EPC Contracts in the Tanzania and East Africa Construction Sector

The construction industry plays a vital role in the economic development of Tanzania and East Africa. The industry is experiencing rapid growth, driven by government initiatives and foreign investment. It is essential for investors to understand the mechanics of construction projects, the key stakeholders, the agreements involved, and how to navigate potential risks. Effective risk allocation under EPC Contracts is critical to ensuring bankability, stability, and sustainable investment in the sector.

In this article, we identify some of the key points to consider when negotiating and implementing EPC Contracts in Tanzania and East Africa. We also examine some of the necessary consents and permits in Tanzania, along with specific jurisdictional risks. A clear understanding of these factors will help facilitate the successful negotiation and implementation of projects.

Structure of a Typical Construction Public Private Partnership (PPP) Project

EPC Contracts tend to be most appropriate on major infrastructure projects. In recent years, several major projects in Tanzania have been procured as PPPs. Investment in PPP projects is growing significantly in Tanzania, supported by the passing of new legislation. With that comes increased opportunity for global contractors. 

For context, we summarise below a typical PPP project structure. 

A typical PPP Project involves multiple stakeholders, with EPC Contractors appointed by the Project Company to undertake the design and construction of the project. 

Tanzanian EPC contracts for large scale projects commonly follow the FIDIC standard forms, with the 1999 Yellow Book and the 2017 Silver Book being adopted most frequently. 

Structure and Contractual duties

EPC contracts typically allocate substantial risk to the Contractor by way of a fixed completion date and contract price, with limited ability to be varied over the course of construction. Standard form agreements tend to be appropriate as a starting point, with parties finding it necessary to amend the terms of the contract to appropriately allocate project specific risks. The EPC contract is drafted alongside other key project documents, such as the PPP/Concession Agreement, so that it fits with the broader contractual framework and risk management of the overall Project.

The financing of a project also determines the distribution of risk between the relevant parties. Project finance, the most conventional means of funding for major infrastructure projects, relies on the projected cash flow of the completed Project itself. Therefore, the expertise and creditworthiness of the Contractor are fundamental to a project’s bankability; lenders will want to ensure that risks are sufficiently managed so that construction completes and the Project becomes operational as planned to start generating cash flow for repayment. Conversely, with the Project Company often being a newly incorporated Special Purpose Vehicle, the EPC Contractor will require assurance that funds are available for payment of its invoices.  

Key Negotiation Points

In this section we consider the areas that are subject to most negotiation when drafting an EPC contract and how the contractual strategy may differ according to the parties’ priorities.

Design Risk

In the EPC context, the Contractor usually assumes all of the design risk. Under English law, the Contractor is obliged to exercise reasonable skill and care in performing its design obligations. This position is implied into the contract by law. The position is similar under Tanzanian law; however, the parties to the EPC contract will usually agree to enhance this standard, including a warranty that the completed works will be “fit for purpose”. Failure to meet this standard may result in contractual disputes over the adequacy and quality of the services rendered.

Time for Completion and Liquidated Damages

The parties must fix a completion date by which the works (or a section thereof) must be completed. For projects in Tanzania and East Africa, it is common for liquidated damages to be payable in the event the works are not complete by the agreed date. Liquidated damages are permitted under Tanzanian law and, unlike English law, it is also possible to impose penalties for delay.  

With money on the line, it is essential for the parties to agree a clear methodology for the certification of completion. Depending on the nature of the works, the Project Company and the lenders may require that the Project passes specified performance tests before the burden of the project risks are transferred.

Extensions of Time

Whilst EPC contracts are characterised by their fixed completion date, extensions of time can still be sought in certain circumstances, granting relief from delay liquidated damages. Relief events are heavily negotiated on projects in Tanzania and this is a common area of dispute.  For instance, Tanzania is subjected to extreme weather in the form of long dry periods followed by heavy rainfall. Relief may be granted to contractors where extreme weather affects progress, but it is essential to clearly define when the relief applies as opposed to what should have reasonably been foreseen by the Contractor. 

The parties must balance contractual certainty and timeliness from a project financing perspective, against the risk of termination and cost consequences if a contractor is simply unable to complete the works by the agreed date.

Contract Pricing

The majority of EPC contracts for large-scale projects in Tanzania are priced on a lump-sum basis. The Contractor will want to include a provision which operates a price mechanism so that the contract price can be varied if deemed necessary. Similarly, the Project Company may agree to a “fluctuations” provision or advance payment, recognising that a fixed price is not always appropriate for long-term, complex infrastructure projects. 

Performance Security

It is common for parties to seek protection against non-performance of the other parties, by way of bonds or guarantees. Performance bonds are often used in construction projects in Tanzania and are heavily negotiated. In particular, parties will need to determine whether they are drafted either as conditional or on-demand. Parties should be mindful of complying with the foreign exchange regulations and requirements of the Bank of Tanzania when negotiating financial instruments in connection with EPC Contracts. 

Alternatively, if the Contractor is a local subsidiary of a larger business and there are concerns about its long-term solvency, a parent company guarantee can mitigate the risk of contractor default.

Termination

The right to terminate or suspend the project may be written into the contract and exercised in certain situations, including contractor or Project Company default. This is distinct from termination by law, which depends on the governing law of the contract. The Project Company may request a general right to terminate for convenience, though the contractor will aim to reduce this to a specific right to terminate in the case of named breaches. Termination of the EPC contract may also be triggered by termination of other agreements in the broader contractual framework for the project. 

In the event of termination, the Project Company will look to recover as much of its loss as possible from the contractor. Contractors will often negotiate caps on liability – another area which is heavily negotiated, although often informed by insurance coverage.

Tanzania Framework for Consents and Permits in Construction Projects

The Contractor should obtain necessary consents and permits to facilitate the design, procurement and construction of the Project. Below, we highlight a few key approvals along with their corresponding regulatory authorities. 

Depending on the nature of the Project, additional permits specific to the industry may be required. For instance, when undertaking construction works in connection with a mine, all project stakeholders (including the contractor and sub-contractors) must adhere to the Mining (Local Content) Regulations 2018.

Key Risks in EPC Contracts in Tanzania

In this section we explore some common risks associated with the use of EPC contracts in Tanzania. 

Please contact Peter Kasanda should you have any questions.