- Turkey Construction Contracts Which Mean EPC Contracts in Project Finance
- November 26, 2013
- Law Firm: HERDEM Attorneys At Law - Istanbul Office
Parties of Project Finance
Project Financing is Project Sponsor who is involved (often with others) in originating and structuring a project and who will (usually) be a shareholder or owner of all or a part of the facility or project. The project sponsors are those companies, agencies, or individuals who promote a project and bring together the various parties and obtain the necessary permits and consents necessary to get the project under way. Often they (or one of their associated companies) are involved in some particular aspect of the project, for example, the construction, operation, and maintenance, purchase of the services or output from the project or ownership of land related to the project. They are invariably investors in the equity of the project company and may be debt providers or guarantors of specific aspects of the project company’s performance. The support provided by project sponsors varies from project to project and includes the giving of comfort letters, cash injection commitments, both pre- and post-completion, as well as the provision of completion support through guarantees and the like. Support is also likely to extend to providing management and technical assistance to the project company.
Another significant participant is Project Company who will usually be a company, partnership, limited partnership, joint venture or a combination of them. This will be influenced to a certain extent by the legal and regulatory framework of the host government. For example, in some jurisdictions it will be a legal requirement that the holder of a licence or concession must be a company incorporated in that particular country. The project company will in most cases be the vehicle that is raising the project finance and, therefore, will be the borrower. It will also usually be the company that is granted the concession or licence (in a concession-based financing) and who enters into the project documents.
EPC Contracts and the Risk
The most important subject is to be assessed here in order to discuss risk and risk mitigation instruments according to EPC contracts project finance contracts.
The construction contract in an international project financing serves to give the project company a fully completed and equipped facility. In addition, it provides for delivery by the contractor of a facility that satisfies specified performance criteria, for a fixed or predictable price, and completed on a specific date. There are four types of construction contracts, namely; engineering, procurement, construction and EPC. EPC contracts which consist of engineering, procurement and construction stages.
The contractor, directly or indirectly by being a subcontracting party of a work, designs the installation, procures the necessary materials and builds the Project under EPC contracts. In some cases, the contractor carries the project risk for schedule as well as budget in return for a fixed price, called lump sum or LSTK depending on the agreed scope of work.
In an (EPC) contract, the EPC contractor agrees to deliver the keys of a commissioned plant to the owner for an agreed amount, just as a builder hands over the keys of a flat to the purchaser. The EPC way of executing a project is achieving importance worldwide. however it is also a way that needs to be more careful and needs good understanding, by the EPCC, for a profitable contract execution. EPC is being preferred due to its various advantages such as minimum efforts and less stress to owner and also one point contract leads an easy monitoring and coordination. Additionally, another significant advantage of EPC includes post-commissioning services and quality assurance to owner. on the whole EPC contract provides many advantages to both parties. Therefore there is great demand for Engineering Procurement & Construction (EPC) Projects, Projects from Engineering Procurement & Construction worldwide.
The Ways to Be More Successful In EPC Contracts In Project Finance
Primarily, when an EPC contract is signed, the EPC contractor becomes liable for completing the project according to the tender conditions. The EPC contractor, in turn, may hire sub-contractors or sub-vendors to complete different portions. Payment commensurate with the work completed (in addition to an advance) is normally preferred by a contractor.
Projects are more likely to succeed if the guarantees, scope, milestones and LD/penalty clauses are defined very carefully and meticulously and the payment terms are made specifically by the owner.
On the other hand, the contractor also has ways to improve project success by adopting similar terms and conditions as owner regarding quality, guarantee etc., for subcontracts/vendors. In order to support, the terms are not been kept open-ended and has to be Coordinated vigilantly to reduce chances of errors.
As a conclusion Engineering, procurement and construction (EPC) contracts are the most common form of contract used to undertake construction works by the private sector on large-scale and complex infrastructure projects. Under these contracts a contractor undertakes the liability of delivering a complete facility to a developer who need only turn a key to start operating the facility; consequently EPC contracts are generally called turnkey construction contracts as well.