EPCM and EPC Contracting Strategies

Two major execution models are used in the project environment: EPCM (Engineering, Procurement and Construction Management) and EPC (Engineering, Procurement and Construction). Although the project’s outcome should be similar, the two execution models have distinct differences. Both have their place in the project world, but it is important to understand when to select the correct model, as it could have a major cost and time impact on the project.

 

1. The EPCM Model

In EPCM execution models, the engineering contractor that’s appointed to complete the scope of work has to do most of the engineering and procurement for and on behalf of the client, appoint a contractor to handle the construction, and then manage the contractor to ensure the project is delivered on time. The EPCM contractor does not perform any construction but rather provides a service to the client. The client has to appoint a construction contractor separately and directly.

The EPCM contractor supervises and manages the construction contractor to ensure the project is delivered on time, within budget, according to quality standards, and without any safety problems. Risk management also plays a major role in the EPCM contractor’s scope of work. Regular risk reviews are conducted.

The appointed construction contractor does not have any engineering capabilities. They only focus on executing the project following the specifications and bills provided by the EPCM contractor. Any deviations from the scope of work provided to them by the EPCM contractor are handled through a formal change management process with approval from the EPCM contractor and client.

The EPCM contractor manages and certifies all payments made to the construction contractor. However, the actual payments flow directly from the client to the construction contractor. The EPCM contractor acts as the agent for the client as a service but never takes the financial risks of cost and schedule overruns on the construction contract.

The EPCM model works well in big project environments because the EPCM contractor and the client have a lot of control over the construction contractor. If done correctly, the EPCM delivery model can also help reduce total project costs. The construction contractor does not take all of the risks on his own, and thus, he does not have to inflate his pricing to cover the risk.

On smaller projects, the EPCM delivery model is more difficult to use as one often has to increase resources without major savings on the construction component. Although it is possible to execute any size project using the EPCM delivery model, it is often more productive to use the EPC delivery model on smaller projects.
Another limitation in EPCM delivery is that the EPCM contractor gets paid on a time basis, while the construction contractor usually gets paid on a lump sum basis. This misalignment can result in project suffering.

2. The EPC Model

In the EPC model, the clients appoint the EPC contractor for a certain portion of the scope. The EPC contractor is responsible for Engineering, Procurement and Construction. Although many EPC contractors do not necessarily execute construction or even engineering themselves, they take full responsibility for the EPC execution.

From a client’s perspective, they have one point of contact and one responsible party to execute the work. From the client’s view, they now have a single point of contact and responsibility for all service and construction works on their project, namely the EPC Contractor. The construction risk is completely transferred to the EPC contractor. They still follow a formal change management process, and the EPC contractor remains responsible for the project’s detailed engineering. The EPC contractor will find it difficult to claim compensation for changes in the original quantities, as the EPC contractor themselves were responsible for determining the quantities in the original tender or proposal.

When using the EPC delivery model, clients often need to verify the EPC contractor’s work. When clients do not have an in-house engineering team that can verify the work, they often go to the market for Owner-Engineering contractors. An Owner-Engineering contractor then looks after the EPC contractor in a similar way to an EPCM contractor, but it’s a much smaller team handling exclusively review and verification work.

In the EPC environment, the EPC contractor invoices the client directly. They have sub-contractors under them that will then invoice the EPC contractor. This means that only one party is responsible for the money flow to all subcontractors after the client has paid the main EPC contractor for the scope. This way of execution reduces the administrative burden on the client and assists in controlling the spending on the project. The project also has significantly less risk of incurring corrupt and fraudulent activities that can often occur when several small contractors and suppliers are paid individually.

The lending agencies often determine the contracting strategy during project development. Most international financing institutions find comfort in the EPC delivery model, with one contractor taking responsibility for the entire scope of work. They also appoint strong Owner’s Engineers to assist them with appointing and managing the EPC contractor during execution.

When project finance is raised to execute the development, lending agencies often want the EPC contractor’s balance sheet to be at least the size of the project. This risk mitigation exercise for the banks ensures the project can stand independently.

When the EPC delivery model is used, the EPC contractor has more room for movement during the construction phase and can often use the design phase to optimize their delivery. The client has less control over the details, but this is often better for the project as a whole. Appointing the correct Owner’s Engineers to look after the EPC contractor also plays a major role in controlling the quality of the project without being overly prescriptive towards the EPC contractor.

EPC delivery models work well in big and small project environments and are the most common delivery model internationally. Many clients believe that EPCM delivery models are cheaper to execute because the EPC contractor has to include risk in the pricing of the EPC model. However, this depends on whether the risks allowed for during execution occur. If the risks allowed by the EPC contractor do not occur during construction, the EPC contractor makes more profit. If the risks do occur, they could wipe out profit on the project, and in many cases, the EPC contractor could lose money. In the EPCM environment, the client assumes most of the risk and can either achieve savings or incur losses, depending on how the risks materialize.

3. Conclusion

There is no right or wrong answer when comparing the EPC and EPCM project execution models. You must select the correct model for your project.
Several factors drive the selection of the correct model, the most important of which are project risk and who is in the best position to manage it. In many cases, the EPC contractor is better equipped to mitigate the risks associated with the project execution. However, in certain places worldwide, construction contractors may lack the maturity to effectively manage the risks involved in EPC project delivery, making the EPCM model a more suitable option.

As a client, these strategies must be decided early in project development and implemented accordingly. Choosing the correct partners and contractors to help execute the project also plays a major role. Clients should ensure that potential contractors have experience and an understanding of the delivery models before they appoint them.

Employing or contracting specialists in the contract management field during the early stages of a project can significantly impact its overall success. Once a contracting strategy is selected, it is advisable to adhere to it throughout the project’s duration.

Executing projects should not be a difficult or painful process. If a Client has a different experience, they should consider alternative options.