Staying on track: Managing time in EPC contracts
Geraldton Wind Farm, Western Australia
Staying on track:
Managing time in EPC contracts
Clients will often ask us: how can we most practically ensure that our project runs to schedule? Here are 5 ways to manage that risk.
1. Milestone payments
Milestone-based payment structures in engineering, procurement and construction (EPC) contracts link payments to the achievement of specific project stages, such as the delivery of materials or the commissioning of plant. This structure aligns contractor goals with project success and incentivises timely progress, as funds are released based on actual progress rather than the passage of time.
Both principals and contractors should thoroughly consider milestones so that they can more accurately forecast how cash will from or to then over the course of the project.
Milestones with clear, objective criteria and effective communication around claiming milestone payments will go a long way towards minimising conflicts.
2. Delay liquidated damages
Delay liquidated damages regimes are pre-agreed damages regimes often found in EPC contracts. Delay liquidated damages are intended to cover financial losses that may arise from project delays, such as delays to energy production or opening dates.
In the Australian context, to be enforceable, liquidated damages need to be a genuine pre-estimate of loss, and accordingly require careful consideration and quantification. Liquidated damages serve as financial disincentives, motivating contractors to avoid failure to meet project timelines.
Exposure to the prospect of liquidated damages can be balanced by contractors insisting on lower liquidated damages rates and caps on the total liquidated damages than may be levied.
3. Bonus payments
Early completion bonuses in EPC contracts are financial rewards given to contractors for completing projects or achieving specific milestones ahead of schedule. Provided they are not exorbitant, these bonuses should motivate contractors to work efficiently and prioritise timely delivery, without sacrificing the standards, quality and functional performance of the asset and its components.
This approach fosters a win-win outcome, as contractors gain additional earnings while project owners benefit from earlier asset availability and the opportunity to generate more revenue.
Early completion bonuses can also be used as an effective negotiating tool for principals and contractors when balanced against delay liquidated damages.
4. Progressive testing
Progressive testing obligations require contractors to conduct – and report the results of – tests on the works at various stages, ensuring that any major issues, like serial defects, are identified early in the project lifecycle. This proactive approach allows principals to detect problems before practical completion, minimising and the need for rework and the associated costs and delays.
For example, principals may insist on having the right to direct rectification of issues at any time prior to practical completion (in addition to during the defects liability period). Principals may also insistif the contractor fails to take necessary corrective action within a reasonable timeframe, the principal can and take such corrective action itself (aka ‘step-in’) and charge the costs back to contractor for the costs (aka ‘back-charge’).
Progressive testing regimes promote stricter conformance with contract specifications along the way so that the parties are not left with significant non-conformances (i.e. a mess) at the end.
5. Prompt notification of claims
The obligation for contractors to notify the principal as soon as practicable about actual or potential delays, regardless of cause, is crucial in EPC contracts. Early notice allows the principal to take proactive steps to mitigate impacts, such as allocating additional resources or alerting upstream customers about potential delays.
This collaborative approach helps maintain project momentum, reduces the risk of compounded delays, and enhances the principal's ability to manage project outcomes and customer expectations. By fostering transparency and communication, early notice regimes support smoother project delivery and more effective response to unforeseen challenges.
Contactors should carefully consider whether proposed notice regimes are realistic and give them enough time to notify so that their future claims are not barred.
Contact us
For tailored advice on managing time in EPC contracts, reach out to our team. Whether you're a principal looking to keep your project on track or a contractor seeking to manage cash flow or exposure to liquidated damages or back-charges, we can help you implement practical strategies that drive successful outcomes.