Engineering, procurement and construction (EPC) contracts are evolving as utilities seek to spread risks, contain costs, and execute their business strategies. As a result, turnkey contractors are...
Engineering and construction firms adapt to a changing market.
to their clients. Building transmission projects might’ve been a core competency 20 or 30 years ago, but now they’re looking for a one-stop shop, and they want more performance security. Owners are looking for EPC firms with strong balance sheets to provide parent-company guarantees. High bonding and liquidated damages provisions are common in EPC contracts these days.
Owners are risk averse because they’re getting a lot of pressure from PUCs to ensure the prudency of their investments. In this down economy, everyone is asking if something could’ve been done better. Utilities are taking that to heart and avoiding being in the position of being the one who made the mistake.
Theis, Burns & McDonnell: The term ‘turnkey’ has various meanings. I think it’s where you have an owner that gives you specifications and asks you to include financing and so forth, and they back off until it’s finished. Some owners might want financing brought to the table in this economic climate, but so far we haven’t seen much of that. We see that more in the international arena than we do in the U.S.
However, we are seeing more owners wanting the full wrap. They’re probably able to get a little tighter terms today than they were in the past, because of the competitive nature of the market. Today is a great time to build a project. How long that will last is yet to be seen. It could end up like it was in the late 1990s or early 2000s, when the market turned and companies became busy.
Eppinger, Fluor: Our clients clearly are looking for increased certainty when it comes to cost, schedule and quality. That’s impacting the terms that are being required under turnkey contracts. Years ago clients were more open to carve-outs or escalating cost items, and now they’re less willing to consider any carve-outs in pricing.
For IPPs, project financing is more difficult to arrange, and lending requirements are more stringent. That’s causing clients to seek stronger guarantees and higher limits of liability. We’re seeing the perceived risk in contracts increase. That could abate as lending conditions improve, but not in the near future.
We’re finding innovative ways to mitigate risk so we don’t have to increase our price and we can remain competitive. For example, we provide development support for renewable projects. In early development stages, for IPPs we might put a little skin in the game to help the project move along and get to the point where a permit can be finalized. We’re not a developer but we’re in a position to help developers secure financing.
The need for this kind of support goes through cycles. In today’s market we’re being asked to take development risk in solar and biomass projects, and in some cases in gas-fired facilities.
Champagne, CH2M Hill: If coal plants are shut down at the rate that some people expect, utility balance sheets won’t be able to handle the financial burden of building all the needed replacement capacity. They’ll be looking for alternative ways to get plants built, like contracting