Fulfilling or exceeding Compliance in EPC business is essential and needs strategic decisions

Usually, HR compliance, safety compliance, and even finance compliance do not get the focus from Indian EPC firms as much as they are supposed to get.

HR compliances: Usually, all the subcontractors working for EPC contractors have to pay salaries to all the registered employees with the Principle customer of the project. Suppose even one subcontractor defects on this condition, that EPC contractor & all his subcontractors are not allowed to work in the project. Usually, EPC owners hire low-cost subcontractors who have hand-to-mouth cash flows with them. Many times they are unable to give salaries to their employees on stipulated time, which has a grave impact on the overall timeline of the EPC contractor’s deliverables. There are many ways to mitigate this risk. One of the most commonly used methods is that the EPC contractor should carry a list & bank account of all the laborers working with his subcontractors. If the final date for compliance, for example, is the 7th of each month, then on the 4th, the EPC contractor team should ensure that all his subcontractors are compliant in paying salary to their worker. In case some subcontractor shows his inability to comply due to lack of funds, the EPC contractor should pay from his kitty and deduct the same amount from the subcontractor’s payments. He can also charge 0.5-1% interest per month to the subcontractor for payments to laborers.

Safety compliance demands PPEs for all the workers and staff visiting the site as well as in the yard. Since the subcontractors are having cash flow problems, many times, they send workers without PPE. Also, the EPC firm owners consider safety expenses as waste especially in the Indian context, so they tend to spend very minimally in this area. EPC firms’ customers are usually multinational firms and regard safety as the number one priority in all their dealings. The result is that the EPC contractor keeps getting warning letters on safety issues, and the EPC firm tries to close the problem by giving warnings to subcontractors without an intention to improve safety. In a few days, safety issues resurface again, EPC contractors issue the same advice to the sub-contractors. Such negligent behavior of EPC contractors leads to stopping work at the site and wastage of resources in useless efforts to close the problem. With the strict customer, the EPC contractor gets penalized for this negligence. One of the solutions to this problem is to hire a knowledgeable safety expert to lead these efforts in the EPC firm, and whatever budget he asks for should be given to him. These expenses are minimal compared to delays & penalties which EPC contractors face later on.

Finance Compliance: When contracts are written with suppliers and subcontractors a promise is made about payments to be made by the EPC firm in 30 or 60 days after completion of the milestone. Few deviations in a year are acceptable due to cash flow problems provided the other party is informed well in advance. But if it becomes a regular habit to make payment to suppliers & subcontractors beyond the promise date and many times not even make a payment, the EPC company does not get the long term trust of these partners and this hampers the EPC firm to grow into a professional company or enhance its revenue. The best solution for the cash flow problem is to have an active CA as a finance manager who is also business savvy and connects well with all the team heads as well as customers. He should be having options to manage cash flow not by stopping payments due to vendors & subcontractors but by ensuring that cash flow is as per plan most of the time.