EPC and EPCM contracts are two project delivery methods commonly used in the large-scale, complex process plant construction projects, such as in the petrochemical oil and gas, mining and power sectors, including renewable energy.
The choice of contracting approach on each particular project will depend on a number of factors, including the time available, the lender’s requirements, the sophistication of the Sponsors and the identity of the contractor(s).
Despite the similarity in their names, EPC and EPCM contracts are very different and sometimes confusion may arise in relation to what these contacting methods entail and the typical risk allocation under each model.
1. EPC contracts
Under an EPC contract a contractor is contracted to provide engineering, procurement and construction services by the Sponsors, i.e. to deliver a complete facility to the Sponsors who only need to turn a key to start operating the facility, hence EPC contracts are sometimes called turnkey construction contracts.
In addition to delivering a complete facility, the contractor must deliver that facility for a guaranteed price, by a guaranteed date and the facility must perform to the specified level. Therefore the project is largely contractor managed and the cost risk and control are weighted towards the contractor and away from the Sponsors.
The EPC contractor develops the project from its inception to final completion.
The EPC contractor has direct contracts with the construction contractors.
EPC contracts are almost always “lump sum”, where the EPC contractor is limited to receiving a fixed price irrespective of the actual cost of performing the work.
The EPC contractor generally bears the risk of any cost overruns and also benefits from any savings that can be made.
Additionally, the EPC contractor provides a performance guarantee (subject to general liability caps).
EPC contracts are widely used and understood and they are generally seen as the most “bankable” procurement method.
In the context of detailed engineering and construction, lenders will prefer for one financially robust party to accept full responsibility for the delivery of works on time, on budget and to meet the required technical and performance specification i.e. a single point of responsibility.
However the cost of EPC contracts can be high as EPC contractors will add a substantial risk premium to the price.
2. EPCM Contracts
Under an EPCM contract a contractor is contracted to provide engineering, procurement and construction management services.
Other companies are contracted by the Sponsors directly to provide construction services and they are usually managed by the EPCM contractor on the Sponsor’s behalf.
An EPCM contract is, at its core, a professional services contract – broadly, and EPCM contractor is not contractually obliged to provide the Sponsors with a completed project “on time and on budget”, nor does it take responsibility for the construction or quality of the facility.
In other words no physical construction will actually be carried out by the EPCM contractor.
An EPCM contract is a sophisticated project management or agency arrangement where the EPCM contractor:
- takes responsibility for the provision of engineering and design services;
- generally procures contracts with suppliers and contractors as agent of the Sponsors;
- manages the construction phase of the project i.e. manages, supervises and co-ordinates all of the suppliers, construction contractors and other contractors as the Sponsor’s representative. Typically however, the EPCM contractor will accept limited liability in this respect.
In circumstances where a single point of responsibility cannot be achieved (i.e. EPC contract) or it is not necessary because the Sponsor is sophisticated and can itself manage residual risk, an EPCM contract may be considered.
This will require the Sponsors to have multiple points of responsibility for delivery of the facility.
While an EPCM contractor is responsible for the design component, it is not usually responsible for the construction and procurement components.
Rather, the Sponsor must separately contract with contractors and suppliers, and responsibility for those goods and services lies with the relevant contractor or supplier.
An EPCM contractor’s responsibility is generally limited to the managing of those contractors and suppliers on behalf of the Supplier.
That is, an EPCM contractor generally does not assume time, cost and quality risk for the project.
The financial risk of delayed completion will ultimately rest with the Sponsor. Similarly, the majority of the liability for any substantive performance failure will be retained by the Sponsor.
Unlike EPC contracts, EPCM contracts are almost always “cost plus” (or “cost-reimbursable”). The Sponsors pays the subcontractors directly for materials, equipment and on-site works, and only pays the EPCM contractor its actual direct costs (mostly labour) for performing engineering and supervisory services, plus an agreed margin. The margin charged by EPCM contractors varies depending on the risk assumed (which is usually low), the size of the project (small projects usually have higher margins) and supply/demand position in the economy.
There are of course various advantages and disadvantages to using one or the other of these two contracting methods.
The choice of contracting method will ultimately rest on the particular circumstances of the project, the lenders requirements, the identity of the EPC/EPCM contractor the capability (or lack thereof) of the Sponsors to manage the project.
How can I help
I have experience working on large scale international process plant projects.
I have particular knowledge of EPC contracting and civil and engineering sub-contracting arrangements in the energy sector, with a particular expertise in energy from waste plants.
My EPC contract experience includes:
- Advisng an international waste management company in its capacity as SPV/EPC Contractor on the EPC contract and EPC Sub-Contracts arrangements for three of their major waste PFI schemes in the UK.
- Advised the SPV and EPC Contractor on the North London Waste Authority (NWLA) fuel use procurement during ISFT (part of NWLA £3 billion waste PFI scheme).
For further information or to discuss a matter, please Contact me.