Common EPC Commercial Terms in a Capital Project Contract

A Request For Proposal (RFP) document is issued by facility owners or contractors (in the case of required subcontracts) to solicit proposals for project work to be done. Depending on the scope of the project, these requests may be sent weeks or days prior to the execution phase. The components of a typical RFP are:

• Contract Type
• Execution Method
• Technical Scope
• Schedule
• Commercial Terms

Commercial Terms for industrial capital projects, sometimes called Engineering, Procurement, and Construction (EPC) Contract Terms, represent the legal agreement made between the parties. In most cases, the owner who submits the request for proposal (RFP) will send the EPC contract terms to the bidding parties as part of the RFP process. 

EPC Contracts For Small & Large Projects

Smaller projects (under $10 million) are typically executed under a Master Service Agreement (MSA) that a facility owner or corporate entity has in place with selected contractors. These agreements dictate the ground rules under which projects will be performed, including overarching requirements that apply to all portfolio projects executed under the MSA, such as:

• Insurance requirements
• Legal agreements (confidentiality, dispute resolution, etc.)
• Safety requirements

MSAs are typically valid between one to three years. 

An RFP for a scope of work that is covered by an MSA may include additional terms that are not already covered by the MSA. These are often specific to the individual circumstances of the project.

Larger projects (over $10 million) are often executed under an individual contract for the specific project; this individual contract is a self-contained agreement that provides governance for the expectations and requirements of the project, including the above items. Due to the complexity of these agreements and the unique requirements of each project, some commercial terms will need to be defined and agreed upon by all parties.

Regardless of project size, EPC agreements will include EPC contract terms that define the legal rights and obligations of all parties involved in the contract. 

Common EPC Commercial Terms 

The teams executing the project must fully understand the terms of the contract prior to execution to ensure the project stays within the bounds of the contract and to identify any potential issues as early as possible. 

These are some of the commercial terms most commonly addressed in an RFP (directly or indirectly in MSA):

Insurance Requirements

Insurance requirements are part of every project contract due to the financial, safety and environmental risks involved in  projects. Insurance coverage requirements will vary depending on the scope and size of the work, but often include:

• General Liability
• Professional Liability
• Automotive
• Umbrella policy
• Pollution (as required)
• Builders Risk (as required)

Payment Terms

Payment terms outline when, how, and under what conditions payment is made. This includes information about what is required from the contractor to receive payment from the project owner (e.g. invoice) and how long project owners have to complete payment for the project (e.g. net 30, 45, or 60 days). On a typical project, when invoicing, labor, materials and taxes are shown as separated line items.

Work Authorization, Access, and Performance Requirements

Work Authorization and Access terms include facility permitting requirements on site and job specific approvals as well as communicating what is provided by the client for the contractor to utilize during the execution of the project. This includes what areas of the facility can be utilized and what infrastructure can be accessed such as utilities like air, water, steam, and electricity, typically at the contractors own risk. 

Performance Requirements terms list performance requirements expected from the contractor during the execution phase. This includes items such as completion dates, materials specifications, vendors to utilize, inspection and testing expectations, and other deliverable requirements. 

Warranties

Warranties in an EPC contract ensure the goods and services supplied meet the specifications required and are free from defects for a period of time. This clause provides that if something breaks due to defects in workmanship and will promptly remedy them to the client's satisfaction if issues arise in the time period. In addition, warranty sections of some agreements include protections for patents, trademarks, copyrights, and other intellectual properties. 

Work, Training, and Qualification Requirements

This EPC commercial term clarifies that the contractor is responsible for furnishing all necessary supervision, labor, goods, equipment, etc., essential to perform the desired work. Other things identified include training and qualifications the workers on site need. It also identifies the laws and/or regulations workers, companies, and others must comply with while working on the project. This can include things such as various safety trainings and drug testing. Work, training, and qualification requirements also acknowledge that experienced personnel are performing all project activities safely and competently. 

Safety and Health Requirements

Safety and health requirements identify the rules and/or laws that are to be followed throughout the execution of the project. This may include an acknowledgment that hazards may be present on the site and that liabilities may be present due to such hazards. This part of the contract may also identify HSE requirements, such as Experience Modification Ratings (EMR) and Total Recordable Incident Rates (TRIR), and the consequences of non-compliance (e.g., halt of project, termination of contractor, etc.).

Indemnification, Governing Law, Proprietary Rights, and Confidentiality

Indemnification defines liability and compensation in the event of harm or loss. This may include providing the project owner or contractor with safety against any claims for injury, death, disease, etc. from employees working on site. It could also provide safety against damages, fines, etc. that result from a breach of contract.

Governing law identifies which laws the parties will use in the event of an issue or dispute. 

Proprietary rights identify the legal ownership or rights of patents, copyright, trademarks, and other intellectual property.

The confidentiality of a contract is a binding agreement that information is to be contained between the respective parties. There can be exceptions when the project owner or contractor explicitly gives consent. This is often done via written consent forms and nondisclosure agreements (NDAs). The part of the contract that addresses confidentiality may include the project owner or contractor’s definition of “confidential” and outline the consequences of confidentiality breaches. 

Record-Keeping Requirements

Record-keeping requirements identify how drawings, attachments, and other records are to be created and retained throughout the effectiveness of the contract and execution of the project. These requirements may also identify the proprietary rights of each of these records and the specific laws that are to be followed for record-keeping processes. 

Reporting Requirements

Reporting requirements identify the metrics that must be sent to the project owner throughout the effectiveness of the contract. These requirements identify the frequency in which these reports need to be sent along with the format and type of documents. 

Sustainability Requirements

Sustainability requirements identify requirements for the sustainability of environments, infrastructure, safety, and ethics throughout the project. This may include guidelines for disposing of waste, sourcing materials, and/or adhering to labor laws. 

Nondisclosure Agreements

Nondisclosure agreements (NDAs) are contracts that establish confidential relationships. NDAs include what information the recipient must not disclose and often define the consequences of disclosure. 

Change Notification Process

The change notification process outlines the responsibilities of the contractor when making a change to the project. These processes vary but often require a change order notification (CON). The contract will define the process and usually specify the requirements for the change to be completed. 

Ensuring EPC Project Success 

Building a contract with appropriate Commercial Terms is important to ensuring a fair contract that increases the chance of project success for all parties. H+M Industrial EPC has been delivering successful capital projects since 1988. Our experienced industry professionals exceed the requirements of the energy, chemical, and terminal and logistics industries using our proven EPC approach. 

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