Understanding EPC Performance Guarantees
A performance guarantee (a performance bond) protects downside risk by holding the EPC accountable for ensuring all the equipment works as expected when connected for operation. In its simplest form, an EPC performance wrap is an engineering design guarantee. Each respective process technology package typically comes with a performance guarantee of its own, but that does not necessarily mean that each piece of equipment will play nice with the others. A performance guarantee is intended to motivate the EPC to stand behind the engineering and do what it takes to achieve nameplate production capacity.
Some EPC performance guarantees require absolute compliance and impose unlimited make-good obligations on the contractor until attained. In other cases, and more commonly, the EPC will assume liquidated damages with a defined minimum performance level. These damages are traditionally capped, often ranging from 5-10% of the contract value. Additionally, there is typically an overall damages cap (10-20%) for which this is factored into.
Are these performance bonds worth it?
To answer that you need to truly understand performance risk. After all, that is what the performance guarantee is designed to address.
Performance Questions for Evaluating Performance Risk
- Is any new technology being deployed?
- Is there scaling risk?
- Are all vendors providing a guarantee on each piece of equipment?
- Are there any similarly designed facilities in operation?
- Has the fuel supply (often organic feedstock) been adequately sampled, tested, and considered on the design basis?
- Is there a realistic base case startup timeline? This is important because compressed schedules lead to poor commissioning, startup and operations practices, and performance bottlenecks.
The answer to the question, are performance bonds justified, lies in the answers to the above questions. One could argue if you do not feel comfortable that the facility will be commissioned and started up properly over a reasonable time frame, then the real guarantee is that the performance bond will be pulled upon. If the performance guarantee is based on the feedstock provided by the owner’s team, what is the probability that the feedstock may change or doesn’t meet specification, thereby potentially voiding the guarantee?
This is not to say that performance bonds are not valuable motivators, but they only guarantee you will get some of your money back to pursue corrective actions. They do not guarantee that the plant will operate properly.
This article contains excerpts from our soon to be released whitepaper, Establishing EPC Contracts that Actually Work for Sustainable Infrastructure Projects. Subscribe to our newsletter to get first access.
- Nexus PMG Announces Strategic Reorganization to Satisfy Demand for Construction Monitoring - June 24, 2021
- Understanding EPC Performance Guarantees - May 6, 2021
- Understanding the EPC Contract: Contingency Basics & Beyond - April 15, 2021