An engineering, procurement and construction (EPC) contract is the most common form of contract used to undertake construction works by the private sector on large-scale and complex infrastructure projects.
Under an EPC Contract, a contractor is required to deliver a complete contract for a fixed price by a fixed date.
An EPC Contract is sometimes referred to as a «turnkey» construction contract because a contractor is required to deliver a complete facility so that the recipient only needs to turn a key to start operating the facility.
The increasing popularity of EPC Contracts is not due to the turnkey delivery method, which is the reason most often cited, although turnkey delivery is an appealing feature in EPC Contracts.
While much of the discussion focuses on the turnkey delivery of completed construction projects, attributing their unparalleled acceptance to turnkey delivery is a simplistic view of EPC Contracts and, more broadly, project finance documentation.
The biggest reason for their overwhelming acceptance is the transfer, to the extent contractually possible, of all of the design, engineering, and construction risk from the project company who owns the project, to the EPC contractor that builds it.
An EPC Contract is a risk mitigation and management tool in the form of a project document. In fact, EPC Contracts were specifically conceived to transfer risk to the contractor.
They make the contractor responsible for all project activities from the design phase all the way through the construction phase.
Specifically, they make the contractor responsible for all design, engineering, procurement, construction, commissioning and handover activities of the project, leaving the owner with no responsibilities save for turning the key at project delivery.
Another reason for the widespread use and acceptance of EPC Contracts is that they are strongly preferred by project finance lenders.
Project lenders are much more comfortable providing project financing when construction contracts have fixed prices and required dates for completion.
Less risk to the lender means the likelihood of your project finance loan being approved increases substantially.