EPC or EPCM Contracts

Which one can drive stronger outcomes for project owners?

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?

Ausenco’s Executive Vice President, Global Project Delivery, Ron Douglas has been involved in major projects ranging from the millions to multi-billion dollars and he believes EPC and EPCM contracts can both deliver strong outcomes, however careful consideration should be made of the different levers and potential outcomes to determine which one is best for each project.

In this white paper he explores some of the key dimensions project owners should consider in choosing their project contracting strategy.

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.

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.

See below for comparisons of both EPC and EPCM contracting options for Owners along key project aspects, or download the white paper in PDF format.


For more information on EPC and EPCM contract advantages and disadvantages, contact:

Ron Douglas, Ausenco Executive Vice President,Global Project Delivery (ron.douglas@ausenco.com) or connect with Ron on LinkedIn