What is the difference between an EPCM and an EPC contract?
EPCM or EPC contract? There are fundamental differences between the two that can shape the progress and fundamental workings of your project. We explain what each entails and the benefits and drawbacks of each.
What is an EPC Contract
The EPC in EPC Contract stands for “Engineering”, “Procurement” and “Construction”. Under this contract type responsibility is given to the contractor to manage all aspects of a construction project. The contract also defines the relationships and responsibilities between the project owner and contractor. Sometimes referred to as a “turnkey” project, it essentially passes responsibility to the contractor to complete a construction project to the point of being able to simply “hand the key” to the project owner. Not only must the contractor deliver a fully completed site, they should do this by a fixed date, for a fixed price and to an agreed standard. If not delivered to these criteria, stipulated within the EPC contract, then the contractor may well be liable to financial penalties.
What is included in an EPC Contract
There is no fixed template for an EPC contract, but characteristically a project owner should expect the following responsibilities at each stage of EPC:
- Equipment Specification
- Sourcing & Supplier Liaison
- Purchase and Receipt of Goods
- Testing & Commissioning
- Scheduling & Risk Management
- Subcontractor Management
- Materials Sourcing/Management
- Site supervision/management across civils, mechanical, electrical etc.
- Start-up and commissioning
There can be variations not only in the structure of an EPC contract but also the pricing – from a single fixed cost for the entire project to a more flexible solution that shares responsibilities or incorporates tiered pricing, dependent on performance.
What is an EPC Contract?
What is included in an EPCM contract?
Again, there is no fixed template for an EPCM contract, but the following elements could typically be expected. Unlike an EPC contract, within each phase the client is informed and able to input into decisions, giving full transparency on the management of the project:
- Scoping & Feasibility
- Planning & Design
- Detailed Engineering Stages
- Specification and Quotation Sourcing
- Tender Process Management
- Purchase and Receipt of Goods
- Testing & Commissioning
An EPCM contract is typically costed on either a cost-reimbursable or unit rate basis. On a cost-reimbursable basis the project owner should give an upfront fee followed by a series of fixed payments. A unit rate basis also includes the upfront fee but the following payments are only made based on completion of agreed construction phases.
Benefits/Drawbacks of an EPC Contract
- The obvious benefit of an EPC Contract to the project owner is the handing over of project responsibility to the contractor. The client can be assured that everything is being handled on their behalf and need only deal with one single point of contact.
- Should an issue arise within the project (e.g. increased costs or non-delivery) then it is the responsibility of the EPC contractor and they bear the risk of any associated cost implications.
- One of the drawbacks of an EPC contract is the level of complexity in setting it up. Dependent on the size of the project, contracts can be lengthy and cover huge scope of tasks within them. The layers of legal responsibility at each stage necessitate careful crafting of the contract with professional assistance. Included within them as a minimum are the obligations of both the contractor and the project owner; the expected performance of the contractor; terms for delivery and cost at each stage; sign-off criteria; warranties; liabilities and disputes; changes and termination of contract. Holes in the terms of the contract can lead to huge financial and legal consequences for either party should the project turn sour.
- The project owner has little influence within an EPC project as ownership on decisions such as supplier/equipment type are passed in entirety to the contractor
- One disadvantage is that the cost of an EPC contract is higher. Given the increased risk and responsibility borne by the contractor, costs are often significantly higher to reflect this.
- Highly technical projects may not be suited to an EPC contract as the flexible nature of their project lifecycle may not suit the rigidity of the terms contained within the contract.
Benefits/Drawbacks of an EPCM Contract
- An obvious drawback is the client’s liability and involvement in the instance of any dispute/issue, given that contracts are directly between sub-contractor and project owner within an EPCM contract.
- An EPCM contract allows for greater client influence and overall project transparency, meaning the project owner can influence overall delivery, terms and costs.
- Conversely, this influence can also be a negative, given the additional time and effort a project owner must dedicate within the project decision-making stages.
- Projects necessitating change/flexibility are well suited to EPCM contract terms as they give more opportunity for the project to evolve during its lifecycle.
The individuality of any project will dictate the suitability of contract type chosen – be that EPCM or EPC. On the one hand, EPC projects can be complex to set up and rigid in their approach but, once formed, the clear demarcation of terms and responsibilities affords the project owner assurance that liability does not lie with them and they can take a hands-off, resource-light approach to their project. An EPCM project allows a client-centric approach, where they are able to take more control of decisions within the project and make amends if required, yet with the support and expertise of their engineering contractor. In exchange for this increased flexibility and transparency however there are more client time and resource commitments and they should be prepared to shoulder responsibility when resolving any disputes or issues. Fully understanding the scope, purpose and requirements of a project is key to selecting the right contract type. We can help you not only deliver your project on both an EPC or EPCM basis, but also support you in defining and scoping your project from initiation stage. Speak to our project planning team today
We can help you not only deliver your project on both an EPC or EPCM basis, but also support you in defining and scoping your project from initiation stage.