To add to the pressure of entering into EPC contracts in these sectors, parties to project financed deals will often find that the lenders require that an EPC contract be entered into as a result of the certainty (whether it be actual or perceived) that is afforded to an employer, and hence a lender, under an EPC contract.
Historically, the South African construction industry did not have significant exposure to EPC contracts. The industry is however au fait with the local JBCC contracts, the FIDIC red and yellow books and in some instances with the NEC suite of contracts. None of these construction contracts are EPC contracts, but are either "design build" or contracts to construct, with no design responsibility.
All of this leads one to the question - why are contractors reluctant to contract on the basis of EPC contracts? In essence an EPC contract is a contract in terms of which the contractor undertakes to engineer, procure and construct a facility, based on the employer's requirements (this term is used in a generic sense and not in the same sense as under FIDIC), which will usually include the performance specification to be met by the contractor. The employer's requirements under an EPC contract may contain differing levels of design, but ultimately the employer is purchasing an operational facility, which it expects to be delivered on a certain date and at a certain price. I would dare to say that this is not worlds removed from a "design build" contract, such as the FIDIC yellow book. If one performs a comparison between the FIDIC yellow book ("design build") and the silver book (EPC), the following main differences are apparent:
In entering into EPC contracts, contractors need to focus on risk mitigation strategies. The following are examples of such strategies, based on the additional risks carried by a contractor under the standard FIDIC EPC contract:
Once the contractor knows what he is signing up for, it is a commercial decision whether the contractor can accept the allocated risks by making provision therefor, whilst remaining competitive in the market.
Furthermore, one needs to have regard to the specific conditions of any EPC contract. The mere fact that a contract is termed as an EPC contract, does not necessarily imply that the contractor would be required to take on risks which it would not be able to mitigate against. A contract is an EPC contract when it requires the contractor to engineer and design the facility, procure the materials and services required for the facility, and constructs the facility, whether by itself or through subcontractors. Whether the contractor, under an EPC contract, takes on risks which it would not be required to take on under a "design build" contract, is a matter that is to be negotiated between the parties.