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Applying EPC contracts in PPP projects

Services: Project financing / Public-Private Partnership, Real Estate and Construction, Construction
Date: 10.06.2013

The terms and conditions of engineering, procurement and construction (EPC) contracts – which are not yet widely used in Russia – are perfectly suited to public-private partnership (PPP) projects. There are several reasons for this:

PPP projects are major infrastructure projects that use the build-operate-transfer framework.

Construction within such projects is merely one part of the investment process; since risks arising in the course of construction may bring down the entire project, it appears reasonable to pass those risks on to the independent contractor (an engineering company).

An experienced and reputable engineering company (the contractor), unlike the consortiums that win the tenders, can assess its expenses and risk level with a sufficient degree of accuracy and, while bearing full liability for project implementation, can provide the client with a turnkey facility.

The following features are typical of EPC contracts:

a fixed price that is, as a rule, determined based on the 'lump-sum' principle;
a high limit of contractor liability (or, as is common, liability limited to the overall price of the EPC contract); and
most risks, including those of unforeseen costs and delays, borne by the contractor.

Russian legislation, unlike the International Federation of Consulting Engineers (FIDIC) Silver Book, secures the contractor's right to request a revision of cost estimates, provided that the cost of the works exceeds the cost estimate by no less than 10% due to reasons beyond the contractor's control (Clause 3, Article 744 of the Civil Code). The law contains no provisions that allow the client to reject the revision of cost estimates or require the client to agree to the new calculation of cost estimates provided by the contractor.

When drafting EPC contracts in Russia, it should be taken into account that FIDIC standard forms are universally applied and are permissive in nature, but have one drawback – they are poorly adapted to the Russian legal system (documents include either a variety of legal terms and mechanisms unknown to Russian law or contents that differ from what is provided under Russian law). Therefore, should FIDIC standard forms be applied, a relevant adaptation of the contract to bring it into line with Russian law will be required.

The material differences between the Civil Code regulations and the standard provisions of FIDIC contracts are given in the table below.

Положение	Russian Civil Code	FIDIC
Engagement of subcontractor	No limitations (unless otherwise provided in the agreement)	The contractor is not entitled to sign a subcontractor agreement for the whole facility construction
Control over work performance	The client is entitled, at any time, to review the process and quality of work performed by the contractor, without interfering with the contractor's activities	The client (employer) must exert only limited control over the contractor's work and, as a rule, must not interfere with the contractor's activities
Defects in technical documentation (defects in the client's requirements)	If the client, having received notice from the contractor regarding defects in technical documentation (in particular, unrecorded works which result in the performance of additional works and an increase in the cost estimate), fails to provide a reply within the timeframe stipulated in the agreement, the contractor is obliged to suspend respective works, charging the client the losses caused by the downtime	It is assumed that the contractor thoroughly studied the client's requirements (including design requirements and calculations), and is responsible for the project and the accuracy of those requirements (save for the sections for which the client is responsible and which the contractor cannot verify)
Work acceptance	Executed through an act signed by both parties	The transfer and acceptance act is issued after testing has been completed. The contractor is not deemed to have performed its obligations under the EPC contract until the client has provided it with the performance certificate
Financial report	Not applicable	The contractor is obliged to provide the client with a financial report after works have been completed (together with supporting documents) that contains information on the following amounts: the final cost of all works performed under the contract by the date indicated in the transfer and acceptance act; any additional amounts which the contractor considers due and payable; and the estimated value of any additional amounts which, in the client's opinion, will be due and payable to the contractor under the contract. These amounts must be indicated separately in the financial report executed after the works have been completed.
Contract performance security	Not applicable	No amount may be paid out by the client until the client has received and approved security for contract performance

In practice, a stage-by-stage acceptance of facilities frequently occurs during construction, which is not typical for a turnkey contract. The acceptance provisions, as well as other provisions included in the EPC contract, directly depend on the respective provisions of the concession agreement or PPP agreement. Therefore, when performing construction works on a stage-by-stage basis, such provisions should be included in the wording of the EPC contract, preferably specifying the stages and types of work.

When signing the EPC contract, the contractor must consider all potential risks in advance. This will undoubtedly result in an increase in construction costs, but will be compensated by the consistency of the contract's final price and the timely completion of work.

For further information on this topic please contact Anna Karpinskaya by telephone +7 (812) 346 7990, St. Petersburg Office of Capital Legal Services.

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