EPC contracts are those contract where in addition to the construction capability, one also has to possess necessary expertise in the area of Engineering & Design of structure and Procurement of Equipments. Normally EPC contracts are taken on a lumpsum basis instead of item rate basis. Thus the challenges and the risk involved in an EPC contracts are much higher as compared to a pure construction contract. As an auditor one needs to have a basic understanding of the challenges in EPC contracts which can be summed up as under: –
a) Requirement of Design capability – Separate team is required for taking care of design and drawing aspects. If not in-house, then the same is to be outsourced to some reliable consultant. Further for Concept based EPC projects where the contractor himself has to envision the project, he might need services of some expert for proper design which may have an impact on the overall cost of the facility intended to be built. Thus there are costs to be incurred even at the tendering stage, and if the project is not received, then these would be sunk costs. Long term tie up’s with engineering consultants can be of great help in this regard.
b) Considering that procurement is also in the scope of the contractor, he has to have clarity in supply schedule and also a network of approved stable vendors for various jobs.
c) Since a lot of working capital is required in these contracts, one has to have adequate cash reserves to meet tough times. For e.g. there may be instances when there are last minute changes which delay the dispatch of equipments at the site. So the contractor should be in a position to absorb all such events in his working capital cycle.
d) The contractor would be doing both construction as well as procurement, installation and commissioning of equipments, hence the construction team has to carry out the work in such a manner, that the other teams are able to carry out the next stages very smoothly and with proper co-ordination.
e) One has to be ready for stringent third party checks at various points. As the client can only exercise controls by appointing third party quality consultants in various areas, so the contractor would have to satisfy the pre-certification requirements of these consultants.
f) There may also be a case when procurement has to be made from overseas markets. In such cases the voyage time, marine insurance, custom formalities need to be complied with. Further in case of imports, the contractor has to ensure that the equipment represents latest technology and should not be dumped machineries by the developed nations.
g) Since various nature of services and goods are being provided under EPC contracts, even the direct and indirect taxation at multiple points pose an extra challenge.
h) The contractor also has to have proper logistics arrangements, as loading and unloading of heavy goods would be required at various places from the purchase location to the destinations where the equipments are to be installed. Thus planning for heavy trailors / cranes / forklifts needs to be proper.
i) Normally it is considered that when the project is finalized on a lumpsum basis, it may not be possible to claim any extra items. However even in a lumpsum contract the contractor has to document all the specifications based on which the contract price has been finalized. Thus if any deviation from the specifications is required during the course of the project, the same may be claimed as an extra item.