Engineering, procurement and construction

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In an engineering, procurement and construction (EPC) contract, the EPC contractor (EPCC) agrees to deliver the keys of a commissioned plant to the owner for an agreed amount, just as a builder hands over the keys of a flat to the purchaser. The EPC way of executing a project is gaining importance worldwide. But it is also a way that needs good understanding, by the EPCC, for a profitable contract execution. An owner decides for an EPC contract for several vital reasons. Some are:

  • The owner puts in minimum efforts for his project and, so, has less stress
  • EPC gives the owner one point contact. It is easy to monitor and coordinate
  • It is easy for the owner to get post-commissioning services
  • EPC way ensures quality and reduces practical issues faced in other ways
  • Owner is not affected by the market rise
  • Investment figure is known at the start of the project

Besides the plant siting, in an EPC contract the owner will define the following:

  • Scope and the specifications of the plant
  • Quality
  • Project duration, and
  • Cost

The cost, that is the price to be paid to the EPCC, will be negotiated and finalised and paid in mutually agreed installments.

Coordination and communication In an EPC contract, coordination with various agencies is a demanding task, especially in item rate contracts. Often it happens that agencies try to put the reasons of delays etc., on others. The coordination is more difficult during commissioning and post-commissioning times, because each agency tries to correlate its own performance with the others'. It is very likely that, in an EPC contract, the communication channels get overlapped, short-circuited and confused. The EPCC is the prime functionary and so there has to be a conscious effort for clear messages.

Global arena An EPC contract is a complex phenomenon. It involves various agencies and characteristics (see chart). So the EPC contract, especially in global context, needs thorough understanding. The EPCC must know about the various factors that will affect the working, the results and success or failure of the contract, in global arena. The EPCC must have data and expertise in all the required fields. A thorough knowledge of many aspects is required. Some important areas are:

  • Local (where the plant will be located) market conditions for the materials supply and labour availability and performance
  • Local code, statutory etc., requirements
  • Availability of local supervisory personnel
  • Availability of local and global engineering services
  • Local and global contractors, their experience and performance

Cost variation Another important factor that can affect the EPCC's performance is cost variation. An EPC contract has no price escalation clause. The cost variation to the EPCC can occur on two main counts, viz.:

  • Foreign exchange fluctuation
  • Variation in the prices of materials and labour and services

These are the inherent risks and the EPCC must be careful. The owner has committed a fixed price and is free from the variation of market prices. The EPCC, in turn, too, at the time of the commitment to the owner, must have a similar agreement with various agencies, but the scope and quantities of the services must be known.

Monitoring by owner and EPCC The following points will be helpful to the owner for monitoring the project:

  • Define guarantees well
  • Define scope and quality very carefully
  • Define milestones meticulously
  • Have the LD/penalty clauses well-defined

The handling of an EPC contract is a complicated and complex phenomenon for the EPCC management. Some important points to know are:

  • Have payment terms very specific
  • Have similar terms and conditions regarding quality, guarantee etc., as demanded by owner's with various vendors
  • Do not keep terms open-ended
  • Coordinate vigilantly to reduce chances of errors at site

For the owner First, the owner must have clarity of the project. Any changes later will be costly. Then, select a reputed and experienced EPC contractor. After all the plant belongs to the owner and the owner has to live with it. The owner should also get the cross checking of the design of major structures done and the main plant machines inspected, by in-house experts or consultants. That will add to the success of the plant. The EPC way is, after all, an effective and efficient way to execute a project, for all stakeholders.

(As told to B.P. Nansi)

(The author is Senior Engineer - Civil, TCE Consulting Engineers Ltd, and has worked on EPC contracts from the owner's/EPC contractor's side.)