Conclusion What is EPC? The engineering and construction contractor will carry out the detailed engineering design of the project, procure all the equipment and materials necessary, and then construct to deliver a functioning facility or asset to their clients. One of the special modes of carrying out international business is a turnkey project. The term turn-key project Turn-key delivery describes a project or the delivery of such in which the supplier or provider is responsible to the client for the entire result of the project and presents it to the client completely finished and ready to use. Synonyms for the term turnkey project are a turn-key solution, turn-key delivery, or ready-to-use.
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Under the usual arrangements for this type of contract, the entity carries out all the Engineering, Procurement and Construction: providing a fully-equipped facility, ready for operation at the "turn of the key". This type of contract is usually negotiated between the parties. These risk sharing principles have been beneficial for both parties, the Employer signing a contract at a lower price and only having further costs when particular unusual risks actually eventuate, and the Contractor avoiding pricing such risks which are hard to evaluate.
These risk sharing principles are continued in the new updated versions of the Red and Yellow Books. During recent years it has been noticed that much of the construction market requires a form of contract where certainty of final price, and often of completion date, are of extreme importance. Employers on such turnkey projects are willing to pay more - often considerably more - for their project if they can be more certain that the agreed final price will not be exceeded.
Often the construction project the EPC - Engineer, Procure, Construct - Contract is only one part of a complicated commercial venture, and financial or other failure of this construction project will jeopardize the whole venture. For such projects it is necessary for the Contractor to assume responsibility for a wider range of risks than under the traditional Red and Yellow Books.
To obtain increased certainty of the final price, the Contractor is often asked to cover such risks as the occurrence of poor or unexpected ground conditions, and that what is set out in the requirements prepared by the Employer actually will result in the desired objective. If the Contractor is to carry such risks, the Employer obviously must give him the time and opportunity to obtain and consider all relevant information before the Contractor is asked to sign on a fixed contract price.
The Employer must also realize that asking serious contractors to price such risks will increase the construction cost and result in some projects not being commercially viable. Even under such contracts the Employer does carry certain risks such as the risks of war, terrorism and the like and the other risks of Force Majeure, and it is always possible, and sometimes advisable, for the Parties to discuss other risk sharing arrangements before entering into the Contract.
In the case of BOT Build - Operate - Transfer projects, which are normally negotiated as a package, the allocation of risk provided for in the turnkey construction Contract negotiated initially between the Sponsors and the EPC Contractor may need to be adjusted in order to take into account the final allocation of all risks between the various contracts forming the BOT package.
Apart from the more recent and rapid development of privately financed projects demanding contract terms ensuring increased certainty of price and performance, it has long been apparent that many employers, particularly in the public sector, in a wide range of countries have demanded similar contract terms, at least for turnkey contracts. This need of many employers has not gone unnoticed, and FIDIC has considered it better for all parties for this need to be openly recognised and regularised.
Thus the Employer does not have to attempt to alter a standard form intended for another risk arrangement, and the Contractor is fully aware of the increased risks he must bear. Clearly the Contractor will rightly increase his tender price to account for such extra risks.
The Tenderer should then be permitted and required to verify all relevant information and data and make any necessary investigations. He shall also carry out any necessary design and detailing of the specific equipment and plant he is offering, allowing him to offer solutions best suited to his equipment and experience. Therefore the tendering procedure has to permit discussions between the Tenderer and the Employer about technical matters and commercial conditions.
All such matters, when agreed, shall then form part of the signed Contract. Thereafter the Contractor should be given freedom to carry out the work in his chosen manner, provided the end result meets the performance criteria specified by the Employer.
Clearly the Employer will wish to know and follow progress of the work and be assured that the time programme is being followed. A feature of this type of contract is that the Contractor has to prove the reliability and performance of his plant and equipment.
FIDIC recognizes that privately-financed projects are usually subject to more negotiation than publicly-financed ones and that therefore changes are likely to have to be made in any standard form of contract proposed for projects within a BOT or similar type venture. Among other things, such form may need to be adapted to take account of the special, if not unique, characteristics of each project, as well as the requirements of lenders and others providing financing.
Nevertheless, such changes do not do away with the need of having a standard form. FIDIC wishes to record its appreciation of the time and effort devoted by all the above.
Under the usual arrangements for this type of contract, the Contractor constructs the works in accordance with a design provided by the Employer. Conditions of Contract for EPC Turnkey Projects, which are recommended where one entity takes total responsibility for the design and execution of an engineering project.
Short Form of Contract, which is recommended for building or engineering works of relatively small capital value. Depending on the type of work and the circumstances, this form may also be suitable for contracts of greater value, particularly for relatively simple or repetitive work or work of short duration.
The forms are recommended for general use where tenders are invited on an international basis. Modifications may be required in some jurisdictions, particularly if the Conditions are to be used on domestic contracts.
The sub-clauses which were considered to be applicable to many but not all contracts have been included in the General Conditions, which will facilitate their incorporation into each contract. The General Conditions and the Particular Conditions will together comprise the Conditions of Contract governing the rights and obligations of the parties.
It will be necessary to prepare the Particular Conditions for each individual contract, and to take account of those sub-clauses in the General Conditions which mention the Particular Conditions.
For example, Sub-Clause This Sub-Clause becomes inapplicable even if it is not deleted if it is disregarded by not specifying the amount of the advance. It should therefore be noted that some of the provisions contained in the General Conditions may not be appropriate for an apparently-typical contract.
Further information on these aspects, example wording for other arrangements, and other explanatory material and example wording to assist in the preparation of the Particular Conditions and the other tender documents, are included within this publication as Guidance for the Preparation of the Particular Conditions. Before incorporating any example wording, it must be checked to ensure that it is wholly suitable for the particular circumstances; if not, it must be amended.
Where example wording is amended, and in all cases where other amendments or additions are made, care must be taken to ensure that no ambiguity is created, either with the General Conditions or between the clauses in the Particular Conditions.
It is essential that all these drafting tasks, and the entire preparation of the tender documents, are entrusted to personnel with the relevant expertise, including the contractual, technical and procurement aspects. This publication concludes with example forms for the Letter of Tender, the Contract Agreement, and alternatives for the Dispute Adjudication Agreement.
This Dispute Adjudication Agreement provides text for the agreement between the Employer, the Contractor and the person appointed to act either as sole adjudicator or as a member of a three-person dispute adjudication board; and incorporates by reference the terms in the Appendix to the General Conditions. Another relevant FIDIC publication is "Tendering Procedure", which presents a systematic approach to the selection of tenderers and the obtaining and evaluation of tenders.
In order to clarify the sequence of Contract activities, reference may be made to the charts on the next two pages and to the Sub-Clauses listed below some Sub-Clause numbers are also stated in the charts. The charts are illustrative and must not be taken into consideration in the interpretation of the Conditions of Contract.
Module 5 : FIDIC Conditions of Contract for EPC/Turnkey Projects
This Second Edition of the FIDIC Silver Book maintains the principles of risk sharing established in the edition, while seeking to build on the substantial experience gained from its use over the past 18 years. Essential items of information which are particular to each individual contract are to be included in the Particular Conditions Part A — Contract Data. In addition it is recognised that many Employers, especially governmental agencies, may require special conditions of contract, or particular procedures, which differ from those included in the General Conditions. These should be included in Part B — Special Provisions. In drafting Special Provisions, if clauses in the General Conditions are to be replaced or supplemented and before incorporating any example wording, Employers are urged to seek legal and engineering advice in an effort to avoid ambiguity and to ensure completeness and consistency with the other provisions of the contract. The charts are illustrative, however, and must not be taken into consideration in the interpretation of the Conditions of Contract. This publication also includes a number of sample forms to help both Parties to develop a common understanding of what is required by third parties such as providers of securities and guarantees.
What is the difference between an EPC and a Turnkey Projects?