EPC Bonds, what are they?
Engineering, Procurement, and Construction (EPC) contractors undertake complex infrastructure projects and are responsible for coordinating all pieces of the project from engineering, to procuring the materials, and constructing the project to completion by the specified date. We often see EPC contracts for utility scale solar installations. EPC contracts range from hundreds of thousands to hundreds of millions of dollars. The underwriter will investigate the contractor’s character, capacity, and capital when making an underwriting decision.
EPC contracts are similar to design-build contracts. The significant variation is during the design phase; EPC contracts use engineering best practices while design-build contracts include the project owners’ preferences during the design phase. This design-build style of contracting is what government agencies are currently moving toward for future contracts.
EPC contractors are often required to obtain an irrevocable letter of credit (ILOC) as security for projects; however, ILOCs tie up a contractor’s cash, affecting their working capital. There is ongoing advocacy from the surety industry to encourage project owners to accept surety bonds as security when an ILOC is accepted as security; surety bonds ensure equity for small, emerging contractors by enabling them to bid on projects that require financial security. The surety bond brings in a third-party financial guarantor, the surety company. The surety company provides additional benefits such as legal representation in the event of frivolous claims as well as remedy in the event of a valid claim. If there is not a surety bond option in the EPC contract, the contractor and/or the contractor’s surety agent can work with the obligee to allow surety as acceptable financial assurance.
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