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. In an EPC contract, coordination with various agencies is a demanding task, especially in item rate contracts. Often it happened that agencies try to put the reasons of delays etc. on others.. The EPCC is the prime functionary and so there has to be conscious effort for clear messages. Engineering procurement and construction (EPC) contracts are the most common form of contracts used to undertake construction works by the private sector on large scale and complex infrastructure projects, such as power plants, petroleum and LNG terminals, steel mills, Roads etc. Construction insurance has become more expensive due to significant losses suffered on many projects and the impact on the insurance market.

However, because of their flexibility, the value and the certainty, sponsors and lenders derive from EPC contracts, the author believe EPC contracts will continue to be the predominant form of construction contract and will be used on large scale infrastructure projects in most jurisdiction.

EPC contracts vary on the basis of the assignment of responsibility and related penalties.

EPC in National Highways

The National Highway Development Programme, for which National Highways Authority of India is the nodal agency, is perhaps the biggest episode of India’s infrastructure development story. It is estimated that upto 2012, an investment of Rs. 2,20,000 crore would be required to upgrade India’s national highway network covering nearly 66,000 km. what is most encouraging is that what started off as a ministerial project, financed by the government and implemented through cash contacts, is now moving to be an inspiring example of the public-private partnership philosophy.

From Construction Contracts to EPC–WHY

In recent years, the construction industry is making a very vital and visible shift from “owner managed construction projects” to EPC projects with independent but coordination disciplines of construction. The EPC contractor takes the responsibility of completing the project at a given cost and time frame and acts as a single point of interface between the promoter and all other agencies connected with the project. EPC contracts vary on the basis of the assignment of responsibility and related penalties.

Contracts as such can be classified into the followings:-

EPC, Lump Sum Turnkey, Engineered Packaged Route, Item Rate Contract etc.

The most modern variation is called EPCM that is engineering, procurement construction and management. On a global level, construction industry has completely adopted the EPC contracts and the EPC contractors have limited the otherwise predominant role of engineering consultants. These EPC firms are ready to take the risks associated with managing a project and posses procurement and project.


Construction and EPC

Construction is a business sustained by money advanced by clients and progress payments made during the course of the project. Compared to this system, EPC is governed by project finance, deferred payments and equity stakes, organized up front by the contractor until the completion of the work and commissioning to the satisfaction of the client.

In an EPC contract, the payments may even be made in a phased manner as per agreement between the parties, based on pre decided milestones, in short, other money finances a general construction where as an EPC project is financed by the contractor’s own funds or what he will raise upfront based on the contractor’s core competence and financial strength. Construction is a self-financed business with advances secured under various heads before the start of construction and during the course of project execution.

 Types of EPC Contracts

EPC contracts may vary in the basis of assignment of responsibility and related penalties. The relationship between different constituents of the industry is very flexible as shown in the diagram below.

Based on these linkages constituents, various project delivery mechanisms have been devised. The size and nature of the project also influences the choice of the project delivery mechanism. The different types of contracts are as given here:

• Engineering, Procurement and Construction (EPC)
• Complete single point responsibility
• Fixed time fixed price contracts, heavy penalties for non-performance
• Escalation possible by mutual consent
• Most popular for power projects in the range of USD 0.5 to 1bn
• Lump-sum Turnkey (LSTK)
• EPC with no scope
• Preferred for power and industrial with projects in the range of USD 0.5-1bn.
• Engineering Procurement Construction Management (EPCM)

Contractors can also help to highlight potential problems associated with the design obligations, the responsibility for which such contractors will ultimately bear on EPC Turnkey projects. Furthermore, contractors’ input into EPC turnkey systems means a single team both to design and to construct projects bringing normally distinct specialists into a cooperative relationship, it being the intention of all concerned that design integrated with and overlapping construction should lead to cheaper and speedier implementation.

Since the delivery schedule for completing the project is fixed for an EPC project by the EPC contractor, it reduces the chance of any time over run. A big advantage of EPC projects is that, the procurement and the engineering activities can take place simultaneously resulting in the reduction of overall delivery schedule.

The EPC contractor provides comprehensive guarantees to the owner, which includes mechanical warranties, quality of workmanship and process guarantees capacities and capabilities, cost effective productivity in some cases.

EPC Construction Risk Management

Often EPC construction contemplates a turnkey approach to project delivery. In other words, the project owner or employer will look to the EPC contractor as the single point of contact for all facets of the project, from basic design through commissioning and start-up of the facility. EPC projects offer a mutually beneficial and exciting form of project delivery for both the owner and the contractor. But, with the EPC contract come many new risks that are often severe due to the complex nature and high cost frequently associated with this type of project. Understanding these risks and some of the other unique characteristics of EPC contracting its critical to a successful project where both the owner and the contractor obtain the high rewards for the risk.
Financing Stage

The employer has to achieve financial closure, which involves the promoters brining in their own funding in the shape of equity as well as organizing loans. This should ideally precede or proceed with parallel with the EPC negotiation process.

Bidding Award of Contract

Having made a decision to benefit from a contractor’s expertise and experience by selecting the EPC Turnkey approach the Employer, usually in collaboration with his chosen consultant, will, first of all, express his requirements in the form of a design brief. The consultant, normally employed to oversee the project, advises the Employer from the conceptual stage of the project and is then involved in expanding the brief in to the more explicit “Employer’s Requirements”’ taking into consideration, up to what stage it has been decided that the design responsibility should be taken over by the successful contract.

Negotiating Stage

The consultant incorporates the employer’s requirements into the bid documents and brings out a notice for prequalification. This is done so that only established parties are short listed as bidders. Thereafter, a notice inviting tenders (NIT) is issued by the consultant on the employers’ behalf. The short listed contractors are then required to submit a two part proposal. The technical part contains details of all deliverables and processes. Those technical bids that are found satisfactory are put through the commercial bidding process. The price of the bids finally determine the contract award.

Contract Agreement

After the contract has been awarded, the two parties, that is, the contractor and the employer, sign the contract agreement. The contract includes the following aspects to be covered.

The time and the mode of payment of the works

It also consists of the warranty terms and tenure in addition to the damages that would be payable if the contractor deviates from the contract in terms of specified design or commissioning schedule etc.

Intricacies Involving Handing Over Incomplete Design

However, as normally happens in major engineering contracts, by bid stage the Employer’s consultant will have already prepared at least part of the design and when the transition of responsibility for design to the contractor occurs, all the interconnected parts of the project might not necessarily be at the same stage.

Design and Manufacture of Equipment

This is a vital aspect especially in case of power projects, which have been discussed in this study. Once the contract has been signed, the selected EPC contractor assumes his responsibility for satisfying employer’s requirements. Verifying does this first the incomplete bid package or basic design and then expanding this design into a complete description of the required project in the form of residual and detailed design, engineering drawings, diagrams, specifications, purchase orders and other specified matters.

Procurement

After the completion of all design related parameters, the procurement process begins. The contractor is responsible for supplying all the equipment and procuring all the equipment from the vendors. In this process, the EPC contractor also assumes responsibility for inventory and materials management.

Procurement becomes important because it is here that project management can be most effective in cutting time without compromising quality. For this, either the EPC contractor puts together a separate team or hires a project management.

Construction

Once the project and related subsystem have been designed, manufactured and supplied, construction begins. This includes pre-installation. Civil construction as well as installation of the project at the identified site.

Commissioning and Handing Over

This is the final stage of the EPC contract. Once the pre-commissioning and commissioning trials of the individual equipment and of overall systems are complete, the contractor has to commission the contract as per the term of the contract

The Time Aspect

Turning now to the aspects of time, both the Employer and his consultant ought to be very much aware that in performing their consenting functions under the Contract any review of the contractor’s design development must be done without delay, the Employer, and not just the contractor, having undertaken to perform his obligations in order to meet the time schedule. As referred to above major problems occur when Employers arid their consultants indulge themselves in a design “approving “exercise’ exhaustive comments, if any, strictly limited to conformity with the agreed Requirements and any other contractual or legal right, have to be made and dealt with efficiently to avoid endless and unnecessary reconsideration and to allow the contractor to respond to any legitimate needs in a timely manner.It is clear, therefore, that any review and comments by the Employer and his consultant ought to be carried out bearing in mind the level of information supplied and the strict time limits imposed by the Employer himself and that decisions to freeze any or all aspects of the design, engineering and ultimately procurement cannot always be mad.