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October 2017
EPCM CONTRACTS 2
Abstract
construction project. As projects are growing in scale, budget and complexity, engineering the
process and executing it within time and budget can be a real challenge. Added to this is the
significant shift in contracting strategy by construction companies, especially in finance and risk
allocation. Also, there has been an age-old challenge of over-paying the bidder and maintaining
quality at the same time. All the above-mentioned factors have triggered alternatives to the likes
of traditional lump-sum contracts or the design and build contracts. One such contract focusing
more on the complex engineering requirements of project, specialized procurement needs and
engineering contract in which the firm/company hired, provides the client with services from the
initial concept to the final commissioning and management. These types of contracts have been
found to be beneficial in many large-scale projects or the mega projects, especially the ones
Petrochemical and mining sector. This essay is an investigation into the EPCM contract, its
conditions for use, comparisons with the other contracting strategies, specific advantages of this
engineering, Procurement
EPCM CONTRACTS 3
One of the key reasons for a contract, including the construction sector, is to allocate
benefits and risks between the parties in the contract. Due to a significant shift in the contracting
strategy over the recent years, owners, developers, contractors and consultants have developed
different ways to accept and tackle risk. This change is driven partly by more sophisticated risk
analysis by the contractors but largely due to complex mega projects and shortage of
contractors, skilled labor and associated cost fluctuation. In favorable economic conditions, it
isnt uncommon to see contractors refusing to bid for usual fixed price and time contracts; While
unavailability of expertise and capacity on either side of the contract can put cost reimbursable
contracts off the charts. Consequently, owners and contractors are looking for alternatives to the
traditional Fixed Price, Cost Reimbursable and Unit Rate Contracts. A key difference and
advantage to point-out is that EPCM may itself be one of the three types of contracts, and could
employ many subcontractors with a mix of above mentioned contracts. EPCM, at its core, is a
professional services contract and the further section would explain it in detail.
The concept of EPCM is not new, however it has wavered in popularity mainly in the
past few decades, primarily in the oil, petrochemical and resources industries. Sophisticated
owners often unprepared for high risk premium and profits to contractor, added with fast track
delivery, rising material/labor costs and limited client resources are changing the way projects
are delivered. EPCM contracting is one such alternative on the rise, and it is essential to
The projects with traits mentioned below are usually chosen for EPCM contracts:
Unclear equipment specification, while control over its quality and cost is desired
While the EPCM contract provides more control to the owner over the design and
construction, equipment procurement and contractor selection, it is important to note that the
a pure consultancy or an integrated alliance style contract. In some ways, its procurement
structure may resemble a typical construction management approach but with the key difference
that EPCM contractor also carries out detailed design and engineering for the project.
project structure, owner and industry, the EPCM contractors often enter into direct contracts with
construction contractor and suppliers, as an agent of the owner, while assuming limited or no
liability from such contracts. Furthermore, the EPCM contractor usually will not take full
responsibility of project delivery on key milestone dates (thus liquidated damage provisions are
rarely included in contract), care and custody of works (with certain exceptions like arranging
security and management) and completion of project within the set budget. However, depending
of scope of work being provided, potential liabilities may relate to negligence, fraudulent
Normally, the maximum liability of the contractor is much less as compared to those in
Turnkey or other fixed time and cost arrangements. It is often concluded with re-performance of
defaulted work and capped out to a maximum of 5% to 20% of total remuneration of works. To
counter such happenings, the contractor is usually heavily incentivized to complete the
Another important aspect is the type of relationship structure of the project, which further
Type 1 Direct contractual relationship with works package contractors and suppliers
EPCM CONTRACTS 6
While the services offered by the EPCM contractor depend from project to project and
the scope of work as per agreement with the client, the services that can be expected from a
Design and Engineering The EPCM contractors involvement may start as early as
the feasibility stage of the project. This means that the contractor will be engaged to
EPCM CONTRACTS 7
analyze crucial technical and other relevant aspects to prepare a report on project
considerations. The EPCM contractor may further be chosen to carry out the FEED1
for the project. This enables the client/owner to approach the market with sufficient
scope definition and ensure more competitive and realistic bids. Following this stage,
the EPCM contractor proceeds with detailed engineering and design. The scope of
work usually also includes coordination with all related parties and to ensure that the
materials and equipment (specially long-led items that can adversely affect the project
schedule). The contractor also needs to assist the owner in preparation, administration
and implementation of major work packages with various trade contractors. Further,
and technical analysis of the offers received) and technical and commercial
agreements, all with the consent of the client/owner is also under the procurement
that the work follows the final design, and in time and budget. Depending on the
scope of EPCM services, the contractor also needs to monitor and report during the
1
FEED Front-End Engineering and Design includes basic engineering and design for the
project along with preliminary budget, schedule and work packages.
EPCM CONTRACTS 8
during the defects liability period and to monitor and report cost and schedule
overruns throughout the project. Active management of claims and disputes by the
work package contractors is also included in the scope in some cases. Hence, in the
construction management phase, the EPCM contractor acts like the owners Agent
The EPCM contract differs with other forms of collaboration in several aspects. This
section covers the difference in behavior of EPCM, EPC and DBFM contracts.
EPCM contracts offer certain crucial advantages over other contracts like EPC, especially
due to better management and its applicability for all scales of projects (further illustrated from
The Owner gets more flexibility and control over the entire project life cycle,
Flexibility to deal with problems and changes and deploying extra resource to counter
it during execution
Faster completion of project as long lead procurement and other contracts can be
Useful in large complex projects and where scope of work is uncertain at outset
All contracts have certain demerits, and so does the EPCM. The complete risk for the
project borne by the owner can be a disadvantage, but it comes with this type of contract and the
following aspects/risks can be countered with specific mitigation measures to make it foolproof:
rewards and maximum design completion before tendering can be a way out.
Increasing EPCM risk in the contract and assigning goal based incentives can be
Use of low skilled team by contractor can be adopted as the EPCM contractor has
limited liabilities. High recruiting standards and proper assessment program for
Scope/Cost growth and Schedule overrun are all inter-related. To prevent this,
modifications in the contract to allow scope change, accept schedule slippage due to
scope change and minimizing scope change from the owners end (by appointing a
TRUE CASES
be applicable to complex mega projects as well as smaller projects with imprecise scope at the
outset. This section covers two case examples, one of each type mentioned above and how
concentrator and associated infrastructure for this high-altitude project worth 1.75bn
across Australia, Canada and Peru. Inspiration was taken from other innovative
mining projects by Ausenco and applied to Costancia. 8 million man-hours LTI free
were spent for Ausenco managed scope. (Ausenco - Constancia Project, 2016)
This was a fast-track construction of a complex food processing unit (for shelf-stable
products; Retrofitting in a 200,000 sq.ft. warehouse), right from the design phase.
Due to several modifications and improvements required and the time crunch, a
detailed bid package could not be developed by the owner. Matrix was continuously
in touch with the owner to detail the scope, and finalize the design (starting with early
managing safety was of paramount importance, which was also ensured because of
continuous coordination with all associated parties. Matrix issued 60 separate bid
packages and scopes. By providing a comprehensive schedule for the issuance of bid
packages, the EPCM contractor could also work ahead on future packages while
less than eleven months. Due to the remote location of the project, owner chose an
saving approach, and bid packages available on time, multiple contractors were
CONCLUSION
delivery models like EPC/lump-sum will succumb to the changing time and will be used less
often. DBFM model of delivery has been the trend in Europe for mega projects in the past
decade, but eventually clients would need to choose between paying huge risk premiums for
such contracts or choosing expert and reputed managing contractors for each specific field for
EPCM form of contracts can produce the best results (for the owner) under the right
circumstances. Such right circumstances include proper engineering, work package management,
coordination, estimation and monitoring etc. Certain demerits of the contract can also be
mitigated with solutions like incentives, active discussion, share in the risk of the project etc. The
case studies also show that this contract can not only be used for Mega Projects (like the
Constancia mine project) or a much smaller, imprecisely scoped project like the food processing
unit, both completed with utmost success on account of proper expertise as per project domain
and management. Hence, EPCM contractor can be used in multiple types of projects of varying
Contract.
EPCM CONTRACTS 13
REFERENCES
Agnitsch, S., Cooke, S., & T., S. (2001). E.P.C.M. THE MISUNDERSTOOD CONTRACT .
http://www.ausenco.com/case-studies/constancia-project#
Connell, M. (n.d.). Fast-Tracking a New Food Production Plant: An EPCm Case Study.
tracking-a-new-food-production-plant-an-epcm-case-study/
Loots, P., & N., H. (2007, November). Worlds Apart: EPC and EPCM Contracts: Risk issues and
McNair.D. (2016). EPCM Contracts: Project Delivery through engineering, procurement and