It is a common form of contracting arrangement within the construction industry. Under an EPC contract, the contractor will design the installation, procure the necessary materials and construct it, either through own labour or by subcontracting part of the work. The contractor carries the project risk for schedule as well as budget in return for a fixed price, called Lump sum or LSTK depending on the agreed scope of work.
When scope is restricted to engineering and procurement only, this is referred to as an EP or E and P (E+P) contract. This is often done in situations where the construction risk is too great for the contractor or when the Owner has a preference for doing the construction himself.
In an EPC contract, the EPC contractor (EPCC) agrees to deliver the keys of a commissioned plant to the owner for an agreed amount, just as a builder hands over the keys of a flat to the purchaser. The EPC way of executing a project is gaining importance worldwide. But it is also a way that needs good understanding, by the EPCC, for a profitable contract execution. An owner decides for an EPC contract for several vital reasons. Some are:
- The owner puts in minimum efforts for his project and, so, has less stress
- EPC gives the owner one point contact. It is easy to monitor and coordinate
- It is easy for the owner to get post-commissioning services
- EPC way ensures quality and reduces practical issues faced in other ways
- Owner is not affected by the market rise
- Investment figure is known at the start of the project
Besides the plant siting, in an EPC contract the owner will define the following:
- Scope and the specifications of the plant
- Quality
- Project duration, and
- Cost
The cost, that is the price to be paid to the EPCC, will be negotiated and finalised and paid in mutually agreed installments.
Coordination and communication
In an EPC contract, coordination with various agencies is a demanding task, especially in item rate contracts. Often it happens that agencies try to put the reasons of delays etc., on others. The coordination is more difficult during commissioning and post-commissioning times, because each agency tries to correlate its own performance with the others'. It is very likely that, in an EPC contract, the communication channels get overlapped, short-circuited and confused. The EPCC is the prime functionary and so there has to be a conscious effort for clearing the clarification of the subcontractors or by the owners.
Global arena
An EPC contract is a complex phenomenon. It involves various agencies and characteristics (see chart). So the EPC contract, especially in global context, needs thorough understanding. The EPCC must know about the various factors that will affect the working, the results and success or failure of the contract, in global arena. The EPCC must have data and expertise in all the required fields. A thorough knowledge of many aspects is required. Some important areas are:
- Local (where the plant will be located) market conditions for the materials supply and labour availability and performance
- Local code, statutory etc., requirements
- Availability of local supervisory personnel
- Availability of local and global engineering services
- Local and global contractors, their experience and performance
Cost variation
Another important factor that can affect the EPCC's performance is cost variation. An EPC contract has no price escalation clause. The cost variation to the EPCC can occur on two main counts, viz.:
- Foreign exchange fluctuation
- Variation in the prices of materials and labour and services
These are the inherent risks and the EPCC must be careful. The owner has committed a fixed price and is free from the variation of market prices. The EPCC, in turn, too, at the time of the commitment to the owner, must have a similar agreement with various agencies, but the scope and quantities of the services must be known.
Monitoring by owner and EPCC
The following points will be helpful to the owner for monitoring the project:
- Define guarantees well
- Define scope and quality very carefully
- Define milestones meticulously
- Have the LD/penalty clauses well-defined
The handling of an EPC contract is a complicated and complex phenomenon for the EPCC management. Some important points to know are:
- Have payment terms very specific
- Have similar terms and conditions regarding quality, guarantee etc., as demanded by owner's with various vendors
- Do not keep terms open-ended
- Coordinate vigilantly to reduce chances of errors at site
Regarding owners
The owner must clearly define the project as any changes after the EPC contract has been signed will be costly. In order to ensure quality, the owner must also select a reputed and experienced EPC contractor. The owner should also utilize a third-party or in-house consultant to verify the design of major structures and inspect the main plant machines.
EPC / Инжениринг
