This is important to service project debt. It is vital then that
facility performs in respect of output, efficiency and reliability. This is
purpose of the Performance Liquidated Damages payable by the
Contractor if performance requirements are not met. (Silver Book does not
provide for performance liquidated damages see e.g. Art. 9.4. Can be
amended as required.)
Performance Liquidated Damages must also be genuine pre-estimate of
loss. They are usually calculated on net present value (less expenses)
calculation of revenue foregone over the project
E.g. in case of a power station what this might mean is if plant output is 5
MW less than required performance liquidated damages will be designed
to compensate project company for that loss of revenue for life of project
by being unable to sell that 5 MW

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 Key Clauses in EPC Contracts and
Common Approaches (3)
Caps on liability: most EPC Contractors will baulk at unlimited
liability. Market is generally a cap at 100% of the Contract Price.
Sub-caps of 20% of Contract Price on delay and performance
liquidated damages also common (Silver Book LOL is dealt with
in Special Conditions see Art. 17.6)
Consequential damages are also generally excluded. Profit also
often expressly excluded (Silver Book Art. 17.6)
There may be some exceptions to those caps (e.g. wilful
misconduct, breach of patent rights)
Security EPC Contract will require that performance security be
supplied by the Contractor in respect of its obligations under EPC
Contract (Silver Book Art. 4.2)

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 Key Clauses in EPC Contracts and
Common Approaches (4)
Market security includes:
Bank guarantee for between 5-15% of Contract Price
Retention (withholding of 5-15%) of each payment under EPC
contract (Silver Book Arts. 4.2 and 14.3(c) and Annex F)
Advance Payment Guarantee if an advance payment is made
(Silver Book Art. 4.2 and Annex E)
Parent Company Guarantee to secure Contractor s
performance if it does not perform (Silver Book Art. 4.2 and
Annex A)
Variations
Project Co must have right to order variations/agree to suggested
variations clause must contemplate omission of work as well as
pricing (Silver Book Arts. 3.5 and 13)

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 Key Clauses in EPC Contracts and
Common Approaches (5)
Defects Liability
Contractors required to repair defects 12-24 months following
completion of performance testing can be one period or tiered
(Silver Book Art. 11)
Intellectual Property
Contractor must warrant it has the rights regarding any proposed
LP. Also note there is often an indemnity for breach (Silver Book
Art. 17.5)
Force Majeure
Parties excused from performance for certain Force Majeure events
(Silver Book Art. 19)
Suspension
Project Co has this right (Silver Book Arts. 8.8 to 8.12)

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 Termination
Contractor has very limited rights e.g. non-payment/
extended suspension, material breach by employer
(Silver Book Art. 16.2)

Project company has much broader rights. This will be

tied with third party agreements. Can terminate:
For convenience (Silver Book Art. 15.5)
For breach/insolvency, otherwise (Silver Book Art.
15.2)

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 Power-specific Clauses in EPC
Contracts
General interface issues:
Commencement and completion dates
LDs amounts and trigger points (NB: Silver Book does not
provide for performance liquidated damages and will need
adaptation)
Caps on liability
Indemnities
Entitlements to extensions of time
Force Majeure (Silver Book fairly wide, beyond a Party s
Control and could not reasonably have been provided against
before entering into the Contract )
Third party interfaces
Intellectual Property

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 Key Power Issues
Grid Access
EPC Contract must provide that Project Company provides Grid Access
this has 2 levels:
(a) obligation to ensure that the infrastructure is in place; and
(b) obligation to ensure that Contractor is permitted to export power
Interfacing of commissioning and testing regimes (fuel for testing?)
Consistency between testing/offtake/PPA regime? important that they
relate
Interfacing of issues between the Offtaker and EPC Contractor
Project company must control relationship with Offtaker (on-going
relationship)
Silver Book will require substantial modification issues such as
connection, metering, point of delivery and third party interfaces to be dealt
with

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 Key Performance Issues in Power
Projects (1)
Liquidated Damages is main relevant provision governing
performance
Output LDs (how many mega watts produced)
Heat rate (how much fuel burnt to produce required power
output)
Delay liquidated damages
Testing performance most common approaches
Functional Tests pumps/conveyers/pressure vessels. Test
functionality of parts at station but not whole station. Important as
condition LDs will attach
Emissions Tests compliance against environmental requirements.
Absolute obligation generally not linked to LDs

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 Key Performance Issues in Power
Projects (2)
Silver Book will require substantial modification to provide for
performance liquidated damages and testing in power projects:
Employer s remedy for defective plant accepted into service is
a reduction in the Contract Price; and
Testing and commissioning provisions are generally defined
and require further definition can use technical schedules
Guarantee Tests these are the ability of power station to meet
the performance criteria set out in Contract
Generally these are set at maximum level of required
performance. Lender s input will be important in determining
this level. Lender s interest though will be that debt service
obligations are met Sponsor s interest will be to get optimal
performances

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 Key Performance Issues in Power
Projects (3)
Hand-over ought to occur after all performance tests are
satisfied. This retains Sponsor s potential rights to both
performance and delay damages
Contractor s will often request a right to modify station in event
performance guarantees are not met (EPC Contract must
allocate costs for this eventuality)
Silver Book provisions will need modification to be made
applicable to project specific requirements (See Art. 9 of Silver
Book)

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 Technical Issues
Testing procedures ought to be set out in EPC Contract including:
Testing Methodology (i.e. American Society of Mechanical
Engineers)
Testing Equipment (who must provide it, where will it be, how
sensitive)
Tolerances what is margin of error?
Ambient Conditions what atmospheric conditions are
assumed to be base case (testing results will need to be
adjusted to take into account any variance from these
conditions)
If a multi-unit station individual unit tests and then whole of plant
testing
Provision of fuel and consumables

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 To EPC or not to EPC?

Advantages Disadvantages

1. Bankable 1. Higher Contract price than

2. Certainty (as far as that is possible) alternative structure due to risk
3. Turnkey responsibility on the allocation (and built-in Contractor
EPC Contractor contingencies)
2. Limited scope for Project Sponsor
to intervene if problems arise
during construction
3. Not many players

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 To Silver Book or not to Silver Book?
Silver Book very general and requires modification for
complex process driven projects
No provision for lender or concession grantor step-in in
project-financed (including PPP and BOT) deals
Dispute resolution provisions require consideration
currently dispute adjudication board appointed (can be
expensive)
Performance liquidated damages against Contract Price
reduction lenders requirements and debt servicing
Substantial modification required for project-financed
deals

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