Running head: EPCM CONTRACTS 1

EPCM: The Special Engineering Contract

Harsh Soni - 4738772

TU Delft

For Forms of Collaboration in Civil Engineering (CIE 5981), CME

October 2017
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Abstract

It is an evident fact that procurement strategies are intrinsic to the success of a

construction project. As projects are growing in scale, budget and complexity, engineering the

process and executing it within time and budget can be a real challenge. Added to this is the

significant shift in contracting strategy by construction companies, especially in finance and risk

allocation. Also, there has been an age-old challenge of over-paying the bidder and maintaining

quality at the same time. All the above-mentioned factors have triggered alternatives to the likes

of traditional lump-sum contracts or the design and build contracts. One such contract focusing

more on the complex engineering requirements of project, specialized procurement needs and

guidance to the client through the process is EPCM.

Engineering, procurement and Construction Management or EPCM is a special type of

engineering contract in which the firm/company hired, provides the client with services from the

initial concept to the final commissioning and management. These types of contracts have been

found to be beneficial in many large-scale projects or the mega projects, especially the ones

with a specialized engineering or procurement condition like projects in the Power,

Petrochemical and mining sector. This essay is an investigation into the EPCM contract, its

conditions for use, comparisons with the other contracting strategies, specific advantages of this

strategy and its future trends.

Keywords: EPCM, EPC/turnkey, Design and Build, Mega Projects, Complex

engineering, Procurement
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EPCM: The Special Engineering Contract

One of the key reasons for a contract, including the construction sector, is to allocate

benefits and risks between the parties in the contract. Due to a significant shift in the contracting

strategy over the recent years, owners, developers, contractors and consultants have developed

different ways to accept and tackle risk. This change is driven partly by more sophisticated risk

analysis by the contractors but largely due to complex mega projects and shortage of

contractors, skilled labor and associated cost fluctuation. In favorable economic conditions, it

isnt uncommon to see contractors refusing to bid for usual fixed price and time contracts; While

unavailability of expertise and capacity on either side of the contract can put cost reimbursable

contracts off the charts. Consequently, owners and contractors are looking for alternatives to the

traditional Fixed Price, Cost Reimbursable and Unit Rate Contracts. A key difference and

advantage to point-out is that EPCM may itself be one of the three types of contracts, and could

employ many subcontractors with a mix of above mentioned contracts. EPCM, at its core, is a

professional services contract and the further section would explain it in detail.

WHEN, HOW, WHAT?

The concept of EPCM is not new, however it has wavered in popularity mainly in the

past few decades, primarily in the oil, petrochemical and resources industries. Sophisticated

owners often unprepared for high risk premium and profits to contractor, added with fast track

delivery, rising material/labor costs and limited client resources are changing the way projects

are delivered. EPCM contracting is one such alternative on the rise, and it is essential to

understand when to choose and what to expect from it.

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WHEN to choose an EPCM contract?

The projects with traits mentioned below are usually chosen for EPCM contracts:

Low scope definition, which is expected to grow substantially

Top priority is schedule

Protecting intellectual property is a strong desire for owner

Owner has a strong core group with experience in EPCM contracts

Owner has preferred contractors

Unclear equipment specification, while control over its quality and cost is desired

Pre-ordering long lead procurement items is desired to reduce overall duration

Risk of project suspension/termination due to market uncertainty

While the EPCM contract provides more control to the owner over the design and

construction, equipment procurement and contractor selection, it is important to note that the

overall risk of the project is shifted towards the owner.

HOW does an EPCM contract work?

As mentioned earlier, EPCM in simple terms is a professional services contract. It can be

a pure consultancy or an integrated alliance style contract. In some ways, its procurement

structure may resemble a typical construction management approach but with the key difference

that EPCM contractor also carries out detailed design and engineering for the project.

Typically, the EPCM contractor is responsible for:

Design and engineering (basic and detailed)

Managing tender procedures for work package as well as material procurement

Overall project management and administration, including during warranty periods

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This contrasts with the traditional Owner-Contractor agreement. Depending on the

project structure, owner and industry, the EPCM contractors often enter into direct contracts with

construction contractor and suppliers, as an agent of the owner, while assuming limited or no

liability from such contracts. Furthermore, the EPCM contractor usually will not take full

responsibility of project delivery on key milestone dates (thus liquidated damage provisions are

rarely included in contract), care and custody of works (with certain exceptions like arranging

security and management) and completion of project within the set budget. However, depending

of scope of work being provided, potential liabilities may relate to negligence, fraudulent

behavior or willful default in matters such as:

Performance of engineering and design

Preparation of project budget and schedule

Management of procurement, including failure in execution of an objective and

competitive tender process

Management, administration and supervision of trade contracts

Coordinating design and construction works between the trade contractors

Normally, the maximum liability of the contractor is much less as compared to those in

Turnkey or other fixed time and cost arrangements. It is often concluded with re-performance of

defaulted work and capped out to a maximum of 5% to 20% of total remuneration of works. To

counter such happenings, the contractor is usually heavily incentivized to complete the

project in time and within the budget.

Another important aspect is the type of relationship structure of the project, which further

affects the contractors scope of work, liabilities and chances of misconduct.

Type 1 Direct contractual relationship with works package contractors and suppliers
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Type 2 Direct contractual relationship of Owner with works package contractors

and suppliers, which is procured or assisted by the EPCM contractor.

Figure 1 - Type 1 relationship (above); Type 2 relationship (below) (McNair.D, 2016, p. 6)

WHAT services does EPCM offer?

While the services offered by the EPCM contractor depend from project to project and

the scope of work as per agreement with the client, the services that can be expected from a

standard EPCM agreement are:

Design and Engineering The EPCM contractors involvement may start as early as

the feasibility stage of the project. This means that the contractor will be engaged to
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analyze crucial technical and other relevant aspects to prepare a report on project

duration, cost, procurement strategy, design consideration and other long-term

considerations. The EPCM contractor may further be chosen to carry out the FEED1

for the project. This enables the client/owner to approach the market with sufficient

scope definition and ensure more competitive and realistic bids. Following this stage,

the EPCM contractor proceeds with detailed engineering and design. The scope of

work usually also includes coordination with all related parties and to ensure that the

engineering and design comply with all specific project requirements.

Procurement An important part of the EPCM contractors work is to advise/assist

the client on preparation and implementation of procurement strategy for required

materials and equipment (specially long-led items that can adversely affect the project

schedule). The contractor also needs to assist the owner in preparation, administration

and implementation of major work packages with various trade contractors. Further,

preparing comprehensive invitations of tender, awarding the tender (after economic

and technical analysis of the offers received) and technical and commercial

agreements, all with the consent of the client/owner is also under the procurement

responsibility of the contractor.

Construction Management This includes management and supervision of all

construction activities along with coordination of various work packages to ensure

that the work follows the final design, and in time and budget. Depending on the

scope of EPCM services, the contractor also needs to monitor and report during the

1
FEED Front-End Engineering and Design includes basic engineering and design for the
project along with preliminary budget, schedule and work packages.
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commissioning phase of work packages, to oversee notification and rectification

during the defects liability period and to monitor and report cost and schedule

overruns throughout the project. Active management of claims and disputes by the

work package contractors is also included in the scope in some cases. Hence, in the

construction management phase, the EPCM contractor acts like the owners Agent

or Representative, with the contractors powers clearly defined by the owner.

EPCM VS. REST OF THE WORLD

The EPCM contract differs with other forms of collaboration in several aspects. This

section covers the difference in behavior of EPCM, EPC and DBFM contracts.

Area EPCM EPC / Turnkey DBFM

Overall Risk Significantly with the Significantly with the Significantly with the
owner contractor contractor
Commercial The contract is limited Since the contract is As it is privately financed,
Risk liability and the lump-sum with related commercial risk is high
responsibility for penalties/profits, and market dependent.
procurement and commercial risk is high During adverse financial
contracts lies with the situations, risk is shared
owner. This implies with financer and
low commercial risk contractor
Schedule Liquidated damages in Along with liquidated Major payment is on
Motivation these contracts are less damages, schedule project completion. Also,
in value; Limited overruns show due to associated financers
liabilities can develop contractors failure and who monitor, and delay
no incentive attitude often has associated penalties, motivation is
but is less common due penalties. So, high
to competition motivation is high
Cost As the owner controls Cost control is better as Project is costlier due to
scope decisions, cost final costs are included high risk premium and
growth can be difficult, in the lump-sum budget interest, but cost overrun is
added to no incentive less due to proper
attitude management and
associated incentives
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Area EPCM EPC / Turnkey DBFM

Quality Engineering and Construction quality is High standards are
construction quality ensured by owners maintained as penalties are
can be maintained at team during execution usually associated with
high standards and quality in poor quality. Also, since
engineering is also such contracts are mostly
specified in the bid for mega projects, margin
documents of error is less plus to keep
maintenance cost less,
quality must be good
Scope Due to continuous Less likely as detailed Very less likely as owner
Growth interaction and scope already defined interference is very less
approvals from owner, in bid documents and and such contracts are
controlling scope extra work may be tendered with a detailed
growth is difficult charged heavily scope
Procurement All material and Apart from any major All material and equipment
equipment procurement or exclusive procured by the contractor
are managed by the equipment, all is done
EPCM contractor with by the EPC contractor
approvals from the
owner
Table 1 Comparison of EPCM, EPC and DBFM contracts

GOOD THINGS & BAD

EPCM contracts offer certain crucial advantages over other contracts like EPC, especially

due to better management and its applicability for all scales of projects (further illustrated from

case examples). Following are few crucial advantages of the contract:

The Owner gets more flexibility and control over the entire project life cycle,

regarding scope, design, equipment, finance, work packages etc.

Flexibility to deal with problems and changes and deploying extra resource to counter

it during execution

Cheaper as expert supervision on cost and budget by contractor plus no risk

incentives as all the project risk is with the owner

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Faster completion of project as long lead procurement and other contracts can be

started before detailed engineering is over

Useful in large complex projects and where scope of work is uncertain at outset

All contracts have certain demerits, and so does the EPCM. The complete risk for the

project borne by the owner can be a disadvantage, but it comes with this type of contract and the

following aspects/risks can be countered with specific mitigation measures to make it foolproof:

Multiple contractual interfaces might be a management problem and make it

difficult to execute contractors liability. Tendering in a fashion to allow full contract

rewards and maximum design completion before tendering can be a way out.

Increasing EPCM risk in the contract and assigning goal based incentives can be

beneficial for the owner and the project.

Use of low skilled team by contractor can be adopted as the EPCM contractor has

limited liabilities. High recruiting standards and proper assessment program for

EPCM contractors can prevent this.

Scope/Cost growth and Schedule overrun are all inter-related. To prevent this,

modifications in the contract to allow scope change, accept schedule slippage due to

scope change and minimizing scope change from the owners end (by appointing a

team to manage) should be done.

TRUE CASES

To be regarded as a Special Engineering and a Multipurpose contract, EPCM should

be applicable to complex mega projects as well as smaller projects with imprecise scope at the

outset. This section covers two case examples, one of each type mentioned above and how

EPCM proved to be beneficial for the project.

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Constancia Project, Peru

This is a copper-molybdenum high altitude mine located in southern Peru, 4100m

above sea level. Ausenco provided Engineering, Procurement and Construction

Management (EPCM) services to design, construct, and commission a 25 Mt/y

concentrator and associated infrastructure for this high-altitude project worth 1.75bn

USD from 2011-15. Ausenco's knowledge of Constancia was extensive having

previously delivered an updated feasibility study and FEED to Hudbay (Client).

Ausenco undertook project management and engineering which was distributed

across Australia, Canada and Peru. Inspiration was taken from other innovative

mining projects by Ausenco and applied to Costancia. 8 million man-hours LTI free

were spent for Ausenco managed scope. (Ausenco - Constancia Project, 2016)

Food Processing Plant, U.S.A.

This was a fast-track construction of a complex food processing unit (for shelf-stable

products; Retrofitting in a 200,000 sq.ft. warehouse), right from the design phase.

Due to several modifications and improvements required and the time crunch, a

detailed bid package could not be developed by the owner. Matrix was continuously

in touch with the owner to detail the scope, and finalize the design (starting with early

requirements first). In addition, with multiple contractors working in common areas,

managing safety was of paramount importance, which was also ensured because of

continuous coordination with all associated parties. Matrix issued 60 separate bid

packages and scopes. By providing a comprehensive schedule for the issuance of bid

packages, the EPCM contractor could also work ahead on future packages while

contractors completed previous packages. This effective scheduling approach allowed

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the owner to complete full engineering and construction of a $20,000,000 project in

less than eleven months. Due to the remote location of the project, owner chose an

EPCM contractor instead of a general contractor (for better management). As a cost

saving approach, and bid packages available on time, multiple contractors were

chosen. Choosing EPCM saved up on general contractors markup due to which

project savings were substantial. (Connell, n.d.)

CONCLUSION

As forms of collaboration in the construction sector continue to evolve, the traditional

delivery models like EPC/lump-sum will succumb to the changing time and will be used less

often. DBFM model of delivery has been the trend in Europe for mega projects in the past

decade, but eventually clients would need to choose between paying huge risk premiums for

such contracts or choosing expert and reputed managing contractors for each specific field for

their project. EPCM is an ideal contract for the latter case.

EPCM form of contracts can produce the best results (for the owner) under the right

circumstances. Such right circumstances include proper engineering, work package management,

coordination, estimation and monitoring etc. Certain demerits of the contract can also be

mitigated with solutions like incentives, active discussion, share in the risk of the project etc. The

case studies also show that this contract can not only be used for Mega Projects (like the

Constancia mine project) or a much smaller, imprecisely scoped project like the food processing

unit, both completed with utmost success on account of proper expertise as per project domain

and management. Hence, EPCM contractor can be used in multiple types of projects of varying

complexity and specialized engineering requirements, making it The Special Engineering

Contract.
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REFERENCES

Agnitsch, S., Cooke, S., & T., S. (2001). E.P.C.M. THE MISUNDERSTOOD CONTRACT .

Ausenco - Constancia Project. (2016). Retrieved from http://www.ausenco.com:

http://www.ausenco.com/case-studies/constancia-project#

Connell, M. (n.d.). Fast-Tracking a New Food Production Plant: An EPCm Case Study.

Retrieved from http://matrixti.com: http://matrixti.com/matrix-on-manufacturing/fast-

tracking-a-new-food-production-plant-an-epcm-case-study/

Loots, P., & N., H. (2007, November). Worlds Apart: EPC and EPCM Contracts: Risk issues and

Allocation. Mayer Brown.

McNair.D. (2016). EPCM Contracts: Project Delivery through engineering, procurement and

construction management Contracts. PricewaterhouseCoopers.