EPC vs EPCM

Engineering Procurement & Construction / Engineering Procurement & Construction Management

OIL & GAS PROJECTS ARE CURRENTLY

CHARACTERIZED AS FOLLOWING :
Increase in Project Complexity
Different sizes of Project
Various International involvement
Technological risk and challenges
Financial Risk associated to Project
Strategy of Project to achieve objective
Challenges in terms of timely completion cost, quality & revenue

DEFINATION OF CONTRACT :
Acontractis a written or expressed agreement between two parties to provide a
product or services. There are essentially six elements of a contract that make it a legal
and binding document.
In order for a contract to be enforceable, it must contain:
a. An offer that specifically details exactly what will be provided
b. Acceptance, which is the agreement by the other party to the offer presented
c. Consideration, money or something of interest being exchanged between the parties
d. Capacity of the parties in terms of age and mental ability
e. The intent of both parties to carry out their promise
f. Legally enforceable terms and conditions, also called object of the contract

FUNDAMENTAL PHILOSOPHY OF CONTRACT :

Contracts are ,in essence of tools for allocations of tasks responsibility and risk.
It is principle in contracting that the party who control the risk carry the risk
A contractor will often carry the risk whether he controls it or not but at a price
Every contractor and owner should evaluate the following options :
a. Is whole risk of supply & services is a better approach ??
b. Is shared risk is a better approach???

CONTRACTING STRATEGY :
The desired allocation of risk
Division of responsibility
Interfaces
Market situation
Splitting of works and services between concern parties
Time constraints

PROJECT EXECUTION APPROCH :

Project execution encompasses full responsibility for delivery of project scope, on varied
contractual basis:
PMC / EPCM
EP & CM
EPC
Reimbursable, fixed/incentivised fees, selective lump sum arrangements
Award normally through negotiation from concept or FEED stage

EPC APPROACH
This Contract scope includes following :
Design
Engineering
Supply of entire scope
Procurement
Construction
Installation , Commissioning ,Start-up
Training
Acceptance and Testing
Final Hand over to Owner

KEY CHARACTERSTICS OF EPC CONTRCAT:

Single Point responsibility for performance of works, communication and
coordination's with EPC contractor.
Guaranteed Completion date ,Performance and firm contract price
Clear division of obligation and liabilities
High contract price due to markups, The contract price may be inflated as the EPC
contractor is assuming most of the risk.
Negative impact on time schedule as due to long engineering phase during tendering
stage
Full dependency on one contractor

EPCM APPROACH
This is an Engineering Company is contracted to provide Engineering Procurement and Construction
Management services. EPCM Contractor assist the owner to manage entire project under the
professional services contract. EPCM Contractor carry out following activities on behalf of owner
Develop Design Engineering
Execute Procurement Processes
Manages all contract process and Construction on behalf of owner
Assists in all contractual negotiation to create direct contractual relation between owner and
contractors
Support Owner in handling Installation , Commissioning ,Start-up
Coordinate with supplier for carry out Training
Coordinate with supplier on behalf of owner for Acceptance and Testing

KEY CHARACTERSTICS OF EPCM CONTRACT

Overall controls in owners hand
No Mark up due to share contract risk
Competitive market price for all deliverables , materials ,equipment's and cost
advantages with owner
Contractual ,Schedule , Cost , risk , technical rest almost with owner.
High effort in communication and coordination due to interfaces in multiple
contract's
Complex contract built-up potential gaps in risk allocation or missing and required
work services.
Delay in approval of various technical and commercial issues.

EPC/EPCM COMPARISION:
Task / Issue

EPC (Engineering,

EPCM (Engineering,

Procurement and

Procurement and

Construction)

Construction Management)

Equipment Supply Contracts

Negotiated & Signed solely

between EPC contractor &
Supplier

Negotiated & signed between

Owner and Supplier /with
EPCM contractors advise and
assistance

On-Site Construction
Contracts

Negotiated & Signed solely

between EPC contractor &
Supplier

Negotiated & signed between

Owner and Contractor /with
EPCM contractors advise and
assistance

Supplier Selection

Suppliers chosen solely by EPC Suppliers chosen by mutual

contractor with no input from
agreement of Owner and
Own
EPCM contractor

EPC/EPCM COMPARISION:
Task / Issue

Scope of Supply

EPC (Engineering,

EPCM (Engineering,

Procurement and

Procurement and

Construction)

Construction Management)

EPC Contract only as good as

the original project
specifications presented during
bidding process. Changes to
specifications / scope of supply
after awarding of contract can
be expensive, due to EPC
contractors sole contract with
Owner and Owners inability to
Shop Around for multiple
quotations from independent

Owners can modify project

specifications with little or no
trouble. Owner, with the
assistance of the EPCM
contractor can negotiate
independent contracts with
suppliers / vendors at any time
due to the fact that project is
under multiple (independent)
contracts and not one (1) all
encompassing contract

EPC/EPCM COMPARISION:
Task / Issue

Equipment Supply Warranties

EPC (Engineering,

EPCM (Engineering,

Procurement and

Procurement and

Construction)

Construction Management)

Warranties negotiated by
Suppliers & EPC contractor
and issued to EPC Contractor
directly.
Warranty to Owner from EPC
contractor is negotiated
separately between Owner and
EPC Contractor and issued to
Owner by EPC Contractor

Warranties negotiated
individually with each supplier
by Owner with EPCM
contractors advice. Issued
directly to Owner from the
suppliers and contractors

EPC/EPCM COMPARISION:
Task / Issue

EPC (Engineering,

EPCM (Engineering,

Procurement and

Procurement and

Construction)

Construction Management)

Construction Site Safety

(General Liability Insurance,
Workmans Compensation,
Accident, etc.)

Site Safety solely the

responsibility of the EPC
contractor and sub contractors;
in accordance with Contractual
Agreements

Site safety is monitored by

EPCM contractor but site
safety is the legal
responsibility of Owner and
Sub Contractors; in accordance
with Contractual Agreements

Permitting (Environmental,
Construction, etc.)

Permitting is the responsibility

of the EPC contractor with the
exception of permits that are
required by law to be issued in
the name of the Owner of the

Permits are issued to the

Owner directly with EPCM
contractor assisting in filing
the necessary paperwork

EPC/EPCM COMPARISION:
Task / Issue

Project Budget Cost Overruns

EPC (Engineering,

EPCM (Engineering,

Procurement and

Procurement and

Construction)

Construction Management)

The cost risks for a project are

borne by the EPC contractor.
Any cost overruns, for
equipment and/or services
within the EPC contractors
scope of supply, are for their
own account and can not be
passed onto Owner unless
change conditions occur or
contractual agreements to the
contrary

The cost risks for a project are

borne by the Owner. Any cost
overruns, for equipment and/or
services are for the Owner
account (with the exception of
fixed price supply contracts)
i.e. Final equipment pricing
bids / on site cost higher than
originally budgeted.

EPC/EPCM COMPARISION:
Task / Issue

Project Day-to-Day Expenses

EPC (Engineering,

EPCM (Engineering,

Procurement and

Procurement and

Construction)

Construction Management)

The day-to-day expenses for

the project, within the EPC
contractors scope of supply are
borne by the EPC contractor.

The day-to-day expenses for

the project are borne by the
Owner but are managed and
administered by the EPCM
contractor (up to predetermined quantities, without
Owners need for intervention).
Usually a small fund is
established by Owner for dayto-day expenses

EPC/EPCM COMPARISION:
Task / Issue

Project Financing

EPC (Engineering,

EPCM (Engineering,

Procurement and

Procurement and

Construction)

Construction Management)

Project Financing is usually

accomplished by substantial
down payment by Owner to
EPC contractor and the
remainder of the fees issued
with Irrevocable Letter of
Credit (with partial payments)
from Owner to EPC
Contractor.This requires
Owner to have all financing in
place at the onset of the Project
so as to secure letter of credit

Project Financing can be any

combination of down
payments, open accounts, and
Irrevocable Letters of Credit
from Owner to suppliers /
contractors; whatever method
is negotiated during contract
negotiations. EPCM
contractor will assist in all
negotiations on Owners
behalf.This allows Owner to
have partial financing in place

EPC/EPCM COMPARISION:
Task / Issue

Legal Cost

EPC (Engineering,

EPCM (Engineering,

Procurement and

Procurement and

Construction)

Construction Management)

Legal Costs are low for Owner.

Owner negotiates only one detailed
supply contract with EPC
contractor.
EPC contractor must negotiate
individual contracts with suppliers
/ vendors. EPC contractors legal
costs are high due to multiple
contracts.
In the event of legal action is
taken, Owner must sue EPC
contractor, who in turn must bring
legal action against appropriate

Legal Costs are higher for

Owner. Owner negotiates
multiple supply contracts
directly with suppliers /
contractor; with the assistance
of EPCM contractor.
In the event of legal action is
taken, Owner must bring legal
action against individual
suppliers /
contractors.(Usually a shorter

EPC/EPCM COMPARISION:
Task / Issue

Administration

EPC (Engineering,

EPCM (Engineering,

Procurement and

Procurement and

Construction)

Construction Management)

Owners administration costs

are low with EPC contract.
Only minimal staff
(management, QC, legal, etc.)
needed to administer/monitor
project . May have negative
effect on project ownership
feeling within Owners
organization (Hands off).

Owners administration costs

are higher with EPCM
contracts. Substantial staffing
levels needed to
assist/compliment EPCM
contractor in
administering/monitoring
project. Promotes ownership
feeling within Owners
organization. Project staff often
transferred to operational staff

EPCM/EPC ADVANTGES
EPCM

EPC

Lower Overall Cost

One Stop Shopping One point of Contact

Staffs Sense of Ownership

Hands off approach to project

More Control over Process

Minimal Staffing Requirements

Best for Well defined projects with Detailed

Better for less defined projects with anticipated
Engineering Complete before EPC Contractor
changes to scope of supply
selected (Minimal Unknowns).
Less Legal Litigation (Identify issues early and Minimal Legal Risk
remedy situation before larger problems arise)
Owners Financing Flexibility

Contractor Financing issue

CONCLUSION
EPC and EPCM contracting are both very prevalent types of contracts within the
construction industry. Dependent on the level of risk the Owner of a project is willing to
accept, budget constraints, and the Owners organization core competencies, will determine
which method is best for their project.
EPC contracting tends to be more expensive, to the Owner, due to the shift of project risk
away from the Owner and to the EPC Contractor.On average, a projects cost 10% 20%
more using EPC style of contracting than a project using the EPCM style of
contracting.This is due in large part to the projects risk being more evenly distributed
between the Owner and contracts / suppliers.
Construction contracting trends have been leaning towards the EPCM style of contracting
and away from EPC contracting for several reasons but both methods have their place in
business today.

THANK YOU
WINNERS NEVER DO DIFFERENT THINGS THEY DO THINGS DIFFERENTLY