50 FAQS in Contract Drafting for EPC Projects

KNOW YOUR CONTRACT SERIES
50 FAQS IN
CONTRACT
DRAFTING FOR
EPC PROJECTS
- An Employers Guide
Disclaimer: The information in this book is distributed on an “as is” basis, without warranty. Although every
hi
precaution has been taken in the preparation of this work, neither the author nor the publisher shall have any
arit
liability to any person or entity with respect to any loss or damage caused or alleged to be caused directly or
amp
indirectly by the information contained in this book. Please contact us if you require Claim / legal assistance
l
on ilam@pragmaticpc.com
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All rights reserved. No portion of this book may be reproduced in any form without
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I FAQS in Contract Drafting for EPC Projects
CONTRACT BASIS
parithi
Ilam
01 FAQS in Contract Drafting for EPC Projects
Q: What is an EPC contract, and how

does it differ from other contracts?
A: An EPC (Engineering, Procurement,

Construction) contract is a turnkey
agreement where the contractor is
responsible for the design, procurement,
construction, and delivery of a fully
operational project. Unlike design-bid-
build contracts, it provides a single point
of accountability, reducing employer
risks.
parithi
Ilam
Q: Why is "single point of

responsibility" critical for EPC
contracts?
A: The contractor assumes full

responsibility for project performance,
ensuring that any delays, defects, or
design issues are resolved without the
employer needing to coordinate between
multiple parties. This simplifies risk
management for the employer.
parithi
Ilam
03FAQS in Contract Drafting for EPC Projects
Q: What are the key components of

an EPC contract?
A: An EPC contract includes detailed

scope of work, time for completion, price
and payment terms, performance
guarantees, risk allocation, variation
management, and dispute resolution
clauses. These ensure clarity and
accountability for both parties.
parithi
Ilam
Q: How do I define the scope of work

in an EPC contract?
A: The scope should comprehensively

cover design, procurement, construction,
commissioning, and handover obligations.
Clearly define inclusions, exclusions,
specifications, and interfaces to avoid
disputes or scope creep.
parithi
Ilam
Q: What are the roles and

responsibilities of the employer
under an EPC contract?
A: The employer provides access to the

site, approvals, permits, and essential
inputs like drawings or land. They must
also ensure timely reviews, approvals, and
payments to avoid delaying the
contractor's work.
parithi
Ilam
II FAQS in Contract Drafting for EPC Projects
KEY CONTRACTUAL
CLAUSES
parithi
Ilam
Q:What is the significance of the

"Turnkey" clause in EPC contracts?
A: A Turnkey clause obligates the

contractor to deliver a project ready for
immediate operation. It transfers the
performance risk entirely to the
contractor, ensuring the employer
receives a fully functional facility as per
specifications.
parithi
Ilam
Q: How should the "Time for

Completion" be defined?
A: The clause must specify a clear

completion deadline or duration, with
milestones for key phases. Include
provisions for extensions due to
variations, delays caused by the employer,
or force majeure events.
parithi
Ilam
Q: How is "Performance Guarantees"

drafted for EPC projects?
A: Clearly state the performance criteria,

such as output, efficiency, or capacity.
Include remedies like penalties, re-
testing, or deductions for failure to meet
these benchmarks during commissioning
and testing phases.
parithi
Ilam
Q: How do I include Liquidated

Damages (LDs) for delays in
completion?
A: LDs should be pre-agreed and

calculated as a daily or weekly amount for
each delay period. Ensure the LDs are a
genuine estimate of losses to make them
enforceable and avoid claims of being
penalties.
parithi
Ilam
Q: What provisions should be

included for Variations in scope?
A: Define a structured variation process

that requires the contractor to notify
changes, submit costs and time impacts,
and obtain employer approval before
execution. Reference standard clauses
like FIDIC , JCT, NEC for clarity.
parithi
Ilam
III FAQS in Contract Drafting for EPC Projects
PRICE AND PAYMENT

MECHANISMS
parithi
Ilam
Q: What payment structures are

common in EPC contracts?
A: Fixed lump-sum and milestone-based

payments are typical. Lump-sum ensures
cost certainty, while milestone-based
payments are linked to progress stages,
reducing financial risks for the employer.
parithi
Ilam
Q: How do I draft a clause for

milestone-based payments?
A: Divide the payment schedule into

measurable milestones, such as design
approval, procurement completion, and
commissioning. Each milestone should
have clearly defined deliverables and a
payment trigger.
parithi
Ilam
Q: How should advance payments

and recovery terms be structured?
A: Include advance payments for initial

mobilization, supported by a bank
guarantee. Recovery can be structured as
a deduction percentage from interim
payments until the advance amount is
fully adjusted.
parithi
Ilam
Q: How do I safeguard against price

escalation in long-term projects?
A: Incorporate price escalation clauses

that account for inflation, material cost
changes, or currency fluctuations. Limit
these adjustments to specified inputs like
steel, cement, or fuel with indices as
reference.
parithi
Ilam
Q: What clauses ensure fair

adjustment for taxes and duties
changes?
A: Include provisions that allow for price

adjustments if there are unforeseen
changes in taxes, duties, or government
levies post-contract signing, protecting
both parties from unexpected cost
burdens.
parithi
Ilam
IV FAQS in Contract Drafting for EPC Projects
DESIGN
RESPONSIBILITIES
parithi
Ilam
Q: How do I define the contractor’s

responsibility for design and
engineering?
A: Clearly state that the contractor is

responsible for complete design,
including compliance with applicable
standards and fitness for purpose. Ensure
this responsibility extends to any design
subcontractors used.
parithi
Ilam
Q: What provisions ensure

compliance with codes and
standards?
A: Reference specific national or

international codes (e.g., ISO, IEC, ASME)
that must be followed. Require contractor
submissions for employer review and
approval to ensure design compliance
before execution.
parithi
Ilam
Q: How do I manage employer review

and approval of designs?
A: Set clear timelines for design

submission and employer review. Specify
that approval does not relieve the
contractor of their design responsibility,
as they remain accountable for meeting
performance criteria.
parithi
Ilam
Q: What happens if a design defect is

discovered after commissioning?
A: Include clauses that hold the

contractor liable for design defects
during the warranty or defects liability
period. Remedies may include
rectification at the contractor's cost or
compensation for employer losses.
parithi
Ilam
Q: How do I include warranties for the

design, equipment, and
workmanship?
A: Require warranties for design integrity,

equipment performance, and quality of
workmanship. Specify warranty periods
(e.g., 12-24 months) and remedies, such as
rectification, replacement, or financial
compensation.
parithi
Ilam
V FAQS in Contract Drafting for EPC Projects
PERFORMANCE
GUARANTEES AND
TESTING
parithi
Ilam
Q: How do I draft clauses for

Performance Tests and Acceptance
Tests?
A: Detail the procedures, testing criteria,

and acceptable performance thresholds.
Include timelines for tests, employer
inspection rights, and consequences if
performance guarantees are not
achieved.
Q: What remedies exist for failure to

meet performance criteria?
A: Specify penalties, price reductions, or

re-testing requirements if the facility fails
to meet performance guarantees. Include
termination rights for repeated or critical
failures.
parithi
Ilam
Q: How do I include provisions for re-

testing and cost recovery?
A: If initial tests fail, mandate re-testing at

the contractor’s cost. Allow the employer
to recover costs for resources, delays, or
any additional expenses incurred due to
re-testing.
parithi
Ilam
Q: What are the employer’s rights if

the contractor fails to meet
guarantees?
A: The employer may impose penalties,

enforce performance securities, or
demand remedial actions. If guarantees
remain unmet, the employer can seek
compensation or terminate the contract.
parithi
Ilam
Q: How should retention money and

bank guarantees be structured for
security?
A: Retain a percentage (e.g., 5-10%) of

interim payments as security until project
completion. Additionally, require
performance and warranty bank
guarantees to cover risks during and post-
completion phases.
parithi
Ilam
VI FAQS in Contract Drafting for EPC Projects
DELAY AND TIME

MANAGEMENT
parithi
Ilam
Q: What clauses address Extension of

Time (EOT) claims?
A: Include EOT provisions for delays

beyond the contractor’s control, such as
force majeure, variations, or employer-
caused delays. Ensure timely notice and
substantiation of claims to maintain
contractual clarity.
parithi
Ilam
Q: How do I safeguard against

concurrent delays by both parties?
A: Address concurrent delays through

clauses requiring proper delay
apportionment. Use recognized methods
like “dominant cause” analysis or time-
impact analysis to fairly determine each
party’s responsibility.
parithi
Ilam
Q: How do I draft clauses for delay

analysis methods?
A: Specify approved delay analysis

methods (e.g., Time Impact Analysis, As-
Planned vs. As-Built) to resolve disputes.
Reference industry standards such as the
SCL Delay and Disruption Protocol for
transparency.
parithi
Ilam
Q: What happens if the contractor

fails to complete on time?
A: Include provisions for Liquidated

Damages (LDs) to compensate for delays.
Ensure LDs are reasonable and not
punitive to avoid enforceability issues.
The employer can also enforce
performance securities or termination.
parithi
Ilam
Q: How can the Prevention Principle

affect my delay claims?
A: The Prevention Principle states that an

employer cannot enforce penalties for
delays caused by their own actions. To
safeguard against this, manage employer-
caused delays proactively and allow EOT
claims.
parithi
Ilam
VII FAQS in Contract Drafting for EPC Projects
RISK ALLOCATION
parithi
Ilam
Q: How do I allocate force majeure

risks fairly?
A: Define specific events that qualify as

force majeure (e.g., natural disasters, war,
pandemics) and provide clear procedures
for notice, suspension, and termination.
Share the impact of these events
equitably.
parithi
Ilam
Q: What provisions address

unforeseen site conditions?
A: Include clauses requiring the

contractor to notify the employer of any
unforeseen physical conditions promptly.
Allow for reasonable time and cost
adjustments while encouraging pre-bid
site investigations.
parithi
Ilam
Q: How do I manage risks related to

procurement and supply chain
delays?
A: Hold the contractor responsible for

procurement and supply chain risks but
provide limited relief for documented
global disruptions. Encourage advance
planning and risk mitigation measures.
parithi
Ilam
Q: How are interface risks with other

contractors handled?
A: Define clear boundaries of

responsibilities and establish
coordination protocols for overlapping
scopes. Include provisions for contractor
cooperation and employer-managed
interface meetings.
parithi
Ilam
Q: What clauses address delays

caused by employer-provided
inputs?
A: Include specific timelines for employer

obligations such as land, drawings, or
permits. Allow the contractor to claim
EOT and cost adjustments for employer-
caused delays to prevent disputes.
parithi
Ilam
VIII FAQS in Contract Drafting for EPC Projects
TERMINATION
AND
SUSPENSION
parithi
Ilam
Q: How do I draft clauses for

contractor default and termination
for cause?
A: Clearly define “events of default,” such

as failure to complete work, non-
performance, or insolvency. Outline
termination procedures, recovery of
costs, and contractor obligations for site
handover.
parithi
Ilam
Q: What happens in the case of

termination for employer
convenience?
A: Allow the employer to terminate

without default but compensate the
contractor for work done, materials
procured, demobilization, and a
reasonable portion of lost profits. Balance
fairness with flexibility.
parithi
Ilam
Q: How should compensation be

structured for suspension of works?
A: Provide for reimbursement of

contractor costs, such as idle labor,
equipment, and demobilization expenses.
Include limits on suspension durations to
prevent prolonged project disruptions.
parithi
Ilam
Q: What are the employer’s rights

regarding step-in clauses?
A: Step-in rights allow the employer to

take over the project if the contractor
defaults. Specify conditions, notice
periods, and the employer’s ability to
engage third parties to complete the
work.
parithi
Ilam
Q: How are subcontractor contracts

managed during termination?
A: Include provisions to assign

subcontractor agreements to the
employer or allow direct payments to
subcontractors. This avoids disruptions
and ensures continuity of critical works.
parithi
Ilam
IX FAQS in Contract Drafting for EPC Projects
DISPUTE
RESOLUTION
parithi
Ilam
Q: Should I include an arbitration

clause or litigation clause for dispute
resolution?
A: Arbitration is preferred for EPC

contracts, especially in international
projects, due to enforceability under
conventions like the New York
Convention. It also ensures
confidentiality and faster outcomes.
parithi
Ilam
Q: How do I ensure a fast and cost-

effective dispute resolution process?
A: Use multi-tiered dispute resolution

mechanisms: negotiation, mediation,
adjudication, and arbitration. Include
timelines for each stage to encourage
resolution without escalating to formal
disputes.
parithi
Ilam
Q: What role does FIDIC Dispute

Avoidance/Adjudication Board
(DAAB) play in EPC contracts?
A: The DAAB provides interim decisions

during the project to resolve disputes
promptly, minimizing delays and
escalating costs. FIDIC contracts
emphasize the use of DAAB to avoid
prolonged conflicts
parithi
Ilam
Q: How do I manage disputes related

to variations and claims?
A: Establish clear procedures for variation

notifications, claims substantiation, and
dispute timelines. Use structured
evaluation processes to minimize
conflicts and ambiguities around cost or
time impacts.
parithi
Ilam

enforceability of dispute outcomes
internationally?
A: Include arbitration clauses referring to

recognized institutions like ICC or LCIA.
Ensure enforceability under international
frameworks like the New York
Convention to facilitate global
compliance.
parithi
Ilam
X FAQS in Contract Drafting for EPC Projects
MISCELLANEOUS
PROVISIONS
parithi
Ilam
Q: How do I address intellectual

property rights (IPR) for contractor
designs?
A: Specify ownership of designs

developed by the contractor while
granting the employer perpetual usage
rights. Include confidentiality clauses to
protect proprietary information.
parithi
Ilam

confidentiality and data protection?
A: Mandate non-disclosure of sensitive

project data or technical information.
Require compliance with applicable data
protection laws and include penalties for
breaches to ensure accountability.
parithi
Ilam
Q: How do I include clauses for

health, safety, and environmental
compliance?
A: Require the contractor to adhere to

national HSE laws and project-specific
standards. Include penalties for breaches
and provisions for contractor-provided
HSE plans, training, and reporting..
parithi
Ilam
Q: What clauses address the

contractor's insurance
requirements?
A: Specify mandatory insurances, such as

Contractor’s All Risk (CAR), third-party
liability, and worker compensation
insurance. Ensure policies are in place
before work commences and remain valid
throughout the project.
parithi
Ilam
Q: How do I draft provisions for

project handover, defects liability,
and closeout?
A: Define handover criteria, including

successful commissioning and
performance tests. Specify defects
liability periods (12-24 months) and
contractor obligations for rectifications
before project closeout.
parithi
Ilam
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Ilamparithi BoologaSundaraVijayan
For Business Inquiries

Email : ilam@pragmaticpc.com
WhatsApp : +91 99442 54959
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Website : www.pragmaticpc.com
Disclaimer: The information in this book is distributed on an “as is” basis, without warranty. Although every precaution has been taken in the preparation of this
hi
work, neither the author nor the publisher shall have any liability to any person or entity with respect to any loss or damage caused or alleged to be caused directly
rit
or indirectly by the information contained in this book. Please contact us if you require Claim / legal assistance on ilam@pragmaticpc.com
lampa
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KNOW YOUR CONTRACT SERIES

Q: What is an EPC contract, and how

A: An EPC (Engineering, Procurement,

Q: Why is "single point of

A: The contractor assumes full

Q: What are the key components of

A: An EPC contract includes detailed

Q: How do I define the scope of work

A: The scope should comprehensively

Q: What are the roles and

A: The employer provides access to the

Q:What is the significance of the

A: A Turnkey clause obligates the

Q: How should the "Time for

A: The clause must specify a clear

Q: How is "Performance Guarantees"

A: Clearly state the performance criteria,

Q: How do I include Liquidated

A: LDs should be pre-agreed and

Q: What provisions should be

A: Define a structured variation process

PRICE AND PAYMENT

Q: What payment structures are

A: Fixed lump-sum and milestone-based

Q: How do I draft a clause for

A: Divide the payment schedule into

Q: How should advance payments

A: Include advance payments for initial

Q: How do I safeguard against price

A: Incorporate price escalation clauses

Q: What clauses ensure fair

A: Include provisions that allow for price

Q: How do I define the contractor’s

A: Clearly state that the contractor is

Q: What provisions ensure

A: Reference specific national or

Q: How do I manage employer review

A: Set clear timelines for design

Q: What happens if a design defect is

A: Include clauses that hold the

Q: How do I include warranties for the

A: Require warranties for design integrity,

Q: How do I draft clauses for

A: Detail the procedures, testing criteria,

Q: What remedies exist for failure to

A: Specify penalties, price reductions, or

Q: How do I include provisions for re-

A: If initial tests fail, mandate re-testing at

Q: What are the employer’s rights if

A: The employer may impose penalties,

Q: How should retention money and

A: Retain a percentage (e.g., 5-10%) of

DELAY AND TIME

Q: What clauses address Extension of

A: Include EOT provisions for delays

Q: How do I safeguard against

A: Address concurrent delays through

Q: How do I draft clauses for delay

A: Specify approved delay analysis

Q: What happens if the contractor