Projects in the field of renewable (alternative) energy are often not entirely transparent and understandable for potential participants. One of the most frequently asked questions, which requires explanation and clarification, is the possibility of implementing the project, using the EPC contract model (as an option – EPCM-contract) in the construction of solar power plants. The purpose of this publication is to provide an accurate definition of what the EPC or EPCM contract model is, their varieties, advantages and disadvantages for the customer and contractor, and the specifics of using it in practice.
Different forms of contracts are used in the international practice of the realisation of multiple projects in order to regulate the relations between the contracting parties in the field of the construction management and supervision. The same model contracts may be applied to the implementation of solar energy projects in Ukraine. Besides, one can define main model contracts, which include and regulate the relations between the contracting parties at all stages of the solar power plant installation process (project development, procurement, construction):
It is necessary to remember that there are not uniform or standard terms in the classification of the construction contracts, which would be enshrined in the legislation, neither on international level nor on national one. For example, in terms of the solar power plant construction. EPC contract is a unique model contract which determines a fixed price and deadlines enough precisely and exactly. It also stipulates clearly that just the contractor shall assume all risks and liabilities referring to the project construction process. At the same time, other types of model contracts can often intermix their terms with one another and with the terms of EPC contract.
In general, the analysis of the statistics shows that in the cases of the contract conclusion when the client needs to accomplish the full-scope cycle of construction works, EPC or EPCM contracts are used more frequently than other model contracts.
The EPC contract, in most of the cases, is concluded when the client does not have the personnel, which would be able to manage the project construction management, lack of construction and manufacturing capacities and does not want to interfere with performing work or have an influence on it, letting the contractor carry all risks. The EPC contract is, in addition, one of main model contract forms for the implementation of the projects, which are funded by banks or other financial establishments (especially when the case of project financing takes place). It is conditioned by the fact that the lending banks strive to minimise the number of risks assumed directly by the borrower. From the point of view of the owner of a future solar power plant, the EPC model contract is the most convenient also for the reduction of the implementation period for the projects bringing “green tariff” into practice.
There is the number of reasons, which prevent the contractor companies from concluding EPC contracts:
Because of the reasons listed above the EPC contractors do not want to assume the risks on the project implementation, especially the risks resulting from the failure of local subcontractors to meet their commitments, taking into consideration the high level of the EPC contractor liability (unlimited or restricted by the contract price) and the fact that the rate of the EPC contractor fee does not exceed 10-15% of the total price stipulated in the EPC contract.
The EPCM contract contains less strict requirements to the contractor compliance with the deadlines set for the accomplishment of construction works. Moreover, the client shall have a considerable power that allows participating in the project realisation management: the client company has the right to decline or to approve the choice of subcontractors, supervise over their activities, set requirements directly to them. As a rule, the subcontractors are selected through tender in this case. There are several forms of the EPCM model contract:
In most of the cases, one does not assign a full scope of work (or its significant part) for one subcontractor to get the maximum cost saving. This model contract is the compromise between the EPC contract and the EPCM contract basing on the principle “cost plus fee” (the upper limit of the target value, in addition, is not determined). Some sources define this form as the EPC contract with target price.
EPC and EPCM model contracts condition the conduct of the full-scope cycle of works (including engineering, provision of necessary equipment and materials and the full cycle of construction works) by the contractor in order to realize the project of a solar power plant. However, the cases when the client ensures on its own the execution of a certain part of work related to the project implementation: e.g., the project development or the supply of the hardware (solar panels, inverters, other items). It is proper, in particular, to the contractors abroad, who are ready to perform the design work and the provision of the hardware, but do not want to bring the responsibility for performing the cycle of the construction works. Therefore, it is recommended to use so-called “abridged” model contracts:
Sometimes the client conducts a certain part of work related to the solar energy project implementation on its own or divide this volume of work between several contractors. For example, the client shall realise the construction site preparation on its own, one contractor shall conduct the development of the photo power station project and the provision of hardware, other contractor shall ensure performing the construction work volume. In general, If all volumes of work are divided between the contractors in this way, the total cost of the project realisation can be lower than in the case when the EPC contractor conducts all process of the realisation of an analogous project because each of several contractors assumes much less risk than the EPC contractor. This approach has also another aspect. This way of the project construction (the conclusion of agreements with several independent contractors) conditions the increase of the risks related to the cost of the project, which are assumed by the client. When the first contractor performs the assigned works with a poor quality or with the delay, it is possible that the second contractor will come to a halt in performing the works (if the works are performed in succession) and the prolongation of the project implementation period or the increase in the cost of work (if it is necessary to correct the mistakes of the prior contractor). Besides, the situation, when it is difficult enough to establish the failure of a certain contractor, especially in the case when the defect occurs within the interface between the work scopes, which are performed by different contractors, is also possible.