EPC Contracts: Keeping the Cash Flow Flowing

A successful EPC (Engineering, Procurement, and Construction) project relies on a well-defined payment schedule.

Here are some key elements a well-crafted EPC contract should include regarding payment terms:

• Down Payment: Is a down payment required before work starts? The contract should explicitly state this and the amount involved.
• Payment Terms: Will payments be structured as cash-positive (contractor receives progress payments) or cash-neutral (payments align with project milestones)? The contract should clearly define the chosen approach.
• Retention: If the owner withholds a portion of the payment (retention) as security, the contract should specify:
  • When the retention money becomes payable (typically upon acceptance of deliverables).
  • The latest possible timeframe for payment (e.g., “payable upon acceptance at the latest”).
• Security of Payment: For export orders, additional financial safeguards might be required. The contract should specify the type of security needed, such as:
  • Irrevocable letter of credit: A guaranteed payment method from a bank.
  • Buyer credit: Financing provided by a bank to the owner.
  • Export credit insurance: Protects the contractor from non-payment by the owner.
• Invoicing and Payment Procedures: Clear guidelines are essential for a smooth payment process. The contract should define:
  • The invoicing process followed by the contractor.
  • Any documentation requirements invoices must meet for approval.
  • The payment procedures followed by the owner.

By establishing clear and transparent payment terms, EPC contracts ensure timely cash flow for the contractor, financial security for the owner, and a project on track for success.

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