Introduction & Overview
This blog post is developed from the course material I taught for the first time recently:
I will be teaching the course at least every ~ 6 months this year (2023) and 2024. Not sure beyond that. If you are interested in taking this course, check out the details & schedule here: https://www.meirc.com/training-courses/oil-gas/certificate-engineering-procurement-construction-epc-contracts
I will be developing a couple of other blog posts from the course materials in future too. Engineering, Procurement, and Construction (EPC) type contracts are used for many types of projects, most notably in the energy industry but also chemical, mining and mineral processing, pharmaceutical, and some infrastructure projects. They come in various forms; as I will outline in this article the principal difference is the risk allocation between the client and the contractor. A lump sum turnkey (LSTK) EPC contract is very popular as it maximizes the risk transfer from the client (or “Owner”) to the Contractor.
For some forms of EPC contract, notably Lump Sum variants such as LSTK, there needs to be a level of scope definition, so if this is the preferred approach, then rigorous and careful planning and front-end development is required and is best practice to be in a position to bid and award the contract. However, as explained in the Forms of EPC Contract section below, other forms of EPC contract can help to accelerate the process:
Forms of EPC Contract
Forms of EPC/EPCm (Engineering, Procurement & Construction Management) contracts range from fully reimbursable EPCm contracts where the contractor is paid for his manhours and other costs on a per hour basis and usually the purchase orders for materials, equipment and construction contracts are placed directly in the name of the Owner/client and managed by the contractor on their behalf (1 below) through to Lump Sum Turnkey EPC contracts (4 below) where the contractor takes full responsibility and risk on the outcome of the scope of work under the contract usually including commissioning start up and performance testing of the facility and all materials, equipment and construction contracts are in the name of the EPC contractor.
So-called “hybrid” forms of EPC contract are many and varied, items 2 & 3 in the above table are just 2 examples.
The Risk allocation spectrum for the different forms is illustrated in this diagram:
Risk goes from mainly the Client/Owner, grey on the left to mainly the Contractor, blue on the right-hand side of the diagram.
In the diagram above taken from the course materials, I have highlighted in grey the top 10 key success factors in my opinion for success when selecting an EPC contractor (Please do not just select the lowest price without considering these factors in your evaluation!!). I have left the others there as I had difficulty cutting it to just ten!! These factors are listed below but their relative importance will vary depending on the specific project. I recommend considering them all during the bid evaluation and selection of the contractor and in some cases key Contractor personnel:
Clear Scope Definition It's crucial that the project's scope is clearly defined and understood by all parties. This minimises changes during execution, which can lead to delays and cost overruns. I can’t emphasise enough that a clear scope definition developed through robust front end planning phases (Concept/Pre-FEED and FEED - see the first graphic in this blog post) is the key to success, this also emphasised in a number of eminent books such as:
In the widely recognised book “ How Big Things Get Done: The Surprising Factors behind every Successful Project” by Professor Bjorn Flyyberg and Dan Gardner they emphasise planning should be robust and take the time needed so that execution is fast and smooth. This book has many examples where this was not the case, and the project (often mega projects) failed. This applies to EPC contracting equally.
Similarly, in the classic book on this topic, “Industrial Mega Projects - Concepts, Strategies and Practises” by Edward W Merrow the chairman of IPA the independent project benchmarking & analysis company, he emphasises the need for robust front end planning phase.
2. Risk Management
Risks should be identified early and managed proactively throughout the project's life cycle. This includes financial, technical, environmental, and socio-political risks. Many risks can be managed by the EPC contractor as part of their responsibilities (whatever the contract form), but I recommend checking the understanding during selection of the EPC contractor of the specific risks of the project particularly the ones they are responsible for. Ask for a Project Risk Management Plan with their bid and review it to make sure it’s not just a cut-and-paste generic one.
Tim Lister's famous quote, “Risk Management is Project Management for Grown-Ups” applies. Ensure you (the Owner/Client) and the selected EPC Contractor have robust Risk Management processes in place
3. Effective Communication
Good communication among stakeholders (clients, contractors, suppliers, etc.) ensures that everyone is aligned in terms of expectations and project requirements.
In communication between the Owner/Client and Contractor, clarity and explicit communication are important, for anything that has potential contractual or commercial implications MUST be communicated officially in writing between the authorised representatives of both parties. It is good practice to number correspondence and minutes of meetings.
4. Health, Safety, and Environmental (HSE) Management
Adhering to safety and environmental standards is not only essential for legal and ethical reasons but can also impact the timeline and reputation of a project.
HSE and ESG (Environmental, Social & Governance) performance are publicly stated values of most companies today. During selection rigorously evaluate the Contractors and their teams personal commitment to driving performance to the highest standards if this (as is normally the case) is one of your highest values. Enure they have in place all the work processes, procedures and management plans to manage these key risks and challenges throughout the project life cycle particularly at the facility construction site through to the point of handing care and custody to the Owner’s Operations and Maintenance team.
Food for thought:
Ask the EPC contractors how they plan to drive a lower carbon footprint during the project.
5. Strong Project Management
Effective project management ensures that all aspects of the project, including cost, time, quality, and stakeholder expectations, are carefully managed.
6. Contract Management
Clearly defined contracts that outline roles, responsibilities, payment terms, and dispute resolution mechanisms help in avoiding conflicts and misunderstandings. I will write a separate blog going into contract management in more depth soon.
7. Robust Procurement Process
Having a robust procurement process ensures that the right materials and services are obtained at the best price, quality, and time.
Post pandemic and because of the ongoing Ukraine war there has been quite significant supply chain disruption and risk and consensus is that it will continue for several more years at least.
Typically 60% of an EPC project consists of bought-out goods and services so even under a LSTK EPC contract it is important to ensure the EPC Contractor has a robust and effective procurement & supply chain management process; the Owner should have their own checks and approvals on the process to ensure it is proceeding in line with project objectives.
8. Financial Stability
The EPC contractor must have the financial capacity to fund its operations until it receives payment, which often occurs after substantial milestones or project completion.
9. Quality Control and Assurance
Implementing stringent quality controls and regular monitoring can prevent defects and rework, saving time and money.
The EPC Contractors should be required in the Invitation to Bid to submit a Project Quality Plan that demonstrates a robust QA/QC work process across the full EPC Scope of Work from engineering to commissioning and start-up. This should be assessed as part of the Bid Evaluation and scoring/ranking process.
During execution the Owner should have visibility (make it a requirement under the contract) of the quality process and performance of the EPC as well as it’s vendors and subcontractors.
10. Technical Expertise
Keeping up-to-date with the latest technological advancements and best practices in the industry ensures the project's efficiency and competitiveness as well as ensuring the facility achieves its performance objectives.
Owners/Clients can set their capital works projects up for success by applying these key success factors to the EPC Contractor selection and management. In 2 more related blog posts taken from the course, I will be looking more deeply at the EPC Bid Evaluate and Award process and the post-award EPC Contractor Performance and Contract Management best practices.