Solar EPC Contract: The Clauses That Decide Who Carries the Risk

A solar EPC contract is a single agreement in which one contractor engineers, procures, builds and commissions a solar plant for a fixed price by a fixed date, and answers for how the plant performs. The price is fixed only for the scope written into the contract. About a dozen clauses decide who carries the risk of everything outside that scope, and of a plant that under-performs.

We read those clauses here in the order they bite: scope, delay damages, the performance guarantee, taking over, payments, then change and currency. Take advice from a lawyer in the country whose law governs your contract, because damages rules, security instruments and enforcement differ between legal systems.

Our guides to choosing a solar EPC contractor and running a solar tender cover the step before this. Here we assume you have a contract in front of you.

What a Lump Sum Turnkey Price Fixes, and What It Leaves Out

Lump sum turnkey means the contractor takes the risk of the cost of doing the defined work. It does not take the risk of work nobody defined. Owners meet their surprises at the edges of the scope, so mark those edges before signing.

Site conditions. On a roof, someone must have checked the structure, and on a ground site someone must have investigated the soil. The contract should say who. The IFC, the World Bank Group's private sector arm, published model heads of terms for a solar EPC contract in its 2011 guide for utility scale developers, written for India, and they make the contractor commission the ground studies at its own expense. Whether the owner's drawings and survey data are warranted as correct is a separate question, and the contract should answer it.

Grid connection. The same IFC guide notes that interfaces between the project and its surroundings, grid connection among them, remain to some extent with the developer even under a turnkey contract. Say who applies, who pays the utility, who attends the utility's witness tests and what happens to the programme if the utility is late.

Permits and customs. The IFC model has the owner obtain planning, building and grid permissions before site works start. Imported equipment adds clearance, duties and demurrage. Name the party for each, and say who bears a change in duty after signature.

Existing installation. A solar plant that ties into a generator panel, an old switchboard or a weak earthing system inherits their condition. Record the condition at signature, with photographs, so a later fault is not argued over.

Employer's requirements. In a design and build contract, the owner's written requirements are the specification the contractor prices against, so gaps and errors in them become claims. FIDIC's Silver Book is its form for EPC and turnkey work, and FIDIC itself says it is unsuitable where tenderers lack time or information to scrutinise the requirements, where substantial work lies underground or in areas tenderers cannot inspect, or where the owner intends to supervise closely. In those cases it recommends its Yellow Book, for plant and design-build. A ground mounted plant on unsurveyed land can fall into the second case.

The scope edges where a lump sum turnkey price stops, from the IFC model EPC heads of terms and FIDIC's guidance on the Silver Book. Source: IFC, Utility Scale Solar Power Plants (2011); FIDIC, EPC/Turnkey Contract 2nd Ed (2017).

Delay Damages: Setting the Rate and the Cap

Liquidated damages are a sum fixed in advance that the contractor pays for a defined failure. Delay damages compensate for late completion, usually as a rate per day. The IFC model heads of terms provide for compensation per day of delay past the agreed completion date, limited to a stated percentage of the contract value.

The rate should reflect what a day of delay really costs you, and the cap should not run out while the delay is still plausible.

Take a hypothetical 500 kWp plant on a factory with a contract price of $400,000. The site yields 1,700 kWh per kWp a year, or 4.66 kWh per kWp per day on average, so the plant would produce 500 x 1,700 / 365 = 2,329 kWh a day, all of it used on site. If those kilowatt hours would displace diesel power at an avoided cost of $0.30 per kWh, each day of delay costs 2,329 x 0.30 = $699, about $700.

Suppose the contract sets delay damages at $700 a day capped at 10 percent of the price, $40,000. The cap is reached after 40,000 / 700 = 57 days. A delay of 90 days costs the owner $63,000 and recovers $40,000. Whether 10 percent is right depends on how much delay you can survive, so work it out. Keep the working too: in some legal systems a rate far above the real loss can be challenged as a penalty.

Ask what happens when the cap runs out. Clyde & Co's guide to the 2017 FIDIC books records a new employer's right to terminate once the delay damages cap is exceeded, and your form may have nothing similar. Check whether the daily rate is the owner's sole remedy or only the first, and whether extensions of time need written notice by a deadline.

Put the utility's connection date into the programme as a milestone. The same guide notes that the 2017 books give the contractor extra time for delays caused by private utility entities, so a late connection may land on you.

Performance Guarantees: How the Performance Ratio Is Tested

The performance ratio (PR) is the energy delivered divided by the energy the array would deliver at its nameplate rating under the irradiation it actually received. Dividing by irradiation removes most of the weather, which is why PR can be guaranteed. It does not remove temperature, so the same plant reads lower in a hot month, and the 2018 O&M best practices guide from the US National Renewable Energy Laboratory (NREL, now the National Laboratory of the Rockies) warns that a PR taken over a short period varies substantially with the season and the weather. The guarantee is only as good as the test.

The IFC guide describes the usual pattern, written for utility scale plants, and the logic carries down to a rooftop. A PR test runs for a minimum of ten consecutive days, counting the periods above an agreed minimum irradiance. Energy is read at the agreed meter and compared with the guaranteed value after correction for temperature. Energy within 3 to 5 percent of the agreed adjusted PR is typically treated as acceptable. Where the test is repeated, the commissioning tests mark provisional acceptance and final acceptance follows the repeat, after a period of operation that the contract sets. The IFC model allows a make-good period, with retesting at the contractor's expense, and then either compensation or the owner's right to withdraw.

Settle four points in writing.

Irradiance source. PVsyst's documentation notes that hourly satellite irradiance carries an accuracy of 10 to 20 percent, while a good, well calibrated pyranometer is accurate to about 1 to 2 percent. Specify a plane-of-array sensor, its calibration and its cleaning.

Correction method. Name the temperature or weather correction, or name a test standard. IEC TS 61724-2, in its 2025 edition, defines a short test of measured power against the power the design should give, typically three to five days, often used for contractual guarantees at final completion. IEC TS 61724-3 evaluates energy over a longer period. Both compare the plant with its expected output, which is a different yardstick from a fixed PR, so choose one and check which edition your contract cites.

Exclusions. Grid outages and owner shutdowns should be excluded or added back as deemed energy, with the rule written before the numbers arrive.

Link to the yield model. The guaranteed PR should come from the contractor's own simulation, attached as an appendix. The IFC list of contract appendices includes the energy yield study and the performance ratio. PVsyst adds that PR falls as the system ages, so a guarantee for a later year should be a lower, degressive value.

Now the arithmetic. The NREL guide gives an example formula for performance damages in an O&M guarantee: reference irradiation x installed kWp x (expected PR minus measured PR) x the revenue per kWh. The same sum prices an EPC shortfall. Take the 500 kWp plant with a guaranteed PR of 0.80 and a plane-of-array irradiation of 2,125 kWh per m2 a year, which gives the 1,700 kWh per kWp used above (2,125 x 0.80). Measured PR comes in at 0.77. The energy shortfall is 2,125 x 500 x 0.03 = 31,875 kWh a year. At the same $0.30 per kWh that is $9,563 a year, and over 20 years at 8 percent (annuity factor 9.8181, degradation ignored) it is worth $93,886.

Three clauses decide how much of that you recover. A 4 percent tolerance band puts the pass mark at 0.80 x 0.96 = 0.768, so a measured 0.77 passes and the shortfall costs the contractor nothing. A 3 percent band puts it at 0.776 and the plant fails, but then ask where damages run from. Counted from the guarantee the shortfall is 31,875 kWh. Counted from the 0.776 pass mark it is 0.006 x 2,125 x 500 = 6,375 kWh, a fifth of that. And if performance damages are capped at 5 percent of the price, which is $20,000, the cap covers 21 percent of the $93,886 lifetime loss. The IFC model carries its own warning that small performance deficiencies add up to large revenue reductions over the project life.

Pricing a performance shortfall on a hypothetical 500 kWp plant, using the example performance damages formula in the NREL O&M best practices guide. Source: NREL, Best Practices for Operation and Maintenance of Photovoltaic and Energy Storage Systems, 3rd Edition (2018).

Taking Over, the Defects Period and Retention

Taking over is the moment risk and responsibility move to you, so it should follow tests, not a date. The IFC guide describes a take-over certificate issued once tests are complete and defects addressed, with minor items on a snagging list and a stipulated period to clear them. Our commissioning guide covers the tests themselves.

The defects period is the stretch after taking over in which the contractor must repair faults in its work at its own cost. Defects liability period is a common term, but FIDIC's 2017 books say Defects Notification Period, so search your draft for both. Clyde & Co's guide notes that under the 2017 Silver and Yellow Books the contractor's liability for latent defects in plant stops two years after that period expires, subject to exceptions, and tells employers to consider whether that is adequate.

The IFC guide puts EPC warranties typically in the two to five year range, and the NREL guide gives one to five years for installer warranties, against equipment warranties that can run to 25 years for modules. Where the EPC and O&M contractors differ, the IFC guide says to check the warranty exclusions carefully. Our warranties guide separates the layers.

Settle four points in the contract: when the period starts (the IFC model counts its warranty from final acceptance, not taking over), whether a repaired part gets a fresh period, whether the cover includes labour, access and freight or parts only, and whether manufacturer warranties pass to you at handover, as the IFC guide expects.

Retention is money held back as security for work still to prove. In the IFC model the client retains 10 percent of the contract until the plant earns its first income. On a $400,000 contract that is $40,000. A factory roof that only offsets its own bill never receives generation income, so that trigger needs rewriting. Release the money in stages tied to events, such as the final acceptance test and the end of the defects period.

The IFC appendices also list a performance bond and a warranty bond. A bond is only as good as its wording: whether it pays on a simple written demand or only after default is proved, the amount, and the expiry. One that expires on the day the defects period ends leaves no time to claim. Ask your lawyer to read it.

The sequence from tests to final acceptance and what retention secures, following the IFC model contract. Source: IFC, Utility Scale Solar Power Plants (2011).

Payment, Title and Risk of Loss

Pay for progress that can be seen. The IFC model uses six milestones, from an advance on signing through structures, modules and inverters, commissioning, provisional acceptance and first income, and it states that no milestone is payable until all of its requirements are met. Match each payment to a certificate, not to the contractor's invoice.

An advance is normal and should be matched by a bank guarantee. Title to equipment should pass to you as you pay for it, and the IFC model pairs its milestone table with the transfer of title. Until taking over, the loss of equipment through theft, fire or flood should sit with the contractor, who in the IFC model is responsible for site security and for holding erection, public liability and all risks insurance. Ask to see the certificates, not a statement that cover exists.

Change Orders, Force Majeure and Currency

A change order is a written instruction that alters scope, price or time. The danger is the informal change: a site engineer agrees to move an array, and a claim arrives at the end. The IFC model requires the client's approval for alterations above a stated cost. Set a threshold, name who can instruct, and attach rates for common variations at signature, while competition still exists.

Force majeure should be narrow. The IFC definition covers unforeseeable events outside the parties' influence and excludes changes in prices of goods, materials, equipment and salaries, and changes in general economic conditions.

Currency needs its own clause. State the currency of each payment, and who takes the exchange rate between the contract date and the payment date. If you pay in local currency for dollar equipment, a devaluation lands on one of you, and a contractor in a volatile market will price that in. We would rather see a short validity period or a formula tied to a named exchange rate than a fixed price with an unknown allowance for the risk, because you can then see what you are paying for. Which costs less depends on what the currency does.

Questions to Settle Before You Sign

Write down who owns site conditions, grid connection, permits and customs. Calculate your daily loss from delay. For performance, fix the sensor, the correction, the exclusions, the tolerance, where damages run from and the cap. Tie taking over to tests, keep retention and bonds alive until the defects period ends, and link every milestone to a certificate. Name who may instruct a change and who bears the exchange rate.

If you cannot state each of these in a sentence, the contract is not ready to sign.

MIMAH's renewable energy team delivers solar EPC and carries out technical and performance audits. If you have a contract draft and want its performance and acceptance clauses read against the technical documents, get in touch.