EPC / EPCM Definition & Comparison

Many different terms are tossed around the construction industry loosely describing the different methodology used to design and construct new facilities and turnarounds. Unfortunately, there are no tried and true definitions for the different methods and numerous variations of each of the most popular methods.

Determining the correct form of construction contract to pursue can have a great effect on the cost and risk associated with the construction project. The cost of construction varies inversely with the amount of business risk the “owner / financers” are willing to accept. The less business risk the owner wishes to assume, the higher the cost of construction and management. This follows the “risk-reward” motto for business.

The two most common types of construction contacts are EPC “turn-key” and EPCM. Each of these methods have variations that can be adapted to each project as needed; example (EPCC Engineering, Procurement, Construction, and Commissioning), etc.

EPC (Engineering, Procurement and Construction): means the company is contracted to provide engineering, procurement and construction services by the owner. Think Design & Construct style contracts, where the project is largely Contractor managed and the cost risk and control are weighted towards the Contractor and away from the Owner. The EPC contractor has direct contracts with the construction contractors.

EPCM (Engineering, Procurement and Construction Management): means the company is contracted to provide engineering, procurement and construction management services. Other companies are contracted by the Owner directly to provide construction services and they are usually managed by the EPCM contractor on the Owner’s behalf. Think Professional Services contracts, where the project is largely Owner managed and the cost risk and control is weighted towards the Owner.

Included is a simplified Chart showing the differences in the type of contracts and how each would differ under the same situations: The list below is not a complete list of differences between EPC and EPCM contracts but it does address many of the major contractual differences. The way each of these issues is handled can be modified during contract negotiations to suit the situation and overall goals of the project.

Task / Issue	EPC (Engineering, Procurement and Construction)	EPCM (Engineering, Procurement and Construction Management)
Equipment Supply Contracts	Negotiated & Signed solely between EPC contractor & Supplier	Negotiated & signed between Owner and Supplier /with EPCM contractor’s advise and assistance
On-Site Construction Contracts	Negotiated & Signed solely between EPC contractor & Supplier	Negotiated & signed between Owner and Contractor /with EPCM contractor’s advise and assistance
Supplier Selection	Suppliers chosen solely by EPC contractor with no input from Owner	Suppliers chosen by mutual agreement of Owner and EPCM contractor
Scope of Supply	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 contractor’s sole contract with Owner and Owner’s inability to “Shop Around” for multiple quotations from independent contractors / suppliers	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
Equipment Supply Warranties	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 contractor’s advice. Issued directly to Owner from the suppliers and contractors
Process Warranties	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 (Usually in the form of a performance Bond)	Warranties negotiated individually with each supplier by Owner with EPCM contractor’s advice. Issued directly to Owner from the suppliers and contractors (Usually in the form of a Performance Bond)
Construction Site Safety (General Liability Insurance, Workman’s 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 project	Permits are issued to the Owner directly with EPCM contractor assisting in filing the necessary paperwork
Project Budget Cost Overruns	The cost risks for a project are borne by the EPC contractor. Any cost overruns, for equipment and/or services within the EPC contractor’s 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.
Project Budget Cost Savings	The cost risks for a project are borne by the EPC contractor. Any cost savings, for equipment and/or services within the EPC contractor’s scope of supply, are for their own account and are not passed onto Owner unless contractual agreements to the contrary	The cost risks for a project are borne by the Owner. Any cost savings, for equipment and/or services are for the Owner account ie. Equipment/Services bids are returned lower than budgeted.
Project Day-to-Day Expenses	The day-to-day expenses for the project, within the EPC contractor’s 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 pre-determined quantities, without Owner’s need for intervention). Usually a small fund is established by Owner for day-to-day expenses
Project Financing	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 (LC).	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 Owner’s behalf. This allows Owner to have partial financing in place at the onset of the Project with the remainder available as needed, dependant on contractual requirements.
Legal Cost	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 contractor’s 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 suppliers / contractors.(Usually a longer process than EPCM legal actions)	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 process than EPC legal actions)
Administration	Owner’s 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 Owner’s organization (Hands off).	Owner’s administration costs are higher with EPCM contracts. Substantial staffing levels needed to assist/compliment EPCM contractor in administering/monitoring project. Promotes “ownership” feeling within Owner’s organization. Project staff often transferred to operational staff after project completion.

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 Owner’s 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 project’s 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 project’s 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.

EPCM Advantages:

Ø Lower Overall Cost

Ø Staff’s Sense of Ownership

Ø More Control over Process

Ø Better for less defined projects with anticipated changes to scope of supply

Ø Less Legal Litigation (Identify issues early and remedy situation before larger problems arise)

Ø Owner’s Financing Flexibility

These are just a few of the advantages of EPCM style of construction contracting.

EPC contracting has it place in the construction industry as well. Under certain situations, it makes better sense to use this type of construction contracting than other methods.

EPC Advantages:

Ø One Stop Shopping “One point of Contact”

Ø “Hands off” approach to project

Ø Minimal Staffing Requirements

Ø Minimal Legal Risk

Ø Best for Well defined projects with Detailed Engineering Complete before EPC Contractor selected (Minimal Unknowns).

As stated before, these construction contract methods can be tailored to the individual projects / owner’s needs. Some companies can go as far as breaking up each portion of the EPC / EPCM (Engineering, Procurement, Construction / Construction Management) to separate companies. One company can do the engineering; another can do the procurement, while still another can do the construction / project management).

Each company must decide for themselves, with the advice of legal and financial counsels, as to which method of construction contracting is best for their particular project and situation.