Engineering, procurement and construction

The EPC contractor (EPCC) agrees to deliver EPC, which is an acronym that stands for engineering, procurement and construction. It is a common form of contracting arrangement within the construction industry.

Background

Under an EPC contract, the contractor designs the installation, procures the necessary materials and builds the project, either directly or by of the work. In some cases, the contractor carries the project risk for schedule as well as budget in return for a fixed price, called lump sum turnkey (LSTK) depending on the agreed scope of work.^[1]

When the scope is restricted to engineering and procurement, this is referred to as an EP, E and P or E+P contract. This is often done in situations where the construction risk is too great for the contractor or when the owner does the construction.^[2]

The ‘keys’ to a commissioned plant are handed to the owner for an agreed amount, just as a builder hands the keys of a flat to the purchaser. (One should recognise that some EPC contracts terminate at Mechanical Completion but before Commissioning while LSTK contracts always include Commissioning.) EPC is gaining importance worldwide. It requires good understanding by the EPCC to return a profit. An owner decides for an EPC contract for reasons that include:

• Reduced stress for owner (not guaranteed)
• Easy work and growth of the company
• Single point of contact for owner simplifies communications.
• Ready availability of post-commissioning services
• Ensures quality and reduces practical issues faced in other ways
• Owner protected against changing prices for materials, labor, etc.(if there is provision in the contract)
• Cost is known at the start of the project

Besides the plant siting, in an EPC contract the owner defines:

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

The cost (the price to be paid to the EPCC) is negotiated and finalised and paid in mutually agreed installments.

Functions

Engineering Functions

• Initiation
• Implementation
• Planning & Programming
• Estimating → Request for Quote
• Valuation
• Design

Procurement Functions

• Purchasing
• Expediting
• Receiving
• Invoicing
• Reconciliation

Construction Functions

• Construction Schedule
• On-site Material Handling
• Construction Activities
• On-site Client Communications
• Valuation & Cash flow
• testing & checking
• Closing

Owner and contractor liabilities

Once an EPC contract is signed, the EPC contractor becomes liable for completing the project according to the tender conditions. The EPC contractor, in turn, may hire sub-contractors or sub-vendors to complete different portions. Payment commensurate with the work completed (in addition to an advance) is normally preferred by a contractor.

Projects are more likely to succeed when the owner:

• Defines guarantees well
• Defines scope and quality very carefully
• Defines milestones meticulously
• Defines Bonus clauses
• Defines LD/penalty clauses

• Makes payment terms very specific

The contractor also has ways to improve project success:

• Adopts similar terms and conditions as owner regarding quality, guarantee etc., for subcontracts/vendors
• Do not keep terms open-ended
• Coordinate vigilantly to reduce chances of errors at site.

Global arena

An EPC contract is a complex agreement. In a global context, EPC management is more complex. The EPCC must have data and expertise in all the required fields. Some important areas are:

• Local market conditions for materials and labour availability and capabilities
• Local code, statutory etc., requirements
• Availability of local supervisory personnel
• Availability of local engineering services
• Local and global subcontractor experience and performance

Cost certainty

One main reason an owner may prefer an EPC arrangement is “certainty of cost”. An EPC contract binds the Coned. However, changes to specifications initiated by the owner (better finishes for example) may be incorporated thro changes and these changes/prices are recorded in the change order document.

Owner responsibility

To ensure quality, the owner must select an experienced EPC contractor. Changes in scope of work can affect project schedule, cost and risk. Such changes are the responsibility of the owner.

See also

• EPCM
• EPCI
• LSTK

References