When would you select EPCM for a project?

Introduction

Our article What is EPCM? set out the contractual structure for an EPCM contract. A number of large projects that may have more traditionally been procured through an EPC procurement method are considering EPCM as an alternative method for procurement (see our article EPCM – the future of mega projects? which investigated some of the reasons behind this trend).

Reasons that are typically given as to why an EPCM procurement is being considered for a project are:

• Speed and Flexibility: When compared to an EPC procurement method, EPCM offers a greater degree of flexibility, by allowing some activities to be undertaken in parallel to each-other (for example, design on some parts of the project to be developed, whilst some stand-alone works packages are being undertaken or early materials orders placed).
• Potential access to the project’s risk premium: as investigated in our article Comparison between EPCM and EPC, where risks are being placed on a Contractor through the contract, this will attract a risk premium. For some projects and Clients, paying this risk premium may not offer best value.
• Additional Client control: as the Client will directly appoint the works contractors in an EPCM approach (instead of appointing a single main EPC contractor who then self-delivers or subcontracts the key works packages), the Client will have a direct contractual relationship with its key supply chain. In certain projects Clients may consider this closer direct relationship with its main supply chain to be advantageous as it affords the Client additional control over the scope and performance of individual works contractors which may be particularly important as the overall project scope is developed.
• Lack of market interest for an EPC based structure: some projects where the risks are uncertain or perceived to be high risk, may be unattractive to bidders when structured as an EPC contract.

Selecting an EPCM Contract for a project

There are many different types of procurement which could be adopted for an individual project, all of which have advantages and disadvantages but some of the issues to consider when reviewing EPCM as a possible procurement method include:

1. Impact on project financing

EPCM contracting involves multiple contracts with increased risk through contractual interfaces, lower levels of liability and limited recourse against individual works contractors. See for example the impact on performance guarantees in our article Performance Guarantees under an EPCM Contract. As a result an EPCM structured procurement may be unattractive for some project finance structures. The impact of selecting an EPCM structure on your project finance plans should therefore be considered as part of the procurement strategy.

2. Realising the perceived benefit

Understanding the key drivers for selecting an EPCM procurement is a useful tool for challenging whether it is appropriate procurement method for your project:

Lack of market interest for an EPC based structure

Speaking to potential bidders to understand how the contract could be structured to make it more attractive to them is often a helpful process. Conversations with multiple bidders may reveal a common trend as to why the procurement is perceived as unattractive. For example, the project contains a number of undefined risks that the Contractor is being asked to accept in the contract structure - there are lots of risks that will be specific to an individual project that might fall into this category. For example: multi-disciplinary projects involving specialist work elements (eg specialist state of the art process or M&E works) in relation to which an EPC contractor may not be comfortable accepting performance risk; existing facilities that require a tie-in or working on a constrained site or other potential access issues. Also, the appetite of EPC contractors for accepting risk when considering bidding for major projects may be materially reduced in a buoyant contracting market as they may decide for corporate reasons to pursue projects with less perceived risk.

One option may be for some further work to be undertaken to better understand the relevant risks and for this information to be provided to the bidders. For example, further site investigation surveys or production of a constructability report to understand the options available for erection on a constrained site.

Another option may be for some packages of works to be undertaken as standalone packages in order to reduce or remove the risk of particular scope items that the EPC contractor is either not able to accept responsibility for or alternatively would price a significant risk premium for. For example, site preparation or enabling works on operational sites could be separately procured by the Client outside of the EPC contract scope. However, in removing any scope from the EPC contract, Clients should consider the extent to which this may potentially reduce the coverage of any performance guarantees given by the EPC contractor.

Other options may be for provisional sums to be included in the Contract, together with early investigation of the risks that have resulted in a provisional rather than a fixed sum.

It may therefore be possible through a combination of different steps to make the project more attractive to bidders through a means other than moving to an EPCM structure (albeit EPCM might still be an appropriate procurement choice for your project for other reasons).

Reducing project costs

An EPC contractor offers a wrap, over and above the liabilities that their sub-contractors have. This means that they typically have higher levels of liability than their individual sub-contractors have, for both delay damages, performance guarantees and overall liability for breaches. They also have overall single point responsibility for all of the works and take responsibility for supply chain issues. These risks have to be factored into the price, giving an EPC contractor’s risk premium.

For Clients undertaking multiple procurements, consideration of an EPCM contracting structure can be attractive as it potentially removes some or all of the EPC contractor’s risk premium from the project costs. However, this needs to be balanced with the additional costs to the Client if and when these risks arise on an individual project – including the potential significant interface and programme risk being transferred to the Client and the potential need to bring multiple actions across works / EPCM contracts with lower levels of liability.

When considering starting a project on an EPCM basis, it is important that a strategy for the management of interface risks is developed by the Client and built into the packaging structure and contracts, eg through the development of project wide RACI or scope responsibility schedules for incorporation into the works / EPCM contracts. The impact of the removal of the EPC “wrap” should also be considered including the impacts on the mechanics for the warranty periods and defects rectification – please see our article Performance Guarantees under an EPCM Contract for further guidance.

In addition, the way in which the packages are bundled for an EPCM can erode some or all of the expected savings, as the individual packages may also have risks that need to be priced in by the relevant package contractors.

Project speed

One of the advantages that is often referred to for an EPCM contracting approach is the ability to “get away” early packages. For example, site preparation.

This arises out of the EPCM contracting structure as there is no need to have a fully detailed specification identified at the start of the project enabling the EPCM work package contracts to be awarded sequentially as the project scope is developed. As a result, the award of the EPCM works contracts for early packages can be prioritized.

However, understanding what decisions have yet to be made, including on the required project scope, and whether they could require an “in-flight” early package of works to be adjusted is key to ensuring that this doesn’t result in any time savings being lost.

Conclusion

When it comes to contracting strategies for large and complex construction matters, a “one size fits all” approach will not work. An EPCM contracting approach is becoming increasingly popular as a procurement method but typically it can be an inherently higher risk method of procurement for Clients due to the dividing of responsibilities and increased interfaces. However an EPCM approach can provide significant flexibility, control and programme benefits for Clients in procuring Projects . As is the case with every major procurement, the Client must clearly define and consider the key risks involved with delivering the project and its own priority business objectives, in order to evaluate whether selecting an EPCM contracting approach would most appropriately meet its project requirements.