EPCM: Win-win procurement

In the construction and engineering industry, fashions change. There was a time when the dominant approach to procuring international process plant and engineering projects was engineering procurement and construction contracting (EPC).

However, over the past few years there has been a steady growth in the number of projects procured through management-related procurement routes, such as the engineering procurement and construction management model (EPCM).

At the same time, in the UK, “construction management” has been out of favour following high-profile problems on projects such as the Scottish parliament building. It is worth considering the reasons for the contrast in the international arena.

Crucially, EPCM contractors do not enter into contracts with the trade contractors and suppliers

EPCM procurement has been popular for a long time in the mining and oil and gas markets. Its recent growth in popularity is partly driven by the demand for international construction and engineering services in markets produced by the commodities boom, alongside resistance from contractors to “high-risk” fixed-price procurement routes such as EPC. The lack of bank-financed projects since the credit crunch may also be a factor, as funding bodies have traditionally preferred the alleged certainty of lump-sum EPC contracts.

With many UK engineering and construction companies now seeking work abroad in high-growth locations, it is a good time to consider the nature of EPCM procurement.

The key to understanding EPCM contracts is that, at their core, they are a form of construction management contract, where the EPCM contractor carries out engineering and manages and supervises the works, but undertakes no construction. In contrast, an EPC contractor delivers a complete, functioning facility at a fixed price by a fixed completion date, with significant financial implications if it fails to do so.

Under EPCM, the contractor:

• provides engineering and design services, usually producing a basic design, which is sometimes referred to as the front-end engineering and design stage;
• procures contracts with trade contractors and suppliers;
• manages the construction phase of the project by co-ordinating and supervising the above.

Crucially, the EPCM contractor does not enter into contracts with the trade contractors and suppliers - they are engaged under direct contracts by the employer.

As might be expected, the risks for an EPCM contractor are significantly less than that of an EPC contractor for the following reasons:

• the employer enters into direct contracts with the trade contractors and suppliers, and has to manage the interface risk between such parties;
• the EPCM contractor (usually) does not have any responsibility for delay liquidated damages, except if there is a late release of design or engineering information;
• as the EPCM contractor does not guarantee the fixed price of the project, the employer will bear the risk of cost overruns;
• The EPCM contractor will only have responsibility for performance failure arising from failures in its own services (and even this liability is likely to be capped).

From the employer’s perspective EPCM provides increased flexibility to manage change and may have a lower cost profile than the EPC route as EPCM contractors do not have to price large risk premiums. It can also offer programme savings, as trade contractors and designers can be mobilised earlier in the project and the tendering process can be shortened.

Most EPCM procurements include management tools, such as bespoke incentive schemes where the EPCM contractor may have a target cost for its own fees, the overall project budget and against the overall project programme. It is essential that these arrangements are carefully drafted to provide an effective and workable mechanism.

From an employer’s perspective, successful use of EPCM requires more than just a well-drafted incentive scheme. EPCM projects require a sophisticated and well-resourced employer team that is experienced in selecting and managing an EPCM contractor, and who can drive the delivery of the project.

Jerome Dunne is a senior associate at Norton Rose