EPC or EPCM? When it comes to contract strategies for major projects, Engineering, Procurement and Construction (EPC) and Engineering, Procurement, Construction and Management (EPCM) style contracts are two of the key options, but which one provides better outcomes for project owners?
DEFINITIONS
‘EPC’
Engineering, Procurement and Construction (EPC) is a contract option in which the EPC Contractor is responsible for all activities from design to procurement and construction to deliver the asset to the end user or owner.
It’s also known as Design and Construct (Lump Sum Turn Key is a form of EPC).
‘EPCM’
Engineering, Procurement, Construction and Management (EPCM) is a professional services appointment whereby the Contractor’s services are generally to provide detailed design, procurement, construction management and project coordination necessary to deliver a project.
HOW TO CHOOSE
WHY CHOOSE EPC?
EPC contract forms are selected to realise the inherent advantages provided by an integrated team across the full life cycle of a project from design concepts through to commissioning. Traditional barriers between engineering, procurement and construction contractors (or variations of this) are eliminated and the inefficient layering of owners’ management teams is avoided enabling rapid and efficient decision and approval processes. This approach seeks to achieve the most seamless delivery organisation possible.
An integrated EPC team can design, procure and construct facilities safer, in a shorter duration and with lower cost in a manner fit for the purpose specified by the owner.
Budget, schedule and performance risks are transferred from the Owner to the EPC Contractor, enabling the owner to focus on the critical task of developing their business systems and processes in preparation for operating their asset.
As challenges of projects become more complex, owners can transfer risk to a company capable of delivering a complete package of resources, products, innovations and management. In addition to the above, owners routinely expect contractors to provide contemporary industry efficiencies, latest tools and practices, labour relations expertise and risk management. An EPC approach allows these deliverables to be managed under one aligned team.
We believe that the EPC approach is responsive to the critical success factors for new project development, such as:
- Creating and maintaining the highest safety standards
- Mandating and achieving an aggressive completion schedule
- Integrating quality into the work from conceptual design through the final installation
- Delivering a competed project fit for purpose and at the least capital cost
WHY CHOOSE EPCM?
EPCM contract forms were traditionally used to enable a project to progress when the scope was unclear or a risk difficult to quantify such that a contractor required to include excessive contingent allowances in the price to address the risks.
These included:
- New or proprietary technologies
- Specific site or country risks
- Owner supplementing their existing delivery team.
This framework has shifted in the last 10-15 years such that the EPCM approach is now prevalent, initially driven by contractors becoming more sophisticated in their risk analysis and proposing a risk free margin.
Factors influencing this transition were:
- Surge in demand for global engineering and construction and ability for contractors to nominate risk free revenue
- Significant size and complexity of projects such that contractors could not accommodate fixed price risk on their balance sheet
- Shortage of experienced professionals to perform the work.
During this transition period an “industry” of Owner Representative companies has developed to act as the interface between the Owners and Contractors and these organisations will continue to actively promote EPCM contracts to ensure the commercial viability of their business.
EPCM contracts allow critical path activities to continue while scope is further defined. Schedule is therefore shorter as time taken to develop basic design is not
added to the critical path.
It is touted that EPCM project costs are less than EPC as the contractor’s fee is minimised, however the inefficiencies of layering and bureaucracy of decision making processes in EPCM result in inefficient organisation for an extended time and higher costs result. Also, the risk remains with the client and recent performance history indicates owners are being impacted by the advice of their representatives.
IN SUMMARY
EPC is the most direct route to the least cost and highest quality contracting option, where aggressive completion schedules and commitment to peak safety standards complete the mix.
The inherent accountability of an integrated EPC team naturally delivers value, and the customer realises a product that is both fit for purpose and delivers the highest return on their investment.
EXTENSION
Although the engineering, procurement and construction (EPC) contract and the engineering, procurement and construction management (EPCM) contract have been present in the construction sector for many years, there remains confusion as to the fundamental differences between these contracts, the role each party is required to play, and when to use one contract over the other.
The fundamental difference is the role of the EPC or EPCM contractor. In an EPC contract, the EPC contractor develops the project from commencement to final completion. The owner or principal of the EPC project provides the EPC contractor with a detailed design including technical and functional specifications, in order for the EPC contractor to build and deliver the project to the "turn of the key", within a specified time period. This is why EPC contracts are often referred to as "turnkey" projects. The scope of work should be clearly defined in the contract documents; therefore, amendments to the scope of work should not be a common feature in EPC contracts. For this reason an EPC contract is often a fixed price contract or an all-encompassing lump sum contract. Any shortfall of costs is a risk that rests with the EPC contractor, making cost control their number one priority.
A further identifying feature of the EPC contract is that the EPC contractor enters into separate agreements with the contractors, vendors, sub-contractors, sub-vendors and so on. This is advantageous to the owner or principal of the project, as they will look to the EPC contractor to take full responsibility for the project and, in the event of a dispute between the EPC contractor and any party to the sub-agreements, to resolve the dispute without the owner or principal being required to be a party to the dispute. The EPC contractor will, in most cases, have a right of recourse against a party to a sub-agreement who was responsible for causing the loss or damage. The EPC contractor must ensure that its contracts mirror those that it has with the owner of principal.
In contrast to the EPC model, the EPCM contractor is not directly involved in the building and construction of the project, but is rather responsible for the detailed design and overall management of the project, on behalf of the owner or principal. While an EPC contract takes the form of a design and construction contract, the EPCM model can be regarded as a professional services contract.
The EPCM contractor has a duty to ensure that the engineering and design of the project is in compliance with the projects technical and functional specifications. Supervising, management and co-ordinating construction interface in accordance with a detailed schedule is the key responsibility of the EPCM contractor.
The EPCM contractor is responsible for establishing contractual arrangements on behalf of the owner or principal with other contractors, vendors, sub-contractors and sub-vendors, through a tender process. The EPCM contractor is contracted by the owner or principal for the construction management role, while the owner or principal is bound to various contractual relationships for construction related works. From an owner or principal's perspective, there lies a disadvantage in being bound to various contractual relationships in the event of a dispute. Unlike the EPC model, the owner or principal will more often than not find itself involved in a dispute with one or more of the other parties relating to the construction of the project, to whom the EPCM contractor must offer assistance.
In most instances, the EPCM model is structured on the basis of a cost-reimbursable fee structure or a unit rate fee structure. The former allows the EPCM contractor to be paid an upfront sum of money with additional fixed monthly payments, while the latter allows for an upfront sum of money with further payments to be made on completion of specified phases within the construction process.
Both the EPC and EPCM contracts can be highly beneficial to a project. Choosing the incorrect form of contract can have a major effect on the cost and risk associated with the project. The contract you choose to utilise requires a clear understanding of the objectives, scope of work, the role of each party and the contract structure as a whole.