EPC or EPCM Contracts
Which one can drive stronger outcomes for project owners?
Ron Douglas, Ausenco’s Executive Vice President, Global Project Delivery, explores some of the key
dimensions project owners should consider in choosing their project contracting strategy.
EPC or EPCM? When it comes to contract strategies
for major projects, Engineering, Procurement and
Construction (EPC) and Engineering, Procurement,
Construction and Management (EPCM) style contracts
are two of the key options, but which one provides
better outcomes for project owners?
Ausenco’s Executive Vice President, Global Project
Delivery, Ron Douglas has been involved in major
projects ranging from the millions to multi-billion dollars
and he believes EPC and EPCM contracts can both
deliver strong outcomes, however careful consideration
should be made of the different levers and potential
outcomes to determine which one is best for each
project.
In this article he explores some of the key dimensions
project owners should consider in choosing their project
contracting strategy.
DEFINITIONS
‘EPC’
Engineering, Procurement and Construction (EPC)
is a contract option in which the EPC Contractor is
responsible for all activities from design to procurement
and construction to deliver the asset to the end user or
owner.
It’s also known as Design and Construct (Lump Sum Turn
Key is a form of EPC).
‘EPCM’
Engineering, Procurement, Construction and
Management (EPCM) is a professional services
appointment whereby the Contractor’s services are
generally to provide detailed design, procurement,
construction management and project coordination
necessary to deliver a project.
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WHY CHOOSE EPC?
EPC contract forms are selected to realise the inherent
advantages provided by an integrated team across
the full life cycle of a project from design concepts
through to commissioning. Traditional barriers between
engineering, procurement and construction contractors
(or variations of this) are eliminated and the inefficient
layering of owners’ management teams is avoided
enabling rapid and efficient decision and approval
processes. This approach seeks to achieve the most
seamless delivery organisation possible.
An integrated EPC team can design, procure and
construct facilities safer, in a shorter duration and with
lower cost in a manner fit for the purpose specified by
the owner.
Budget, schedule and performance risks are transferred
from the Owner to the EPC Contractor, enabling the
owner to focus on the critical task of developing their
business systems and processes in preparation for
operating their asset.
As challenges of projects become more complex, owners
can transfer risk to a company capable of delivering a
complete package of resources, products, innovations
and management. In addition to the above, owners
routinely expect contractors to provide contemporary
industry efficiencies, latest tools and practices, labour
relations expertise and risk management. An EPC
approach allows these deliverables to be managed
under one aligned team.
We believe that the EPC approach is responsive to the
critical success factors for new project development,
such as:
• Creating and maintaining the highest safety
standards
• Mandating and achieving an aggressive completion
schedule
• Integrating quality into the work from conceptual
design through the final installation
• Delivering a competed project fit for purpose and at
the least capital cost
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EPC or EPCM Contracts. Which one can drive stronger outcomes for project owners? November 2016

WHY CHOOSE EPCM? IN SUMMARY

EPCM contract forms were traditionally used to enable a EPC is the most direct route to the least cost and highest
project to progress when the scope was unclear or a risk quality contracting option, where aggressive completion
difficult to quantify such that a contractor required to schedules and commitment to peak safety standards
include excessive contingent allowances in the price to complete the mix.
address the risks.
The inherent accountability of an integrated EPC team
These included: naturally delivers value, and the customer realises a
• New or proprietary technologies product that is both fit for purpose and delivers the
• Specific site or country risks highest return on their investment.
• Owner supplementing their existing delivery team.
This framework has shifted in the last 10-15 years such
See overleaf for comparisons of both EPC and EPCM
that the EPCM approach is now prevalent, initially driven
contracting options for Owners along key project
by contractors becoming more sophisticated in their risk
aspects.
analysis and proposing a risk free margin.
Factors influencing this transition were:
• Surge in demand for global engineering and
construction and ability for contractors to nominate
risk free revenue
• Significant size and complexity of projects such that
contractors could not accommodate fixed price risk
on their balance sheet
• Shortage of experienced professionals to perform
the work.
During this transition period an “industry” of Owner
Representative companies has developed to act as the
interface between the Owners and Contractors and
these organisations will continue to actively promote
EPCM contracts to ensure the commercial viability of
their business.
EPCM contracts allow critical path activities to continue
while scope is further defined. Schedule is therefore
shorter as time taken to develop basic design is not
added to the critical path. For more information on EPC and EPCM contract
It is touted that EPCM project costs are less than advantages and disadvantages, contact:
EPC as the contractor’s fee is minimised, however the Ron Douglas,
inefficiencies of layering and bureaucracy of decision Ausenco Executive Vice President,
making processes in EPCM result in inefficient Global Project Delivery
organisation for an extended time and higher costs
Email: ron.douglas@ausenco.com
result. Also, the risk remains with the client and recent
Social: Connect with Ron on LinkedIn
performance history indicates owners are being
impacted by the advice of their representatives.

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EPC or EPCM Contracts. Which one can drive stronger outcomes for project owners? November 2016

Comparing EPC and EPCM contracting options

Below are comparisons of both EPC and EPCM contracting options for Owners along key project
aspects and the recommended contract types.

Equipment supply and

1 process warranties 2 Project budget cost overruns

EPC or EPCM EPC or EPCM

EPC CONTRACT EPCM CONTRACT EPC CONTRACT EPCM CONTRACT

Single warranty
between Owner and EPC
Contractor, usually in the
form of a performance
bond. EPC contractor
manages warranties with
sub-contractors and
suppliers.
Owner negotiates The cost risk for the The cost risk for the
warranties with each project is borne by the project is borne by the
supplier and contractor EPC contractor. owner.
directly, often supported
by multiple performance
bonds.

3 Project financing 4 Performance risk

EPC or EPCM EPC or EPCM

EPC CONTRACT EPCM CONTRACT EPC CONTRACT EPCM CONTRACT

Usually requires a Project financing can be EPC Contractor A common perception
substantial down any combination of down provides a single point is that with EPCM the
payment by owner payments, accounts of accountability for risk is sublet to each
to EPC contractor, and/or letters of credit performance and individual contractor by
generally requiring all from owner to different warranty of project Terms & Conditions and
financing to be in place suppliers. execution; responsible financial hammers such
at onset of project. for all risk provided by as liquidated damages,
contract documents although many claims
(e.g. schedule, cost and focus on who influenced
quality, as well as other performance (or who
requirements specific to owns the risk). A Project
the process, location or manager or prime
customer). contractor may be hired
as an agent of the owner,
yet unless expectations
are clear, risk-sharinq
becomes indistinct.

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EPC or EPCM Contracts. Which one can drive stronger outcomes for project owners? November 2016

Accurate and timely

5 measurement of performance 6 Performance incentives

EPC or EPCM EPC or EPCM

EPC CONTRACT EPCM CONTRACT EPC CONTRACT EPCM CONTRACT

With a single contractor Depending on the size From an owner’s Each contractor can
a uniform set of tools and capability of each perspective there is an and should be prepared
can be applied to contractor, the tools used advantage to selecting for incentives related
record and measure to measure and record a contractor willing to to their specific scope
performance. Reporting performance can vary place fee at risk based on of work, plus any global
tools can be integrated from logbooks to highly performance incentives. components such as
across the project automated systems. With EPC this can include safety, cost, quality and
for attributes such If accurate and timely specific milestones schedule. Incentives will
as schedule, cost, performance reporting is along the execution path be successful if they are
materials, labour and expected, the issue rests such as first concrete, designed to reward a
quantities, which with who bears the cost to mechanical completion contractor for exceeding
enhances accuracy conform these assorted or energisation, but expectations, while
through an interactive tools into a consistent can also capture global penalising the same
database. report for the Owner or components such as for not performing to
Project Manager. safety, cost, quality and specified goals.
schedule.

Criticality of project
7 completion schedule
8 Construction work packaging

EPC or EPCM EPC or EPCM

EPC CONTRACT EPCM CONTRACT EPC CONTRACT EPCM CONTRACT

One of the key benefits A hindrance to schedule Work packaging for a Work packages for
with EPC is that the compression under an single EPC contractor contractors must be
construction cycle can EPCM profile involves the can readily adapt to divided into groups
begin concurrently with Bid-Evaluate-Award (BEA) many forms, typically based on both scope and
detailed engineering. cycle associated with driven by scope, commercial content, i.e.
This significantly construction contracts. discipline or schedule the ability to attract a
reduces the cycle An effective and thorough of work. An EPC enables cohesive set of bids for
time to construction BEA cycle consumes the team to plan the evaluation. This may not
completion and allows about 6 to 8 weeks, and work based on the always reflect the optimum
the duration from cannot begin until detailed most efficient menu installation process, and
conceptual planning design is substantially and sequence for can also develop a rigid
to an operating facility complete. If the BEA cycle prefabrication, modules, work process that fosters
to be condensed. As a is compromised, schedule installation and start-up. change orders from
result, schedule critical compression is possible poor definition of
projects are best suited however project costs will subdivided work.
for an EPC application. suffer as a result.

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 EPC or EPCM Contracts. Which one can drive stronger outcomes for project owners? November 2016

Communication of Ratio of administrative, technical &

9 construction issues and changes 10 supervisory personnel to specialists

EPC or EPCM EPC or EPCM

EPC CONTRACT EPCM CONTRACT EPC CONTRACT EPCM CONTRACT

Construction progress, Traditional construction For a project where a single The ratio between
information and contracts bind contractor is responsible field non-manuals and
experience flows quickly communication with formal for EPC, the ratio of field specialists for each
to other team members protocol, where changes, non-manual to specialists contract should fall within
under an EPC approach. issues and reports are should be 15% to 20%. a similar bandwidth as for
Problems are solved accompanied with written This includes all site EPC, however between
rapidly and results are transmittals. This provides personnel, such as clerks, the contractor and owner
available sooner as the a highly accountable record safety professionals, field (or prime) there is often
interface between the of events through the engineers, QA/QC inspectors, duplication in management
E, P and C functions is project, but drives cycle specialist supervisors and administration. This
connected. Cycle times time between questions and site management. In results in a much higher
are reduced, and many and answers to lengthy many cases, non-manual cost for the larger staff,
traditional issues never intervals. It can also prevent employees can fill multiple typically required to fill the
occur as the team works good ideas from fruition roles, reducing the overall void between performance
daily as a cohesive unit. as they get lost though staffing number and reporting and contractor
paperwork. associated costs. accountability.

Modularisation of
11 Material supply cycle 12 components and equipment

EPC or EPCM EPC or EPCM

EPC CONTRACT EPCM CONTRACT EPC CONTRACT EPCM CONTRACT

Procurement of engineered Typically the owner or Modularisation of If modularisation is to
components, equipment EP contractor procures plant components and be applied on an EPCM
and bulk materials can be engineered components equipment should be project, representative(s)
performed on a schedule and equipment for determined by availability from proposed erection
best suited for fabrication, EPCM projects, with bulk of qualified fabrication contractors should be
delivery, installation and materials supplied by either shops, routes of consulted to assure
testing. Considerations the individual contractor or transportation and site effective integration
for commitment and available to all contractors specific conditions such of module issues and
cash flow are built into on a consignment or stock as weather and terrain. An logistics. As the planning
the procurement plan, basis. Material control EPC contractor can review period for module
and control of materials becomes more complex, and module design during the design is typically well
is maintained by a single delays can lead to change constructability process, in advance of the BEA
source throughout the orders or claims. Leveraged to assure that effective cycle for construction, it is
project life. Leveraged procurement does not apply integration of module necessary to perform this
buying provides further well to an EPCM profile. issues and logistics. activity independently.
cost savings.

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 EPC or EPCM Contracts. Which one can drive stronger outcomes for project owners? November 2016

Benefits of innovations
13 and efficiencies 14 Accountability for labour relations

EPC or EPCM EPC or EPCM

EPC CONTRACT EPCM CONTRACT EPC CONTRACT EPCM CONTRACT

With an EPC approach the
owner has an integrated
team accountable for
delivering all facets of the
project in a synchronous
manner. It is advantageous
for the EPC contractor
to foster innovations
and efficiencies, as any
improvements between
the E, P and C functions
translates into most
effective, lowest cost
project delivered in the
shortest duration.
Contractors engaged in EPC contractors are Each contractor on an
EPCM are at a disadvantage responsible for the EPCM project will have
for the benefits of labour across the their preference for labour
innovation, as typically their project. Effective and relations and application of
focus is on the quickest consistent application work assignments. In many
completion of their contract of labour relations is cases these contractors
scope. Willingness to essential in maintaining will employ jurisdictional
accept new and innovative respect with specialist decisions that favour
practices will usually be personnel, including their operation without
a by-product of improved the momentum that will respect for affect to
fee potential. Incentives for deliver the project as other project contractors.
innovations will be centred expected. Owners may retain a labour
on a specific contract in consultant; however it
lieu of a benefit to the total is common practice for
project. each contractor to be
responsible.

15 Demand for skilled resources 16 Percentage of specialty work

EPC or EPCM EPC or EPCM

EPC CONTRACT EPCM CONTRACT EPC CONTRACT EPCM CONTRACT

An EPC contractor capable EPCM contractors usually An EPC contractor is EPCM works well with
of executing substantial have good relationships with challenged executing high specialty applications,
and complex scopes trade(s) sources, as their volumes of specialty work where contractors
usually provides a good smaller team is tailored (e.g. insulation, roofing, possessing unique
draw for skilled labour, as for consistent employment pre-engineered buildings, qualifications, custom
the specialists view them through seasonal changes. containment liners), as both tooling or particular
as a stable source of work This results in a strong direct hire specialists and licenses are best suited
with consistent work draw for labour up to their the contractor’s non-manual over a general contractor.
rules. This can be critical capacity, however unless labour typically do not have The quality of work
when resources are the project scope supports the training required to typically meets or exceeds
challenged, and innovative the dynamics of staffing install such components industry standards,
recruiting actions are multiple contractors, or systems. In such cases, however schedule
necessary to meet the resource recruiting can the EPC Contractor will hire compression is unlikely
staffing plans for large be challenging with less specialty contractors to as the administration
and complex projects. manning for staffing issues. execute unique scopes of multiple specialty
of work. contractors is time and
resource consuming.

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 EPC or EPCM Contracts. Which one can drive stronger outcomes for project owners? November 2016

Management of local community

17 Location of engineering team/s 18 and indigenous peoples

EPC or EPCM EPC or EPCM

EPC CONTRACT EPCM CONTRACT EPC CONTRACT EPCM CONTRACT

Where the engineering EPCM can work An established EPC Hiring local contractors
and detailed design effectively with remote contractor with a formal can fulfil some indigenous
is performed should engineering, as contract labour relations program issues however there can
have minimal impact, if documents should be should be capable of uncertainty around these
effective coordination based on a defined executing an effective contractors having the
and communication scope with clear bid protocol for the hiring, skills and qualifications
is established by specifications. Work can training and involvement required for the project.
the EPC contractor. be executed in an EPCM of local personnel. This With EPCM, the managing
Efficient dialog is regardless of the location includes developing contractor must validate
required early to assure of the design centre; agreements with labour the capabilities of local
constructability issues however contractor leaders to provide access contractors, to assure
and lessons learned expertise should be for indigenous people to that owner or community
are incorporated in a retained during the the project, and the use commitments for
timely fashion. construction. of non-signatory local affairs do not
local contractors for significantly compromise
portions of the work. project execution.

“Build-Own-Operate-Transfer”
19 (BOOT) option

EPC or EPCM

EPC CONTRACT EPCM CONTRACT

The BOOT option is being
considered by more owners
as plant development can
proceed with innovative
capital schemes. In a BOOT
option, a high degree of
contractor accountability
is required, as the risk
associated with traditional
workmanship warranties
is extended to include
performance expectations
over some period of an
operating cycle.
BOOT applications are
possible under an EPCM
contract; however it is more For more information on EPC and EPCM contract
difficult and costly to align
multiple contractors in a risk
advantages and disadvantages, contact:
pattern that extends beyond Ron Douglas,
mechanical completion
of their specific contract.
Ausenco Executive Vice President,
In addition, performance Global Project Delivery
bonding of contractors
can be a concern, as for Email: ron.douglas@ausenco.com
many the cost of Social: Connect with Ron on LinkedIn
extended risk exceeds
their bond capability.

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