Acting as EPC contractor in Finland

Bidding for projects

Plant construction projects in the field of sophisticated infrastructure are being increasingly contracted out as EPC general contracts. Foreign suppliers are welcome, but they need to ensure that they are well-positioned to successfully secure these contracts.

By awarding the complete contract to a contractor as a package, from the detailed engineering stage to turn-key handover, the project owner cuts out many interfaces. Conversely, for contractors taking on a general contract involves increased risks.

Generally, the contractor has to accept full responsibility for making sure the plant is completed and fit for the purpose agreed upon. They can only plead uncertainties and obstacles in extremely limited and exceptional situations.

Risk management with experience

From a technical perspective, the risk for an experienced contractor can be calculated – and insured if necessary. The legal and administrative framework, however, poses challenges for foreign suppliers if they haven’t had solid experience of their own in Finland.

For one thing, there are regulatory aspects that have a direct impact on the costs of providing works and services: employment law and safety regulations first and foremost, but also restrictions on importing and transport, and of course taxes and duties.

The question of what is going to be delivered has even greater bearing on calculations and risk assessment. Here’s where the peculiarity of the EPC contract comes into play: The owner generally only specifies a rough specification (FEED - Front End Engineering Design) from which the functional objectives of the plant construction project are derived. It remains the responsibility of the general contractor to meet the objectives while keeping in line with the requirements set forth by laws, standards, and authorities.

If the supplier moves outside their geographical home area, they may encounter challenges in assessing country-specific risks such as unanticipated safety requirements or documentation demands from authorities, changes in the working environment due to legislative actions, and unexpected taxes.

Be well-prepared, make successful offers

In practice, it can often be observed that foreign bidders create a disadvantage for themselves when competing for an EPC contract in that, due to the risk factors named above, they either calculate an inflated risk premium in addition to the price (causing them to quickly be eliminated from the running, saving transaction costs), or put up too much resistance against accepting the business risks typical of an EPC contract during contractual negotiations (leading to later and more expensive failure).

For prospective contractors to be successful in Finnish EPC projects, it is in fact necessary to be in a position where they can realistically assess and calculate project risks. In this way, they can also convince Finnish clients that they can be relied on to handle a complex project in the Finnish environment.

There are different ways to achieve this in concrete terms. When entering the Finnish market on a long-term basis, consideration can be given to establishing a separate, local staff with the relevant skills. Bringing in external expertise in the form of technical and legal consultants will also be required in most cases.

The EPC contract in Finland, from the contractor’s perspective

Drafting and negotiating a general contractor’s EPC contract primarily follows the needs of the project. Universal rules cannot generally be established. But of course, conventions and customs in the target market - Finland in this case - are a factor.

Full responsibility and assumption of risk

The basic idea behind the EPC contract is that the contractor assumes far-reaching, full responsibility for the success of the construction project. A lump sum price is usually agreed on for completion in this process.

The contractor’s project risk depends on the extent of the contractor’s responsibility. This varies quite widely from project to project, and a tug-of-war is not uncommon in contract negotiations.

The following questions in particular are typical points of contention for distributing risk:

Can the contractor assume the FEED to be correct, or will everything have to be reviewed from scratch?

Does the contractor have to take care of obtaining permits (building permit, environmental permit, industry-specific permits, etc.), draw up the necessary documentation, and take responsibility for any delays that come up?

Is it enough for the contractor to meet the technical objectives identified in the FEED or the contract, or are they responsible for this in a more general form so that the erected plant actually fulfils its purpose, too?

Can the contractor demand additional payment and schedule adjustments in the event of unforeseeable circumstances (e.g., soil contamination, actions of third parties, change in legal framework conditions), or do these fall under contractor risk?

By taking an overly risk-averse position, a supplier may jeopardise their credibility as an experienced general contractor. Many of these risks can be commercially estimated fairly reliably and priced into the commercial offer, if you are familiar with Finland’s legal and factual framework.

Change orders

Even if the project owner wishes to transfer responsibility to the general contractor to the greatest extent possible, they will generally want to have the last word when it comes to what is actually going to be built. The client may order changes to the work to be carried out.

A Finnish client will not allow themselves to be deprived of this right in the contract. You also won’t succeed in making the implementation of a change order dependent on the parties first agreeing on the repercussions for the contract price and the schedule. It is rather common practice in building contracts for the continuation of work and project completion to take priority over all commercial matters.

Suppliers are well advised to accept this starting point and focus on the matters in which they can realistically gain something:

agreement on feasible amendment procedures in which the contractor has clarity regarding whether a change should be implemented, even if the price is not fixed yet,

agreement on realistic price mechanisms that kick in when changes are to be implemented without agreeing on a price in advance, and

consideration for the repercussions that change orders may have on the EPC contractor’s full responsibility.

And of course, one should plan to maintain comprehensive project documentation throughout the course of the project, which will help track the costs and repercussions of changed orders, and to observe the procedures that the contract provides for enforcing surcharges and adjustments to the schedule.

Warranty and liability

Which warranties to assume and for how long depends on the nature of the project. In Finland, a two-year guarantee period is customary. The YSE 1998 terms that are commonly applied in the industry also allow for a subsequent liability for hidden defects, effective for ten years following receipt, if these are due to circumstances such as gross negligence in the quality assurance agreed upon.

Without any contractual limitation of liability, the contractor’s liability - be it for construction defects or the results of any breaches of contract - is legally unlimited according to Finnish law. Even the standard YSE 1998 terms do not include any limitation of liability.

Agreeing on liability limitations, particularly the exclusion of indirect damage and the establishment of liability caps, is common. Willingness to accept responsibility is naturally just as presumed on the market as proper insurance coverage. Thus, suppliers should avoid sending the wrong signals with exaggerated ideas about liability limitation. However, the EPC contractor has an understandable interest in not becoming the centre of risk in the contractual value chain: Passing on liability risks to subcontractors, planners, and other contracting partners is only possible to a limited extent.