Solar EPC Contract Best Practices
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The solar industry has seen historic growth and will continue to explode in the coming years. The U.S. solar industry gained 43% and built a record 19.2 gigawatts (GWdc) of capacity in 2020 alone. Furthermore, during the next ten years, the U.S. solar industry should add a total of 324 GWdc of new capacity. It is crucial to comprehend not only the advantages of clean energy but also the best practices for solar construction contracts given the anticipated demand for these kinds of projects in the upcoming years, particularly in the field of renewable energy.
Advantages of Clean Energy
Construction has seen technological and design advancements that, among other things, make projects more environmentally friendly and support future growth in the clean energy sector. Utilizing solar energy has a number of advantages, including but not limited to: a smaller carbon footprint; financial gains due to equipment's longer lifespan; federal, state, and occasionally even local tax credits and rebates; increased dependability; and less dependence on foreign entities, among others.
What is an EPC Contract?
Engineering, Procurement and Construction (EPC) contracts were utilized for industrial and complex power, petrochemical and heavy industrial projects. Large-scale solar project contracting is increasingly using the EPC framework. These agreements may be more complicated than standard construction agreements.
The primary benefit of EPC is that it shifts the majority of risk from the owner to the contractor. Because most construction projects are backed by major traditional financiers who are looking to financially sound contractors to guarantee plant design and construction in order to reduce their risk and maximize their long-term profits, the transition from traditional design-bid-build to EPC is taking place in the solar market.
The EPC accepts and manages the project's procurement and performance risk by having a sizable, financially secure EPC contractor handle the design, buy the components, install, start up, and hand over the system to the owner.
EPC Contract Best Practices
A careful upfront planning process is necessary for a successful EPC setup. There are a number of essential requirements an owner should meet when choosing a contractor for an EPC contract, including.
Choose the Right Contractor
Similar to choosing a contractor for any large-scale project, choosing one with extensive experience building a solar power conversion is crucial. The financial standing of your contractor is also important. This is partly because performance guarantees have a long duration and are frequently in effect for many years after the project is finished. You want to be confident that the contractor's business will continue to be in operation for many years after the work is finished, just in case there is a non-conformance with the job that affects the overall performance.
A successful solar EPC depends on having an established supply chain for solar components, which contribute to roughly 50% of the plant's expenditures.
They Should Know How to Work with Others
The fabrication and installation of solar systems demand a large amount of labor. The EPC supplier must have a solid awareness of the regional labor laws and rates in order to minimize expenses and hazards. A plan for dealing with transportation, accommodation, and labor costs to bring the crews to the site should be included in the contractor's expertise deploying sizable labor groups to remote locations.
They Understand Production
Solar projects frequently have tight deadlines and require the procurement of materials from all over the world. To reduce project delays, EPCs must have developed project controls. To increase installation quality, for instance, this can entail prior exposure to a production-line fabrication method.
Outline Everything in the EPC Contract
Due to the complexity of solar projects and the accompanying EPC agreements, it is crucial that the project team collaborate to create an agreement that effectively controls risk while taking rigorous project timelines into account.
Stringent Project Control
Scheduling delays can be common and very expensive for solar projects because they require extensive sourcing of complex equipment and prolonged performance output guarantees (which are related to multiple calendar dates). Therefore, it is recommended that stringent project controls and standards be established in an effort to avoid expected issues before they materialize. (For example, planning, management oversight, communication, change order processes, etc.) Owners should also think about liquidated damages clauses, which are meant to make up for lost tax benefits and energy output problems.
Due to the stringent scheduling requirements and completion dates that must be met in order to prevent delay damages, it is crucial to fully comprehend any termination wording in an EPC contract. In the event of a delay, it is advisable to have the option to terminate, at least partially.
The parties should include specific wording describing how, when, and what counts as "completion" for certain activities. In order to avoid confusion, the parties should address who is responsible for carrying out such actions.
Consider the Performance Guarantee and Warranty
The terms of the performance guarantee should be given more thought because they will affect the entire project output for many years after initial completion. The project's later buyer may be entitled to large quantities of money if certain criteria are not met, which could have a negative effect on profitability. The performance guarantees must be well-considered and precise.
Warranty terms are equally significant. For instance, it is likely that the work is nonconforming and will require re-work if the project is not performing as required. A strong warranty clause is essential, especially when trying to reduce future liability due to output problems brought on by non-conforming work.
Appoint a Neutral Expert
The parties should also think about appointing a neutral expert who can advise them on change order valuations and interpret any applicable engineering norms or standards. The process of settling technical disagreements that would otherwise cause delays can be significantly sped up by doing this.
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Even though the aforementioned topics are by no means intended to be an exhaustive list of things to take into account when negotiating your next EPC contract, they are unquestionably some debated topics in this field. Our surety bond professionals can help you with any solar bonds you need with the most competitive terms.