EPC contract (turnkey)
A contract under which a single contractor designs, procures and builds the works for a lump sum and a fixed date. Lenders require it; the project's insurers read its allocation of risk.
An offshore wind farm, a gas plant or a desalination plant financed on a project basis almost always has the same construction contract: an EPC, where a single contractor takes on engineering, procurement and construction for a lump sum, a completion date and guaranteed performance. Lenders insist on it because it concentrates construction risk on a single signature, backed by delay and performance liquidated damages and bank guarantees. The reference form is the FIDIC Silver Book, Conditions of Contract for EPC/Turnkey Projects, whose second edition dates from 2017 and was reprinted with amendments in 2022. It pushes more onto the contractor than the Yellow Book: the contractor is deemed to have checked the site data and in principle bears unforeseen difficulties. Exceptional events (formerly force majeure) sit in clause 18, insurance in clause 19. For project insurance, the contract decides who buys cover and on whose behalf. Under the FIDIC scheme, the contractor insures the works in joint names; on large financed projects the owner often takes over with a program it controls, to keep the policy and delay in start-up cover in view of the lenders. The construction all risks deductible has to land where the contract puts the risk, or the contractor ends up paying a deductible it never negotiated. What insurance does not take remains. Liquidated damages, underperformance without physical damage and design defects beyond what the chosen LEG clause buys back stay on the contractor's balance sheet. An EPC with a low liability cap sends those risks back to the owner, and the delay in start-up underwriter sees it in the submission.
Textbook case, in numbers. A 500 million euro EPC sets delay liquidated damages at 1 million per week, capped at 15% of the price, or 75 million. A fire before taking-over destroys 40 million of works; construction all risks pays 40 - 2 = 38 million, and the contractor keeps the 2 million deductible. The delay is 20 weeks: 20 x 1 = 20 million in liquidated damages, below the cap, paid by the contractor with no insurance. The owner loses 1.5 million of margin per week; with an 8-week waiting period, its delay in start-up cover pays (20 - 8) x 1.5 = 18 million.
EPC, turnkey contract, FIDIC Silver Book, lump-sum turnkey, LSTK
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