[Opinion] Demystifying EPC contracts and its Key Considerations from an AOP Perspective

CA Sahil Bansal & Ajay Sharma – [2023] 149 taxmann.com 438 (Article)

EPC Contract

EPC stands for Engineering, Procurement, and Construction – a type of construction contract commonly used in the engineering industry where a single contractor is responsible for the entire project, from design and engineering to procurement of materials and equipment, construction and commissioning. EPC contracts are often called turnkey contracts because the contractor is obliged to handover the completed project to the owner in a condition where the owner can immediately start operating the facility.

How do these EPC contractors operate in India?

EPC contracts are a common practice for large and complex construction projects in industries like oil & gas, energy, and infrastructure. A consortium of entities with different expertise often joins forces to participate in the bidding process for such contracts. In India, government organizations like DMRC and NHSRC issue tenders for EPC contracts in public domain, ensuring transparency in the bidding process. Once a consortium wins the bid, they create a consortium agreement that outlines each member’s roles, responsibilities and terms of performance. The main contractor oversees the project, ensuring that it gets completed on time and within budget, while consortium members share obligations, risks and consideration. This approach enables effective collaboration, combining resources and expertise to deliver successful projects.

Nature of transactions involved in a typical EPC contract

• Offshore supply of goods – This may include equipment, machinery, or other materials required for the construction project. These goods may be sourced from foreign suppliers and imported into India.
• Procurement of goods from local vendor by Indian entities – The Indian members may procure goods or services required for the project from local vendors.
• Transfer of design from outside India – In some cases, the design of the project may be prepared by a foreign entity and transferred to the Indian consortium member for execution.
• Transfer of know-how or technology from outside India – The consortium may require specialized knowledge or technology from foreign entities to complete the project, which may be licensed or transferred to the consortium members.
• On-site training and supervision service provided by foreign member – In certain cases, the foreign consortium member may provide on-site training and supervision services to the Indian members for smooth execution of the project.
• Manufacturing and after sale support service in India provided by Indian entities – The Indian members may be responsible for manufacturing or assembling components required for the project and providing after-sale support services to the client.

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