Contractual agreement drafting needs a lot of strategic thinking as a lot of risks can be mitigated for EPC firms by it

The EPC firms sign contractual agreements with customers, vendors, sub-contractors as well as consultants. Usually, the owners have a few standard drafts of such contracts. They feel confident about going with them. The primary focus is on payment terms, milestones, and penalties. There are many risks that EPC firms face like warranty payments, stuck product & service invoices, and acceptance of component engineering drawings by Principal customers, to name a few. The EPC firm should mitigate its risk by adding proper clauses in the contractual agreement. I feel that the spirit of the contractual agreement should be kept dynamic, and as knowledge comes, discussions should be initiated between parties to get a win-win situation for all the stakeholders. For example-

Usually, vendors of components provide drawings, which further have to get approved from the Principal Customer as well as from the EPC firm’s customer. Typically, customers support it, but the Principal customers give acceptance with few comments. Most of the time it is seen that someone from the team will get the customer’s informal approval and get the order rolling. Since the drawings have comments from Principal customers, the products delivered at the construction site are not accepted. The result is stuck invoices and initiation of payment issues with Vendors. The best solution for such risk is to have a contractual term with the vendor to get all the approvals of drawing, including from Principal customers. The product is approved at the site by all the stakeholders then only the vendor receives payment. Usually, EPC firms do not focus much on the clause for warranty timing initiation. The warranty period should align with the warranty period initiation defined by customers in their contracts with the EPC firm. All these additional needs may make the cost of the component 5-10% more expensive, but it is worth having it in the contractual agreement.

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