As discussed on the Project Finance Principles page, the Project will attempt to pass as much risk through to the EPC contractor as possible.
This is achieved through the following:
- Fixed price and date-certainty mean that the risk of overruns on price or time are for the EPC contractor’s account
- Any compensation for risks outside of the control of the EPC contractor which the EPC contractor may enjoy will typically be limited to the compensation which the project enjoys from the offtaker. This is typical for, amongst other provisions, force majeure and change in law
- Any provisions which may lead to termination of the offtake contract, or any of the project’s other contracts, will, to the extent applicable, be mirrored in the EPC contract, often with a slightly more onerous threshold, so that the project can terminate the EPC contractor before the other contract is terminated and attempt to fix the situation. In some situations, the project may acquire the right to reject the plant and demand full repayment of money paid to the EPC contractor
- The EPC contractor will pay liquidated damages at a pre-defined rate per day of late delivery, or per percentage point downside performance, upon failure to meet the guaranteed performance levels of the plant when undertaking the completion tests. These liquidated damages are typically capped, and usually guaranteed by a liquid, on-demand bank performance bond.
The EPC contractor will usually only receive funds as certain construction milestones are reached, and signed off by the Owner’s Engineer. The project may also hold back a retention payment until after the performance tests have been passed adequately.