The types of contracts used in construction projects play a critical role in the success of the project. Choosing the right type of contract is one of the factors that determine the success of the project. FIDIC (Fédération Internationale des Ingénieurs-Conseils) contracts and EPC (Engineering, Procurement, and Construction) contracts are two important types of contracts commonly used in large-scale infrastructure and construction projects. In this article, we will examine what FIDIC and EPC contracts are, how they are used in projects, and large-scale projects that are examples of these two types of contracts in our country.
What are FIDIC Contracts
FIDIC is a series of documents prepared by the International Federation of Consulting Engineers that provide international standard contract templates for construction and engineering projects. FIDIC contracts provide standard templates suitable for different types of projects, regulate the rights and obligations of the parties in detail, and regulate the responsibilities of the parties, risk sharing and cooperation, thus providing a transparent structure for the prevention of disputes in projects. FIDIC has a variety of contract books (manuals) to suit different types of projects:
The most commonly used FIDIC contract types, ranked by increased liability of the contractor, are:
- Red Book: It is used for construction and engineering works designed/projected by the employer. Risks are shared in a balanced manner between the employer and the contractor. For example, in the construction of a dam, the employer provides the design and the contractor/contractor performs the construction. It is the type of book that finds the most common application area in construction works in Turkey.
- 2.Green Book: The Green Paper (Short Contract Form – General Conditions) is suitable for projects that require relatively little capital (less than 500,000 US dollars) and is recommended for use in simple engineering and construction works that require repetition or short term. The Green Book is a flexible book that accommodates administrative and commercial regulations and can be easily revised according to the needs of the parties.
- Yellow Book: It is suitable for projects where the responsibility for design and construction is with the contractor. It is often used in industrial facilities and infrastructure projects. For example, in a power plant project, the contractor both designs and undertakes the construction.
- Silver Book EPC Contracts: As will be explained in detail in the subtitle, it is designed for turnkey projects where the precision of the final cost and time is important for the employer; The contractor assumes full responsibility for the design, procurement and construction. These are called EPC Contracts. The bulk of the risks belong to the contractor. For example, in a highway project, the contractor manages all the processes and delivers the completed project to the employer.
- Gold Book: It is suitable for long-term projects involving design, construction and operation responsibility. Unlike EPC Contracts, it also imposes an operating obligation on the contractor. For example, the design, construction and operation of a water treatment plant for a certain period of time is carried out by the contractor.
What is an EPC Contract
As defined above, an EPC contract is a type of contract regulated in the Silver Book of the FIDIC contract. It is especially used in large infrastructure and industrial plant projects. EPC stands for "Engineering, Procurement, and Construction". The EPC model is a type of contract in which the contractor is responsible for the entire engineering design, supply of materials and equipment, and construction processes. In EPC contracts, the contractor is responsible for all phases of the project and provides the employer with a turnkey project. Such contracts are especially preferred in large-scale industrial and infrastructure projects.
Key Features of EPC Contracts
- Turnkey Projects: The contractor completes the project within the specified time and cost and delivers it to the employer ready for use.
- Single Responsibility: The contractor is responsible for all processes, which greatly relieves the employer of technical and operational details, providing the employer with a single interlocutor.
- Fixed Price and Duration: EPC contracts often include a fixed price and a set completion time, which provides certainty for the employer in terms of cost and time.
- Transfer of Risks to the Contractor: A large part of the risks associated with the project lies with the contractor, which reduces the risks of the employer.
The Relationship Between FIDIC and EPC Contract
EPC falls under FIDIC's purview as a project method, and FIDIC's Silver Book is a special contract model for such projects. In other words, EPC is not a type of FIDIC, but an application area.
Risk distribution in FIDIC contracts varies according to the type of book chosen; In the Red Book, risks are shared more evenly, while in the Silver Book, most of the risks belong to the contractor. This type of book is used in EPC contracts.
FIDIC contracts have a more flexible structure and encourage cooperation between the parties. EPC, on the other hand, usually offers a strict structure that stipulates the contractor's full liability outside the business.
In the FIDIC Red Book, the design belongs to the employer, while in the Yellow and Silver Book, the contractor is responsible for the design. In EPC contracts, the design responsibility belongs entirely to the contractor.
Hybrid Models Between FIDIC and EPC
In some projects, hybrid contract models are implemented, combining the advantages of EPC with the flexibility of FIDIC. For example, the employer may determine the overall scope of the project according to the EPC model, i.e. the Silver Book, while requesting that certain sub-jobs be regulated by the FIDIC Red Book or the Yellow Book. This is especially common in infrastructure projects.
Dispute Resolution Mechanisms
FIDIC contracts contain special mechanisms for dispute resolution. These:
- Dispute Adjudication Board (DAB): An impartial board is appointed to resolve disputes between the parties.
- Arbitration: FIDIC contracts often refer to international arbitration mechanisms. Arbitration is generally conducted under the ICC (International Chamber of Commerce) Arbitration Rules as set out in FIDIC.
In EPC projects, arbitration is usually the main resolution mechanism. In the arbitration route with binding decisions, a predominantly neutral place is chosen.
In international projects, the ICC or the United Nations Commission on International Trade Law (UNCITRAL) are preferred as the rules of arbitration.
Exemplary Projects in Our Country Where EPC and FIDIC Contracts Are Implemented
Istanbul Airport: This project, which was built in accordance with the EPC model, was completed on time and remained within the determined budget. The scope, cost and delivery time of the project are clearly defined.
Akkuyu Nuclear Power Plant: As a strong example of the EPC model, the project is progressing successfully thanks to the extensive experience of the contractor Rosatom.
The Case of Akkuyu Nuclear Power Plant
Akkuyu Nuclear Power Plant (NPP) is the first nuclear power plant built in Turkey and is managed in accordance with the EPC model. The plant is being built by Russia-based Rosatom and consists of four reactors with a capacity of 4,800 MW.
EPC Structure of the Project:
- Engineering: The entire technical design of the project was carried out by Rosatom. Nuclear safety standards were taken into account at the design stage.
- Procurement: The procurement of the equipment and materials of the nuclear facility was undertaken by Rosatom and its subsidiaries. For example, reactors and turbines were supplied from Russia.
- Construction: The construction process is carried out with the participation of local subcontractors from Turkey.
Transfer of Risks to the Contractor
In the Akkuyu project, most of the technical and operational risks arising from the design, material procurement and construction processes were assumed by the contractor Rosatom. In addition, when the power plant is completed within the scope of the EPC model, all necessary tests for energy production and operation processes will be carried out by the contractor and the power plant will be delivered to Turkey.
Financial and Operational Structure
Akkuyu draws attention not only with its EPC contract, but also with its "Build-Operate-Own" (BOO) model. Under this model, Rosatom will have the operating rights for a certain period of time after completing the construction of the power plant and will offer the generated energy for sale.
Implementation of FIDIC and EPC Contracts to Akkuyu Project
In addition to the EPC model, FIDIC contracts are also used in some parts of the Akkuyu project. Especially in works such as the construction of infrastructure and auxiliary facilities, FIDIC models such as the Red Book, where the employer has the responsibility for the design, or the Yellow Book, where the contractor undertakes the design, can be resorted to.
Akkuyu Nuclear Power Plant stands out with the turnkey structure and risk management advantages provided by the EPC contract, while at the same time benefiting from the flexibility of FIDIC contracts. In such projects, choosing the right contract types is critical to cost control, on-time delivery, and the overall success of the project.
Result
FIDIC and EPC contracts offer different advantages according to the scope of the projects, risk sharing and the needs of the employer. While FIDIC contracts have a wide range of applications due to their flexible structure and international standards, the Silver Book from the FIDIC contract, that is, EPC contracts, offer an ideal solution for projects where almost all responsibility is transferred to a single contractor. Project managers should evaluate the advantages and disadvantages of both types of contracts and choose the contract model that best suits the project.
Proper understanding and implementation of these contracts is crucial to the successful completion of projects.
Originally published 15.01.2025
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
