Table Of ContentUnderstanding and Negotiating EPC Contracts
Volume 1
In Understanding and Negotiating EPC Contracts, Volume 1, Howard M. Steinberg presents
a practical and comprehensive guide to understanding virtually every aspect of engineering,
procurement and construction (EPC) contracts for infrastructure projects.
The 25 chapters in Volume 1 are supplemented with real-life examples and court
decisions, and offer tactical advice for anyone who must negotiate or understand EPC
contracts in connection with the implementation, financing or operation of infrastructure
projects.
Emphasizing current market practices and strategic options for risk sharing, the book
contains a narrative explanation of the underpinning of all of the issues involved in EPC
contracting. Exhaustive in scope, it clarifies the fundamental commercial principles and
pitfalls of “turnkey” contracting for all types of capital investments ranging from electrical
and thermal power generation (including combined heat and power, nuclear, wind, solar,
natural gas and coal) to refining, to chemical processing, LNG liquefaction and re-
gasification, to high speed rail, bridging, tunneling and road building. Providing clear and
thorough analyses of the issues and challenges, this volume will be of great value to all those
involved in complex construction projects.
Howard M. Steinberg is of counsel and a retired partner in the law firm Shearman &
Sterling LLP and has more than 25 years of legal experience in the infrastructure sector in
more than 100 countries. He is named a leading lawyer in project finance by Chambers &
Partners and IFLR 1000. He represents sponsors, offtakers, miners, suppliers, engineering
firms, consultants, financial advisors, contractors, operators, underwriters, lenders, export
credit agencies and multi-lateral institutions in the development, acquisition, restructuring
and privatization of projects around the world. He holds bachelor’s and business degrees
from Columbia University and a law degree from New York University.
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Every lawyer involved in project finance should read this book!
Oscar Frota, Senior Legal Counsel, GDF Suez Energy Latin America
From the finance side, before we can even look at the economics of a project, we need to know
that its contractual structure is sound. This book is a must for any serious banker.
Edmundo Lujan, Executive Director, Project Finance Latin America, Banco
Bilbao Vizcaya Argentina S.A. (BBVA)
There would be a lot less restructuring work if a proper risk allocation had been put in place
since inception. This book provides a must-read guide to project parties to achieve that goal.
Jean-Valery Patin, Managing Director and Head of Project Finance Latin
America, BNP Paribas
It’s truly astounding how much money companies will spend only to learn they do not have a
project that can be financed. This book should be the first investment for any project.
Halil Sunar, Director of Power for Turkey, State Oil Company of Azerbaijan
(SOCAR)
Financing projects is all about understanding the risks. Anyone who hasn't read this book is just
giving himself an unnecessary handicap.
Natasha Kirby, Associate Director, Strategic Energy Solutions Group, HSBC
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Understanding and Negotiating EPC Contracts
Volume 1
The Project Sponsor’s Perspective
Howard M. Steinberg
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First published 2017
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2017 Howard M. Steinberg
The right of Howard M. Steinberg to be identified as author of this work has been asserted by him in accordance with
sections 77 and 78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic,
mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any
information storage or retrieval system, without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for
identification and explanation without intent to infringe.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloguing in Publication Data
Steinberg, Howard M. author.
Understanding and negotiating EPC contracts / by Howard M. Steinberg.
pages cm
Includes bibliographical references and index.
ISBN 978-1-4724-1106-8 (hardback) 1. Construction contracts–United States. 2. Construction industry–Law and
legislation–United States. I. Title.
KF902.S74 2014
343.7307′862131–dc23
ISBN: 9781472411068 (hbk)
ISBN: 9781315549309 (ebk)
Typeset in Baskerville
by Out of House Publishing
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Contents
Volume 1
List of Figures
Reader’s Note
Foreword
About the Author
Introduction
1 A Historical Perspective
Varying Construction Approaches in the U.S. Power Industry
The EPC Approach Emerges
The Collapse of the U.S. Power Industry
2 Choosing a Development Approach
Concessions
Build and Transfer (BT)
Build, Transfer and Operate (BTO)
Build, Own, Operate and Transfer (BOOT)
Build, Own and Operate (BOO)
Public-Private Partnerships (PPP)
Privatizations
Legal Regimes—Civil Codes vs. Case Law Approaches
Choosing a Legal Entity
General Partnerships
Limited Partnerships
LLPs and PCs
Corporations
Limited Liability Companies
Forming the Project Entity
SPVs
Development Partners
An Integrated Structure
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3 The EPC Contractor’s Approach
Consortia
The EPC “Wrap”
On-shore/Off-shore Issues and Coordination Agreements
EPCM
4 Beginning the Evaluation Process
The Financial Model
Financing
Coverage Ratios
Lenders’ “Step-In” Rights
Financing Agreements
Bank Financing
Construction and Term Loans
Public Market
Functional Analysis
Approaching EPC Contractors
Formal Bid Solicitations
Sole Source, “Open Book” Negotiations
Focusing the EPC Contractor’s Attention
Communicating with the EPC Contractor and the Attorney/Client Privilege
5 Full-Scale Development
The Development Timeline
The Environmental Impact Study
The Contractual Negotiation and Permitting Phase
Notice to Proceed
Limited Notice to Proceed
6 Philosophy of the EPC Contract
Intent
Quasi-Contract
Parole (Oral) Evidence
Additional Terms
Prudent Practices
“Best” Efforts and “Commercially Reasonable” Efforts
“Good Faith” and “Good Intentions”
7 Subcontractors
Terms Contained in Subcontracts
Third-Party Beneficiaries
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8 Site or Route Survey
Hazardous Materials
Legal Control over the Site
9 The Work
The Functional Specification
Contractual Provisions
The EPC Contractor’s Obligations during the Design Phase
Professional Engineering
Quality Control
The EPC Contractor’s Obligations during the Construction Phase
Health and Safety
Supervision
Project and Construction Managers
Union Labor
Security and Surveillance
Minimization of Disruptions in Surrounding Areas
Coordination with Other Contractors
Site or Route
Shipping and Delivery Schedules
Sourcing of Equipment
The EPC Contractor’s Training Obligations during Commissioning
Establishing the Framework
10 The Sponsor’s Obligations under the EPC Contract
Assumption of Responsibility
Owner Furnished Equipment
Refurbished Equipment
Technology Licenses
11 Monitoring the Progress of the Work
Developing the Baseline Project Schedule
Schedule Updates and Progress Reports
Rights of Inspection
Engineering and Design Phase
Manufacturing and Fabrication Phase
Witness Points vs. Hold Points
Field Construction
Project Accounting and Audit
The “Owner’s Engineer”
The “Independent Engineer” or “Lender’s Engineer”
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12 Unforeseen Circumstances, Adjustments and Change Orders
Force Majeure
Risk of Loss
Builder’s All Risk Insurance to Cover Risk of Loss
Equitable Adjustments
Equitable Price Adjustments
Equitable Time Adjustments
Float
Change Orders
Directed Changes
Constructive Changes
Cardinal Changes and Contractual Abandonment
Cumulative Impact Changes
13 The EPC Contractor’s Failure to Perform
The Concept of Default
Remedies at Law vs. Remedies in Equity
Adequate Assurance
The Owner’s Remedies
Exclusivity of Remedies
Engineering Difficulties
Construction Difficulties
Financial Difficulties
U.S. Bankruptcy Example
Procedural and Substantive Consolidation of Cases
Rejection of Contracts
The Slide Toward Insolvency
Subcontractor Difficulties
The Owner’s Options
14 The Owner’s Failure to Discharge Its Responsibilities
“No Damages for Delay” Provisions
Active Interference and Loss of Efficiency
15 Unexpected Market Conditions
The Owner’s Right to Suspend or Terminate Work
16 Testing and Completion of the Work
Mechanical Completion
Startup and Commissioning
The Punch List
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Output During Commissioning
Performance Testing
Unit Testing
Power Plant Degradation
Performance Curves
Test Measurement Locations
Extrapolation
Offtaker or Facility User Requirements
Correction Curves
Deemed Acceptance
Reliability Testing
Ambient Air Temperature
Performance Tests for Offtakers and Lenders
“Inside-the-Fence” Offtakers
Merchant Power Facilities
Substantial Completion or Provisional Acceptance
Final Acceptance
Early Operation
Operating Revenues during the “Early” Operation Period
17 Liquidated Damages for Delay and Impaired Performance
Liquidated Damages for the EPC Contractor’s Failure to Achieve Substantial Completion
or Provisional Acceptance on Time
Early Completion Bonuses
Liquidated Damages for Impaired Performance
Output
Efficiency
Availability
Emissions
“Double Counting”
“Caps” on Liquidated Damages for Delay and Poor Performance
“Subcaps”
18 The EPC Contractor’s Warranties of the Work
Hidden or Latent Defects
Subcontractor Warranties
Superior Vendor Warranties
“Pre-Ordered” Equipment
“Serial” Defects
Locating Defects and Deficiencies
Remedies for Breach of General Warranty
Scheduling of Warranty Work
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