Building to Spec: Guaranteeing Performance in Your EPC Contract
An EPC contract gets you a completed project, but will it meet your expectations?
Here’s how to ensure the contractor delivers a project that performs as promised:
- Guaranteeing Performance, Defining Tests
- Don’t leave room for ambiguity. Clearly define the specific performance guarantees the contractor must achieve. This could involve factors like energy efficiency, production capacity, or environmental impact. The contract should also outline the conditions under which these guarantees will be tested, referencing relevant technical specifications for clarity.
- Second Chances: A Reasonable Cure Period
- Minor hiccups shouldn’t trigger drastic measures. The contract should provide the contractor a reasonable timeframe to address any shortcomings in meeting the performance guarantees. This timeframe should reflect the project’s complexity and allow for achievable solutions.
- Liquidated Damages: Fair Consequences, Not Punishment
- Performance failures come with consequences. Liquidated Damages (LDs) are predetermined fees the contractor pays if the project doesn’t meet the guaranteed standards. However, these LDs should be a fair reflection of your actual losses, not a punitive measure.
- LDs: The Preferred Solution
- LDs are typically the preferred remedy for performance failures. They offer a clear and efficient way to compensate you for any shortcomings, avoiding drawn-out legal disputes.
- Fixing the Problem: Contractor’s Make-Good Obligation
- Sometimes, fixing the issue is the best solution. If performance guarantees aren’t met, the contractor may be obligated to undertake “remedial work” to rectify the deficiencies. The contract should ensure these make-good efforts are achievable within a reasonable timeframe and don’t place an undue burden on the contractor.
- Termination as a Last Resort
- Termination should be a last resort. However, if the contractor fails to meet the guarantees and can’t rectify the issues within a reasonable period, the contract should allow you to terminate the agreement. This right to terminate should only kick in after reaching the LD cap and allowing a further “cure period” as outlined in the Contractor’s Default clause.
By incorporating these provisions, your EPC contract sets clear expectations for performance. It ensures you get a project that delivers on its promises while providing a fair and measured approach to handling any shortcomings.
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