EPC and EPCM contracts

A guide for junior mining companies



A guide to EPC and EPCM contracts for junior mining companies seeking to achieving a project structure that is bankable and delivers optimal returns. First published in June, 2013.

The importance of a robust strategy for the procurement of a mining project, from project inception through to construction implementation, can not be underestimated. In order to achieve this, junior mining companies (the Sponsor) should give full consideration to the key procurement issues identified in this guide; these can often mean the difference between achieving a ‘bankable’ project which achieves optimal returns for the mining company, or an expensive project failure.

On the assumption that the Sponsor has determined through a full and proper feasibility process that the project is economically viable, it must then consider how the project is to be delivered. A key aspect of securing such finance will be convincing lenders (or other backers) that the structure for project delivery is robust.


The terms ‘bankable’ or ‘bankability’ are usually used to describe a lender’s view on the robustness of the project structure in terms of its ability to secure full repayment of outstanding debt. This is typically achieved either through project delivery in accordance with Sponsor requirements or, in a default scenario, through appropriate recourse against the contractor (or other stakeholders as appropriate) responsible for project delivery.

In the context of detailed engineering and construction delivery, lenders will prefer for one financially robust party to accept full responsibility for the delivery of the works on time, on budget and to meet the required technical and performance specification. The key candidates in this regard are typically large internationally recognised engineering and construction contractors.

The identity of the contractor can have an impact on the lenders’ view on bankability.

The lenders want to see the party with the ‘deepest pockets’ bearing the entire risk of project delivery. Having more than one party responsible for delivery of the works (in terms of direct liability to the Sponsor) will raise the following concerns for the lender:

  • that there may be gaps in liability cover
  • that there may be interface issues when it comes to identifying the party responsible for a failure
  • that the party identified as being responsible for a failure cannot be held to account either because its liability is limited in some way under the terms of its contract with either the Sponsor or the EPC contractor (as the case may be) or more generally because it does not have the balance sheet to meet the liabilities in question.

Contract structures

A turnkey engineering, procurement and construction (EPC) contract is the preferred option for delivery of the single point responsibility solution described above.

Although there are several internationally recognised forms of EPC contract, each offering a balanced approach to contracting risk, the hardening of the lending market in recent years - and especially post global financial crisis (GFC) - has seen significant amendments to these forms when applied to a limited recourse project finance transaction. When procuring an EPC contractor, it is essential that there is transparency regarding likely lender requirements from the outset. Raising these points after the selection of the preferred EPC contractor will place the Sponsor in a weak bargaining position if (and more likely, when), as a consequence, the EPC contractor proposes additional contingent risk pricing.

The development of detailed design at feasibility stage may undermine the Sponsor’s ability to achieve a single point of responsibility solution without being exposed to inflated construction pricing, either because there is a lack of appetite in the market to take on 3rd party design risk or because those parties willing to take on such design risk will only do so with a significant amount of contingent risk pricing.

In circumstances where the single point responsibility position described above cannot be achieved (or is not necessary because the Sponsor is sophisticated and can itself manage residual risks, or its achievement would adversely affect project economics such that the Sponsor may not want it) the Sponsor may look to alternative structures. We look at the fundamental differences between the EPC and the alternative engineering, procurement and construction management (EPCM) contracting structures below, focusing on identifying the likely challenges when opting to use the EPCM structure.

EPC Contracts

EPC contracts – summary of key points

(a) In terms of delivery of the detailed engineering and construction phase of a project, lenders will usually prefer for one financially robust party to accept full responsibility for the delivery of all aspects of the works on time, on budget and to meet the required technical and performance specification. In achieving this single point of responsibility position there will be reduced risk that:

  • there may be gaps in liability cover;
  • there may be interface issues when it comes to identifying the party responsible for a failure; or
  • the party identified as being responsible for a failure can not be held to account either because its liability is limited contractually or more generally because it does not have the balance sheet to meet the liabilities in question.

(b) If the single point of responsibility position can not be achieved, and on the assumption that lenders accept this, the Sponsors must consider how they will themselves manage the risk(s) in question and in particular the concerns identified in sub-paragraph (a) above. The Sponsors should at an early stage plan for the management of the relevant risk(s) and obtain board approval to the provision of additional security or the need for any additional cost overrun facility. 

(c) The lenders will have key requirements in terms of:

(i) the obligations on the EPC contract to deliver the works on time, on budget and to meet a required technical and performance specification; and

(ii) the recourse available against the EPC contractor to the extent that it fails to discharge its obligations under the terms of the EPC contract.

The preferred EPC contractor should be procured on the basis that these key requirements will be included in the form of EPC contract eventually signed. This will allow for certainty of EPC price at the conclusion of EPC procurement process and will mitigate the likelihood of price escalation following EPC contractor selection.


Figure 1 below demonstrates a typical EPC contract structure under which lenders and the Sponsor will look to the EPC contractor to accept single point responsibility for all aspects of design and construction.

Notwithstanding the fact that the Sponsor may be able to achieve this contractual structure, the bankability of the contracting structure will depend also on satisfaction of certain key lender requirements under the terms of the EPC contract. These key requirements will establish the obligations on the EPC contractor in terms of project delivery and importantly, the recourse available against the EPC contractor in a default scenario.

In order to gain a better understanding of the approach being seen more recently by lenders in the mining sector, we set out below what we see as being those key commercial terms that lenders will typically be looking for under the terms of an EPC contract.


Key lender requirements

Design risk

The lenders’ ideal position will be for the party delivering the works to be responsible for all aspects of the works, including design (whether or not produced by the party assuming responsibility for the works). This transfer of responsibility should extend to mistakes in the Sponsor’s own stated initial design requirements. If this design risk transfer is not achieved, there could be significant risk of cost overrun to the Sponsor due to increased exposure to claims for additional time and money resulting from the requirement to remediate errors identified in 3rd party design.

In that scenario, it is unlikely that this risk may be backed off fully with the party ultimately responsible for producing the design in question. It is more likely therefore that the residual cost overrun risk will rest with the Sponsor. Whilst in the first instance, this is clearly a concern for the Sponsor, lenders will also be concerned to see that the Sponsor is able to manage the potential financial consequences. This may be achieved through the use of a designated cost overrun facility or a request that the Sponsor provides additional security.

Whilst the intention of the parties may be for the EPC contractor to accept full responsibility for the adequacy, accuracy and completeness of design, the lenders will nonetheless want to assess fully the extent to which design risk may filter back to the Sponsor under the terms of the EPC contract. An example of where this may happen is in circumstances where the Sponsor accepts the risk in certain sub-surface site conditions. For instance, the Sponsor may warrant the correctness of survey information relating to the site and accordingly the EPC Contractor will develop its detailed design and submit its tender price in accordance with the warranted information. However, if this information is incorrect, the risk in the design, and in particular the impact of the changes to the design required to reflect actual sub-surface conditions, will pass back to the Sponsor.

In practice, the lenders’ technical adviser will review the risk profile proposed under the terms of the EPC Contract and will advise the lenders as to the Sponsor’s potential exposure to cost overrun risk. It will ultimately be for the Sponsor to convince the lenders that any such risk identified may be managed by the Sponsor. The Sponsor should be aware that lenders may again seek additional ‘mitigation’ through use of a cost overrun facility or a request that the Sponsor provides additional security. In the alternative, Sponsors and/or their lenders will seek to push the risk in question back to the EPC contractor, which may of course have pricing consequences.

Time and cost

Lenders will want to limit to the fullest extent possible the EPC contractor’s ability to claim for additional time and/or money under the terms of the EPC contract. Again, lenders will be concerned about the ability of the Sponsor to manage the financial consequences that will accompany these time and cost claims and more generally the extent to which exposure to such claims may impact on the delivery of the works in accordance with the requirements of the EPC contract.

Many of the international forms of EPC contract contain scope for time and money claims being made by the contractor. For instance, FIDIC Silver Book places the burden of time and cost risk arising from changes in law, compliance with certain employer instructions and the discovery of objects of antiquity at the works site on the employer. Whilst on balance this may not appear unreasonable, the employer’s potential cost and loss of revenue exposure arising as a result of accepting these risks may be significant. More recently, lenders have been pushing back on the acceptance by a Sponsor of these types of risk, allowing for contractor time and money claims only in very limited circumstances.

The key point to recognise is that the acceptance by the Sponsor of any aspect of time and/or cost risk will undermine the fixed price assumption sought under the EPC structure. On the assumption that lenders can get comfortable with this type of risk being retained by the Sponsor, the Sponsor should itself think very carefully before accepting such risks. The potential exposure to additional costs will need to be appraised fully by the Sponsor as will any potential impact on the financial model for the project. The Sponsor should ideally seek board buy-in to any such proposals, and in particular to the commitment of additional equity as may be required at an early stage in the project. Parent company buy-in may also be necessary particularly where parent company guarantees will be required. We would additionally expect the Sponsor to formulate a strategy for managing any such risks. A ‘let’s wait and see’ approach is unlikely to be satisfactory, since it is likely that prompt and pre-formulated action will be necessary on the occurrence of the risk in question if the Sponsor’s financial exposure is to be mitigated to fullest extent possible.

Delay damages

Where works are completed on a date later than that fixed under the terms of the EPC contract and the responsibility for the delay lies with the EPC Contractor (or lies within its agreed liability envelope), the contract will typically include provision for payment of liquidated and ascertained damages (LADs). These LADs will typically be paid at a daily rate to cover anticipated lost profits and costs (including debt service costs as applicable) during the period of delay. It would be unusual for the EPC contractor to accept unlimited exposure in this regard and any liability sub-cap agreed will typically be sized to the level of LADs payable up to the construction long-stop date. Whether or not any such sub-cap will fall within the contractor’s overall liability cap is likely to be an area of debate between lenders, the Sponsor and the EPC contractor. This issue will tend to be considered by lenders in the context of the EPC security package as a whole.

Performance liability

Following completion of construction and the handover of the works, the Sponsor and the lenders will be keen to ensure that any process system or plant forming part of the works is able to achieve certain minimum performance requirements. This is usually required in order to provide both parties with a degree of comfort that projected project revenues can be achieved by the completed plant over a sustained period. The EPC contract will typically also stipulate a requirement for a post completion testing regime.

To the extent that the minimum performance required (or performance guarantees) can not be achieved for a sustained period of operations, the EPC contractor will typically be liable for payment of performance liquidated damages up to an agreed liability cap. The damages will normally be sized according to the loss of revenue and/or profit occasioned by the performance shortfall for a finite period of time.

It would be unusual for the Sponsor to achieve a life of mine performance guarantee; as such, liability for performance damages would normally be capped at the Sponsor’s loss profit and debt service costs for a specifically negotiated period. Whilst residual liability will be a Sponsor risk, the Sponsor would normally manage this risk by building headroom into the financial model for the project and through plant optimisation over time (including through lifecycle type maintenance).

The pre and post handover testing regime will be subject to scrutiny by the lenders’ technical adviser. If, for instance, it is apparent prior to handover of the works that the plant is not going to achieve the lenders’ base case performance/output requirements, the lenders may look for a right to reject the plant in its entirety with full recourse against the EPC contractor for outstanding debt. For obvious reasons, EPC contractors will tend to resist any such position. They may, for example, look for an extended period of additional testing in order to refine the plant and to achieve the required performance levels. If this is permitted, time and cost impact of this additional testing will tend to be at the EPC contractor’s risk and the lenders will typically seek to retain the right to reject at the conclusion of any such repeated testing or any subsequent post-handover testing regime, if a required level of performance is not demonstrated.

Again, where detailed process design is not provided by the EPC contractor, it may be more difficult to require this party to accept performance risk in full, particularly in circumstances where the technology is more complex in nature. Carving out these types of risks from the EPC contractor’s liability under the terms of the EPC Contract is likely to make potential lenders nervous for the reasons discussed above. Whilst lenders may accept the interface risk in this liability gap being filled by the designer itself (whether under the terms of a design contract with the Sponsors or under the terms of a collateral warranty), it is often the case that the party providing the detailed process design is either unwilling or unable to accept the type and extent of liability for design failure that would usually rest with an EPC contractor under the terms of the EPC contract. If this is the case, lenders may require additional security from the Sponsor to bridge the liability gap and to help manage any additional interface risk.

Limitations on liability

As indicated above, a key consideration for lenders when considering lending into a mining project will be the extent to which they will have recourse against the EPC contractor for debt outstanding in an EPC contractor default scenario.

There is, as may be expected, a tension between the lenders’ requirement for full coverage of debt outstanding from the EPC contractor’s security package and the legitimate requirement of a contractor to limit its liability exposure. It is not unusual however for lenders in the current market to look for an aggregate liability cap of up to 100 per cent of the contract price, especially where the works include an unproven technical solution. The lenders may however accept a lower liability cap on the basis that liability for certain key risks is excluded from the aggregate liability cap. It is not uncommon for instance for lenders to seek to exclude liabilities that are the subject of a sub-cap, such as delay or performance liquidated damages, from the aggregate liability cap.

The appropriate exclusions from the aggregate liability cap will be negotiated on a project specific basis by the lenders following adviser input. The list of exclusions will typically include those liabilities that are not able to be limited at law (and this will require local law advice), those liabilities that are uninsurable and those liabilities that are not quantifiable (and therefore able to be reckoned in the sizing of the cap) at the date of contracting.

Security package

Where the EPC contractor fails to deliver the works, relevant losses may be recovered by the lenders and, in the first instance, the Sponsor. The lenders will ultimately control this process through restrictions placed on the Sponsor in the finance documentation. For instance, the lenders will not allow the Sponsors to use (and ultimately deplete) the EPC security package to replace a defaulting EPC contractor in circumstances where such replacement is unlikely, in itself, to secure delivery of the project. It is more likely in these circumstances that the lenders will look to call a default under the terms of the finance documentation, trigger its security over the project documentation and access the EPC security package to recover outstanding debt.

The security provided by the EPC contractor in respect of its potential liabilities will typically be formed, in part, by a form or forms of liquid security.

Liquid security and bonding

Liquid security refers to forms of security that should be as good as money in the bank for the Sponsor. The Sponsor should be able to claim any such monies by simply serving a demand on the party providing the security on behalf of the EPC contractor. Typical forms of liquid security are performance bonds, retention bonds and letters of credit, all usually provided by international banks with lender approved credit ratings.

Leaving retention bonds to one side for the time being, the lenders in the current lending market will typically require the EPC contractor to procure performance security (i.e. performance bonds and/or letters of credit) with a value no less than 15-20 per cent of the contract sum, but this may vary on a project specific basis. However, the lenders are likely to permit a step down in performance security coverage as the works progress to reflect reduced risk in the project for the lenders. Typically, the level of performance security coverage may reduce by 50 per cent, for instance, following the completion of operational testing and will usually be discharged completely upon expiry of the defects liability period (ie, 12-24 months post-handover of the works).

In the UK domestic market, there has been a shift in recent years away from providing performance bonds of the type described above. This is not to say that such bonds are not available, however procuring them can be prohibitively expensive. Instead the UK has increasingly seen use of conditional bonds under which the beneficiary must first establish the right to make a claim and the quantum of any claim before a call is made on the bond. Whilst a fraudulent claim under an unconditional bond of the type described above can be challenged, a conditional bond is less ‘liquid’ in nature and is more akin to a form of guarantee and for the reasons set below will be less attractive to both the Sponsor and its lenders.

It is usual for lenders to also require that a fixed amount of any payment being made to the EPC contractor is retained and held by the Sponsor as security for the remedying of defects subsequently discovered in the works. Unlike the performance security which secures more general performance by the EPC contractor under the terms of the EPC contract, retentions are held for a specific and defined purpose. However, in reality this is somewhat of a falsity as lenders generally view retentions as part of the wider security package available to the Sponsor, and ultimately the lenders, as security for non-performance by the EPC contractor.

The level of retention required by lenders will vary but typically will be between
3-5 per cent of the contract sum. Instead of a cash retention being made on any payment to the EPC contractor, and to assist the EPC contractor’s cash flow, lenders will usually instead accept a form of retention bond as an alternative which will provide security for monies that would have otherwise been retained. Any such instrument should be in the same form as the performance bond discussed above, ie, provided by an international bank with an approved credit rating and permitting claims for payment upon the presentation by the Sponsor of a demand for payment. Again, any such bond should be as good as money in the bank for the Sponsor.

To the extent that any advance payment is made to cover the cost of the ordering of plant and materials or mobilisation, lenders will expect the Sponsor to secure such payments by requiring the contractor to procure an advance payment bond. Again, any such bond should be unconditional and as good as cash in the bank for the Sponsor.

Liquid security and guarantees

Outside of liquid forms of security, lenders will typically require a guarantee from the ultimate parent of the EPC contractor. The ultimate parent is usually a requirement as a shell holding company, for instance, with limited or no assets will not be acceptable to the lenders.

In practice, lenders will carry out their own due diligence on the parent company proposed to ensure that it is sufficiently robust to meet its potential liabilities under
the guarantee.

Unlike the forms of liquid security described above, a guarantee of this kind will usually first require the establishment by the Sponsor of liability against the EPC contractor, which the EPC contractor has failed to discharge. Furthermore, the Sponsor will run the risk that any claim made under the guarantee will be subject to challenge by the guarantor. Far from being akin to cash in the banks, the pursuit of a claim
under a parent company guarantee can be a lengthily process which is why claims under the liquid forms of security will usually be the Sponsor’s first port of call (unless of course there are restrictions on the order in which claims may be made under the relevant documentation).


Lenders will have certain minimum requirements in terms of the circumstances where they will expect the Sponsor to have the right to terminate the EPC contractor and access the EPC security package to either replace the defaulting EPC contractor and secure project continuance or bring the project to an end. As we have indicated earlier, the lenders will control the actions of the Sponsor in this regard through the restrictions imposed on the Sponsor under the terms of the finance documentation.

It would be usual for lenders to look for the EPC contract to contain a right to terminate the EPC contractor in circumstances where recourse against the EPC contractor may be limited in some way or where key requirements relating to performance are not achieved. Lenders will typically look for advance warning of any problems relating to the works so that affirmative action may be taken before the circumstances become critical.

Lenders will be especially concerned to see that the losses recoverable on termination will (to the fullest extent possible) cover amounts outstanding under the terms of the finance documentation (ie, principal, interest and fees). The ability of lenders to recover these losses tends to be very difficult for the uninitiated to understand and accept this, but this is part and parcel of limited recourse project financing where the lenders’ security is limited to the project and those responsible for delivering it.

EPCM Contracts

The acronym ‘EPCM’ is commonly mentioned in the same breath as the EPC structure. However, from both a structuring and risk allocation perspective, the two contracting solutions are fundamentally different. The confusion would appear to come from the shared use of the word ‘construction’ in their titles. It is important however to recognise that an EPCM contract is (amongst other things) essentially a design and construction management contract and that no physical construction will actually be carried out by the EPCM contractor.

The EPCM structure has been used extensively in the mining sector, especially in the years leading up to the GFC where the lending market became more contractor friendly in terms of both risk allocation and pricing. However, post GFC the lending market has hardened and the liquidity gap has meant that lenders have been increasingly risk averse and far more selective about the projects they are willing to back.

This being said, we have seen more recently the EPCM procurement route re-emerge as the preferred procurement model in the mining sector.

Lenders may consider backing a project being procured on an EPCM basis provided that certain minimum requirements have been met.

EPCM – summary of key points

(a) An EPCM contract is essentially a professional services contract under which the contractor will not accept primary responsibility for the carrying out of the works.

(b) The EPCM contractor will be responsible for:

  • completion of detailed engineering
  • the procurement of contractors, service providers and plant and equipment suppliers on behalf of the Sponsor
  • management of the carrying out and completion of the works on behalf of the Sponsor.

(c) The contracting structure under an EPCM solution is fundamentally different to that adopted under a typical EPC solution. Unlike the EPC solution, it will usually be the Sponsor, not the contractor (but see our comments above where this can be an option), that will enter into contractual relations with the contractors, service providers and plant and equipment suppliers responsible for delivery of the works.

(d) The risk profile under an EPCM solution is substantially more onerous from a Sponsor perspective when compared with the EPC structure. In order to attract project finance the Sponsor will need to:

  • demonstrate an allocation of risk between the Sponsor and the EPCM contractor appropriate in the post GFC lending market; and
  • demonstrate to potential lenders how the risks retained by the Sponsors will be managed (e.g. through use of cost overrun facilities).

The EPCM structure

In contrast with an EPC contract (and as mentioned above), the EPCM contractor does not undertake primary responsibility for delivery of the construction works. The EPCM contract is essentially a professional services contract under which the EPCM contractor will typically carry out the following services:

  • Engineering services – the EPCM contractor will typically be the party producing the basic design at feasibility stage or will be appointed post feasibility under the terms of the EPCM contract to complete the basic design developed by or on behalf of the Sponsor. The EPCM contractor will typically be responsible for overall co-ordination of design for the project to ensure that the completed works meet the required technical and performance specification (but note Appendix 1 to this guide describing the limited liability typically accepted by EPCM contractors in this regard).
  • Procurement services – the EPCM contractor will be responsible for the overall procurement strategy and will source contractors, consultants and the necessary plant and equipment in accordance with the Sponsor’s requirements and the assumptions established at feasibility stage. The EPCM will advise on the timing of the letting of the relevant packages and will advise the Sponsor on the terms available as well as negotiate the contract packages on the Sponsor’s behalf.
  • Construction Management services – the EPCM contractor will typically be responsible for overall management of the carrying out and completion of the works. This will include the co-ordination of the works and services being procured on the Sponsor’s behalf to achieve completion of the works in accordance with the project schedule, the project budget and to meet the required technical and performance specification (but again, note Appendix 1 to this guide and the limited liability typically accepted by EPCM contractors in this regard). The construction management services will also typically include the management of health and safety at the site, the establishment of quality assurance systems and the management of the remedying of defective works and/or services provided by other parties.

Some Sponsors are adopting a slight variant to the EPCM arrangement which is essentially a split EP & CM structure. Under this variant the Sponsor will appoint a firm with greater expertise in engineering design and, possibly procurement, as the EP Contractor. The Sponsor will then appoint a specialist ‘construction management’ firm to appoint and manage the trade contractors and the rest of supply chain (including the engineering designer). This assists in reassuring lenders that an appropriate party will be in place having expertise in procurement to ensure the best chance of success and avoiding cost overruns.

Whilst the EPCM contractor will negotiate the terms of the contract packages, whether for delivery of works, services or the provision of plant and equipment, it is usual that the Sponsor will enter into direct contractual relations with the relevant third parties and assume the rights and obligations under the relevant contracts. We have however seen arrangements under which the EPCM Contractor will itself enter into the contracts with the third parties as agent for the Sponsor. Whilst this is perfectly fine, consideration will be required on the provisions necessary to protect the Sponsor and to maintain the supply chain arrangements should the EPCM Contractor be terminated.

For reference, we have set out below the typical EPCM structure.


As we have indicated above, the EPCM structure may be considered by a Sponsor where the single point of responsibility EPC structure can not be achieved or is not attractive for one reason or another. This may be because:

  • The securing of the single point of responsibility EPC solution may expose the Sponsor to inflated pricing which may have an impact on project affordability and which may not be considered by the Sponsor to offer value for money.
  • There may be a general lack of appetite in the market to take on the project in question on a turn key EPC basis.
  • The Sponsor has a good track record in project delivery and has a large internal management resource and as a result prefers to adopt the EPCM structure to significantly reduce overall outturn cost and increase equity returns.

In the context of a mining project, the EPCM contractor will typically be the party developing the basic design at feasibility stage. This party may then be retained to develop the final design and to provide the other relevant EPCM services for the construction phase of the project. This structure will obviously generate continuity in design responsibility throughout works planning and implementation and will typically allow for greater employer influence in design evolution than would otherwise be available under the EPC structure.

In considering the use of an alternative structure (eg, EPCM) (and on the assumption that an EPC structure is otherwise achievable) the Sponsor will typically balance, amongst other things, the increased cost and reduced equity return that is likely to accompany use of the single point of responsibility EPC solution against the corresponding key benefits, namely, price certainty for project delivery and the increased likelihood of securing project finance. If the negatives of the EPC solution outweigh the positives, the Sponsor may be inclined to consider use of an alternative contracting structure.

EPCM and bankability

The fundamental point for the Sponsor to consider will however be the extent to which the EPCM solution may be considered bankable by potential lenders.

A key difference between the EPC and the EPCM solutions is that the EPCM solution does not offer a single point of responsibility for delivery of the works. There will be multiple interfaces which must be carefully managed by the EPCM contractor and the Sponsor and there will remain a risk that there may be gaps in liability or that a party identified as be liable for a failure will not, on its own or collectively with other culpable parties, be willing to accept the measure of liability typically recoverable by a Sponsor when using the EPC structure.

The provisions of the EPCM contract, in terms of both scope (as identified above) and liability for the services provided, will differ fundamentally from the terms seen in a typical EPC contract. To illustrate these differences, we have provided at Appendix 1 a comparison between the key requirements under the EPC structure and the corresponding terms and risk allocation typically achieved in the context of an EPCM structure.

The reader should note that the summary at Appendix 1 provides only a high level overview for the purposes of comparing the risk allocation typically seen under the EPC and EPCM structures. There will of course be exceptions to these positions on a case-by-case basis. To provide a more detailed picture, we provide our clients with EPC and EPCM risk matrices that essentially show the positions taken on the key risk issues on recent projects closed in the mining sector. These invaluable tools allow us to quickly identify the market position on any given risk and more particularly show how a particular risk allocation has been banked (if at all).

From the high level summary at Appendix 1, it is apparent that the usual risk profile under the EPCM solution is far less favourable from the Sponsor’s (and ultimately the lenders’) perspective when compared with the position typically secured by Sponsors under the EPC structure. It is perhaps a little unfair to compare the two on a like-for-like basis given the material differences in what each structure seeks to achieve.

It is easy to see however why lenders may prefer the certainty and security that comes with the EPC solution and also why many of the key principles under that solution may gain support from the Sponsor. However, whilst risk allocation considerations are very important, the Sponsor will also be looking at the commercial imperative of (a) bringing a project to market where, for instance, the EPC structure is not achievable and, (b) maximising equity returns from the project by securing a significantly lower construction cost.

EPCM – key requirements

If the EPCM solution is to be considered, it will be important for the Sponsor to first satisfy itself and ultimately the lenders that the proposed solution can offer a robust structure for project delivery. The following requirements will, in the writers’ view, be key to demonstrating a robust EPCM structure best equipped to secure project delivery:

(a) The selected EPCM contractor should be a robust experienced organisation with a strong track record of securing project delivery on an EPCM basis in the mining sector. The terms of the EPCM contract should reflect an appropriate risk transfer to the EPCM contractor.

(b) In view of the more limited liability typically accepted by an EPCM contractor under the EPCM structure, the Sponsor should appoint a full-time, experienced and well-resourced owner’s team to monitor and manage the execution of the project in order to ensure that the Sponsor’s key requirements are being achieved and to permit early identification of issues that may impact on project delivery. There should be developed a clear internal strategy for the management and resolution of all risks retained in part or whole by the Sponsor.

(c) The contractors, service providers and equipment and plant suppliers should also be robust entities with experience and a track record of project delivery in the mining sector. Where possible, these contracts should be finalised on a fixed price basis with any limits on liability and security requirements being appropriately determined in accordance with the role assumed by the relevant party.

(d) The Sponsor should identify possible interface issues and put in place an appropriate mechanism to co-ordinate the completion of the works and to address the allocation of risks that may impact on delivery of the work. This mechanism should provide for prompt resolution of the relevant circumstances in a manner which does not detract in any material respect from project delivery.           

Whilst the points identified above will be important in developing robustness in the structure for project delivery, there is little doubt that potential lenders will seek from the Sponsor security for the residual risks that may be retained at Sponsor level under the EPCM solution.

In the first instance this is usually achieved through use of a designated cost overrun facility to meet likely cost and/or time overrun exposure.

A more robust view on EPCM risk transfer

As Sponsors and contractors operating in the mining sector are usually large sophisticated entities, it is perhaps surprising that the approach taken to risk transfer in the context of EPCM solutions has traditionally been relatively simplistic when compared to the approach taken in other sectors. This approach is changing, however.

Given that the role of an EPCM (or EP&CM) contractor will be fundamentally different to that adopted by an EPC contractor and given, as a consequence, the significantly lower price paid for EPCM services when compared with that payable under a typical EPC contract, the wholesale transfer of risk from the Sponsors to the EPCM contractor will not be appropriate.

However, use of more innovative ways to transfer risk to the contractor, without necessarily seeing a dollar for dollar pricing consequence, are being treated more seriously in the mining context. Whilst use of these solutions will not, in themselves, secure a bankable position for the Sponsors, they will however create a more robust EPCM structure by ensuring that the EPCM contractor has ‘skin in the game’ and is further motivated to secure project delivery in accordance with Sponsor requirements.


A key aspect of EPCM risk allocation is the concept of incentivisation.

Incentivisation provisions will typically provide for EPCM contractors accepting financial risk and reward in the achievement of key project requirements, including, completion of the works within the agreed project budget, completion of the works in accordance with the project programme, achievement of certain health and safety targets and the final works achieving key performance and other quality requirements.

Whilst these risks are not passed to the EPCM contractor in full, the EPCM contractor will be accepting a degree of liability in the relevant risk, so will be more motivated to manage it. The key point to understand is that the EPCM contractor will usually be responsible for the financial downside of the incentivisation provisions irrespective of whether it has used reasonable skill and care in managing the risk in question. There is a therefore clear imperative for the EPCM contractor taking ownership of the management of the risk in question from that date of contract to secure project delivery in accordance with the Sponsors requirements.

There would ordinarily be concerns that the EPCM contractor will simply price the risk in question on a contingent basis, and this will of course not offer value for money for the Sponsor, particularly if the risk never materialises. These concerns however tend to be mitigated by the fact that the EPCM contractor’s risk in the project will be limited to its agreed profit margin on which there should, in theory, be absolute transparency beyond the actual agreed cost for providing the EPCM services.

Conversely, there will also typically be a bonus structure under which the EPCM contractor will receive additional payments (up to an agreed cap) for meeting and surpassing key project delivery requirements.

Implicatons of UK Bribery Act

Whilst not an issue that will directly affect the financing of a mining project or more generally its economic viability, any Sponsor incorporated in the UK or carrying out business or any part of their business in the UK should from now be considering very carefully the requirements of the Bribery Act 2010 (the Act).

The Act will make it a criminal offence, for persons to whom the Act relates, to bribe another person or to be bribed, but perhaps most significantly it also introduces a new criminal offence for corporates of ‘failing to prevent bribery’.

Corporate entities can be guilty of this offence if an ‘associated person’, which given the scope of this definition is likely to include any EPC or EPCM contractor, offtaker or operator, carries out an act of bribery when acting on their behalf. It is important to recognise that the ‘associated person’ does not need to be incorporated in the UK or indeed have any business connection with the UK.

The only defence for an entity being prosecuted for failing to prevent bribery is to show that it had ‘adequate procedures’ in place designed to prevent bribery being carried out on its behalf. Whilst the precise meaning of ‘adequate measures’ is not clear, the UK Government has made available guidance as to the key principles to be followed.

Given the significant scope and extraterritorial reach of the Bribery Act, it will be extremely important for Sponsors to firstly ensure that they have robust internal policies in place to guard against bribery and secondly to ensure that its supply chain members have robust anti-corruption compliance programmes and are subject to appropriate due diligence and monitoring.

Specific advice should be sought by Sponsors having any particular concerns about
the scope and implications of the Act.

Appendix 1

EPC risk allocation

Typical EPCM position

EPCM risk allocation

Risk typically transferred to the contractor






Contractor to be responsible for completing the works on time.


The EPCM contractor will not usually guarantee delivering the works on time and will therefore not usually have responsibility for the payment of delay liquidated damages in this regard.

Any damages recoverable from other contractors, who are identified as being responsible for delayed completion of the works, will not typically be of the order recoverable under the EPC structure (either because of quantum or capping arrangements agreed).

Nominal delay liquidated damages may be payable by the EPCM contractor to the extent that the design, or other deliverables for which the EPCM contractor is responsible, are delivered otherwise than in accordance with the project programme.

The EPCM contractor will be responsible for managing the overall works programme and any failure to use reasonable skill and care in doing so will give rise to liability. Any such liability will usually be restricted to a contractual damages claim and will be subject to the limitations on liability identified below.

As the delay damages recoverable from the EPCM contractor, and any other contractors identified as being responsible for delayed completion of the works, will not be sufficient to cover the Sponsor’s potential loss in revenue and debt service costs occasioned by such delay, the financial risk of delayed completion of the works will ultimately rest with the Sponsor.

of works for
a lump sum fixed price.


The EPCM contractor will not usually guarantee the overall outturn cost of
the works.

The EPCM contract will provide for the EPCM contractor setting the budget
and managing adherence to the budget. Any failure by the EPCM contractor to use reasonable skill and care in doing so
will give rise to liability. Given the limits on the EPCM contractor’s liability typically agreed under the terms of an EPCM contract (see below), it is unlikely that liability for any significant cost overrun will be recoverable from the EPCM contractor.

In procuring the works, services and plant and equipment supply packages on behalf of the Sponsor, the EPCM should attempt to procure such packages on a fixed price basis. However, this is not always possible. Notwithstanding the fact that fixed price solutions may be achieved, the multiple interfaces will however widen the scope for time and money claims by the third party contractors which will be a Sponsor risk to the extent that the liability giving rise to any such claim can not backed off fully with other contractors.

Payments to the EPCM contractor for services performed are typically made on a monthly basis based on actually costs incurred at agreed rates (ie, payment is on a fully reimbursable basis).

The Sponsor will ultimately accept the risk of any material cost overrun.

EPC contractor to provide performance guarantees in respect of the completed plant.


The EPCM contractor typically accepts full responsibility for the final design and for it meeting the required technical and performance requirements and will usually be responsible for coordinating the design produced by other parties.

Establishing that a performance failure has resulted from the design produced
by the EPCM contractor and not from
the implementation of such design by other contractors may not always be straightforward.

The liability of the EPCM contractor for design failure will however be limited
as set out below.

Due to interface issues relating to identifying the party responsible for performance failure and the more limited liabilities accepted by parties under the EPCM structure, it is more likely that the majority of the liability for any substantive performance failure will retained by
the Sponsor.

Any limit on liability to provide sufficient coverage for recovery of amounts outstanding under the terms of the finance documentation. Appropriate carve outs to be agreed in respect of which the EPC contractor’s liability will
be unlimited.

The EPCM contractor’s liability will typically be limited to anything from
10-20 per cent the EPCM contract price (which will typically equate to the EPCM Contractor’s profit margin).

Carve outs from the liability cap are usually limited to those liabilities than can not be limited at law.

Sums recoverable from the other contractors in the aggregate (on the assumption that the parties responsible can be held to account) are unlikely to be of the order of sums recoverable from an EPC contractor under the EPC structure.

The Sponsor’s (and ultimately the lenders’) recourse for recovery of debt outstanding and other losses in a project default scenario will be limited. The residual liability in this regard will ultimately be a Sponsor risk.


Security package to include liquid performance security, retentions and parent company guarantees.

Whilst parent company guarantees tend to be procured, it would be less usual for EPCM contractors in the mining sector to provide other liquid forms of security.

The EPCM position in this regard is symptomatic of the nature and extent of liability being accepted by the EPCM contractor.

The nature and extent of the security package obtainable from contractors, services providers and plant and equipment suppliers will be determined on a project specific basis.

Sponsors accept cash flow risk during the period in which a claim is established against the EPCM contractor and sums for which the EPCM contractor is liable are recovered from the parent company.

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