Delay liquidated damages – EPC contract watchits

In an EPC contract that Contractor has a lot of autonomy.  They get to define the details of the design, they manage the procurement, say how and when construction activities take place and they’re in charge of commissioning.  They need to deliver a completed product, in accordance with the specs outlined in the contract, to an acceptable quality and on time.

The Employer shouldn’t really have too strong a role in this scenario.  They have a couple of rights in the contract at their disposal to push or motivate the Contractor to ensure that they’re building the right thing and will have it finished on time.  These are largely big financial sticks.

If the Contractor runs overtime, the Employer has what are often called Delay Liquidated Damages (DLDs).  These damages are calculated ahead of time, based on the expected losses to be experienced by the Employer for every period of delay (most often calculated on a daily basis) and the method of determining the damages payable is included in the contract.

There are few things to consider when determining the rate of DLDs.

• They need to be reflective of the actual losses to be experienced by the Employer, so should be based on expected revenue from electricity sales, costs to the Employer associated with construction delays, etc.  These should be linked to the project’s financial model.
• They should be adequate to incentivise the Contractor to complete works on time
• The higher the DLDs, the higher the level of risk to be carried by the Contractor, and this may impact the overall contract price.  This will naturally be discussed and agreed during contract negotiations.
• There is likely to be a cap on the total DLDs payable, and this should be agreed upfront, and should be inline with industry standards and local regulations.

Something that the Employer should be particularly careful about once the Contractor has started works is making sure that they are extremely cautious about issuing any instructions to the Contractor that could be interpreted as having an impact on the project completion date.  This naturally excludes any instruction issued by the Employer as a result of having witnessed any non-compliance with Health and Safety and Environmental regulations, but putting their nose in how the Contractor goes about their work could be argued to have led to project delays.

Lastly, it may be in the Employer’s interest to forego DLDs, or to defer claiming DLDs.  This could be if the Contractor is short on cash, and needs all available cash to finish the project (especially if certain tasks need to be fast tracked).  The contract should allow for this without the Employer giving up any of their rights.