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.
Under an EPC contract, the contractor designs the installation, procures the necessary materials and builds the project, either directly or by subcontracting part 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 LSTK depending on the agreed scope of work.
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.
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
- 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[clarification needed]
- Owner protected against changing prices for materials, labor, etc.
- 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
- Project duration
The cost (the price to be paid to the EPCC) is negotiated and finalised and paid in mutually agreed installments.
- Planning & Programing
- Estimating -> Request for Quote
- Construction Schedule
- On-site Material Handling
- Construction Activities
- On-site Client Communications
- Valuation & Cash flow
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.
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
One main reason an owner may prefer an EPC arrangement is "certainty of cost". An EPC contract binds the Contractor to deliver the project at a firm, predetermined price regardless of any increase in costs that the Contractor may incur after the contract is signed. However, changes to specifications initiated by the owner (better finishes for example) may be incorporated through a "change order". Here, the owner and the Contractor negotiate the price to make the changes and these changes/prices are recorded in the change order document.
To ensure quality, the owner must select an experienced EPC contractor. A third-party or in-house consultant can verify the design of major structures and inspect the main equipment installations.
Changes in scope of work can affect project schedule, cost and risk. Such changes are the responsibility of the owner.
- Loots, Phil; Nick Henchie (November 2007). "Worlds Apart: EPC and EPCM Contracts:Risk issues and allocation" (PDF). Mayer Brown. Retrieved 2009-04-15.