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Sharing Risk with EPC Contractors Can Lower Project Costs for Owners

Owners of large infrastructure projects naturally try to off-load as much of the risk of the project as possible, but that also can significantly add to the overall costs. As an alternative, owners should examine ways to lower their costs by accepting some level of reasonable risk and working with high-quality EPC contractors.

Project owners can engage in risk sharing by shifting some of their focus on the “bankability” of the EPC (engineering, procurement, construction) provider, thus giving them a much higher comfort level in accepting risk. But what exactly is bankability?

“Bankability should be a key differentiator in selecting an EPC contractor,” said Ted Pintcke, Black & Veatch Vice President, Energy. “It means the banks and equity/debt providers that are standing behind these investments want to know if the contractor has a strong history of completing successful projects . They will examine the history and  financial strength of an EPC contractor to see what sureties they have to ensure that the job will be done at the stated price, completed by a given date, and the facility will perform at the levels of expectations.”

According to Pintcke, the developer and the banks will examine the balance sheet of EPC contractors, as well as the ability to bond or provide the necessary surety in order to determine the real financial strength behind the company. Those that pass the litmus test are “bankable,” meaning the owner/developer is more likely to be successful in financing the project.

“Ultimately, the banks are asking, ‘Can the EPC contractor perform this job? Do they have the wherewithal to stand behind this multi-million dollar project and get it done?’” Pintcke said.

 

@black_veatch