EPC Project Management in 2023: Phases and Challenges

In project management, ‘EPC‘ stands for Engineering-Procurement-Construction. EPC is a type of contract where the owner trusts the contractor with a project in its entirety. They do the Engineering from concept to detailing. They procure all the materials. And, they do the construction as well. The job of the project owner is to inspect whether the contractor delivers the project as per the contractual requirements, timeline, and desired level of quality. EPC project management is mostly the job of the contractor as most of the risk is on their part.

Table of Content

• What is an EPC contract?
• Why do Owners Prefer EPC Contracts?
• Phases of an EPC Contract
• Framing an EPC Contract
• Challenges in EPC projects for the Contractor
• Risks involved in an EPC project for the Owner

What is an EPC contract?

An EPC project or EPC contract means the project is in the scope of the contractor in its entirety. The owner would provide only the features of the final product and award the contract at the agreed price. In turn, the contractor would do the design to achieve the final product, procure the materials so required, and construct the project for the owner. We call it often a ‘turnkey construction contract’, or simply, a ‘turnkey contract’.

Why do Owners Prefer EPC Contracts?

There are two major reasons why owners prefer EPC contracts.

EPC contracts are risk mitigation tools for the owner. By an EPC contract, the owner of the project transfers the complete risk to the contractor, as they are the single point of contact for the project. The EPC contracts are designed in such a way that the construction risk is chiefly on the contractor and they must deal with it for an effective solution to any problem arising out of the process. The contractor is entitled to the price only at which the owner has awarded the project to them and they must include every feature including the risks involved.

Another reason is the preference of the project financers. Most financiers like EPC contracts as they have fixed prices and lesser points of contact. This means less risk for the project financers and the chance of sanctioning a loan for the project is always higher.

Phases of an EPC Contract

The key stages of the EPC project management process include:

• Planning
  • involves basic planning, detailed planning, scheduling, resource planning
• Design
  • involves basic Engineering, Detailed Engineering, detailed design, construction drawings
• Procurement
  • involves logistics, transportation, purchase, material receipt, storage
• Construction
  • involves the construction of Civil, Mechanical, Electrical, Electronics, and instrumentations as per the requirement of delivering the final product
• Commissioning and handing over

For effectively managing the EPC projects, the Project Management Teams must be vigilant in all the stages and sub-stages as we have mentioned above.

Framing an EPC Contract

The EPC project management process starts from the framing of the contract. The framing of an EPC contract is different from an item rate or cost-plus contract. The major features are as below.

The Product Statement

EPC contracts focus on the final product in detail. For example, the primary product statements are like this, which are also EPC Project examples:

1. Construction of a 2×600 MegaWatt thermal power plant
2. Construction of a metro-rail network connecting two specific points in a city with 10 intermediate stations at pre-finalized locations
3. Construction of 2000 bedded hospitals with specific facilities
4. Construction of a coal handling plant to handle 5 Million Ton coal per year

Under the above product statements, there are often further details of the features and quality parameters. For example, in the metro-rail project, the owner may want the external surfaces of the stations to decorate according to the state or country’s local cultures. Or, there could be a requirement of a staff quarter to accommodate the owner’s 100 staff along with the requirements of a habitat. As another example, there could be a requirement for a specific super specialty treatment facility for the patients in the above example no. 3 (2000 bedded hospital).

The details are designed more according to the specific need of the project and the owner from a service or business point of view. These must be part of the contract.

Read More: Difference between Mobilization advance and Secured advance

Quality Parameters for EPC Project Management

The required quality parameters must be part of the contract while framing it. For example, owners usually decide the brands of the primary construction materials that the contractor can use in the project. Also, the contract defines the type and frequency of the materials (raw and final) in the contract to ensure the quality of the work in an EPC project.

To ensure quality control, the Project Quality Assurance Plan, Field Quality Plan, and the report system to monitor quality control become parts of the contract.

Guarantees

Normally, the contractors provide a performance guarantee to the employer at the beginning of the project. The performance guarantee can be in the form of a Bank guarantee or otherwise, but the focus is to protect the employer from any non-performance of the contractor. The value varies from 2.5% to 10% depending on the importance of the project and the probable impact of the delay in the completion of the project.

Payment Terms

The payment of an EPC project is based on the milestones. For example, in the case of a building project like a Hospital, milestones could be:

• Mobilization at the site (on submission of bank guarantee by the contractor)
• Completion of design
• Obtaining the required permissions
• Construction of the foundations
• Subsequent slabs
• Completion of the blockwork
• External facades
• Internal finishes like tiling, door-window, painting, etc.
• MEP works
• External development works like drains, roads, etc.
• External sewerage, treatment plants, etc.
• Substations, Diesel generators, Transformers
• Installation of the medical equipment
• Commissioning and handing over of the project with all functionalities
• Post-construction maintenance (if part of the contract)

Further to the above steps, there could be further, structure-wise, and micro-task-wise intermediate milestones to facilitate the contractor with the cash flow. These milestones can vary from project to project depending on the type.

Liquidated Damage

The contract specifies the penalty for the contractor if they could not perform by the fixed timeline as per the contract. This percentage is for the intermediate milestones as well as final completion. The percentages vary from 5% to 10% depending on the impact of the delay.

Force Majeure

Usually, the force majeure conditions are the same for an EPC contract as for any other kind of contract. The contractors get the time extension for any such event but not the cost compensations.

Challenges in EPC projects for the Contractor

EPC projects are designed to transfer the risk from the owner to the contractor. The EPC Project management process involves the proper identification of all the challenges and taking apt action at the right time. The following are the major challenges involved in an EPC contract for the contractor.

Risks of Design Errors:

In contracts other than EPC (Engineering Procurement and Construction contract), where the owner gets the design done through other agencies and construction through contractors, the contractors are not responsible for any design error. Generally, the cost of getting the design done through an agency is too less than any probable rectification cost arising out of the flaws in the design. Hence, the owner’s risk is not covered for any major design error. On the contrary, when the owner gets into an EPC contract, the design is also in the scope of the contractor. Now the contractor is end-to-end responsible for any kind of errors covering most of the risk of the owner.

Risk of Errors in Estimate:

On getting the scope document, the contractor is required to transform every feature required by the owner into items of work. To accomplish this, the contractor needs to perform the detailed Engineering of the project and find out the quantum of the work that they must execute to deliver the project.

For example, in the case of a 2×600 MW Thermal Power plant EPC contract, the detailed Engineering involves finalizing the power plant system, the equipment required, and the structures to be built up. The next step is preparing the design drawings and determining the items involved, along with the quantities.

Any underestimation in this step will lead to cost overrun for the contractor, and they will face a loss of margin. Also, overestimation may put the contractor out of business as their bid cost will be high in respect of the competitors. Hence, it is of utmost importance to determine the optimum scope in terms of quantities in view of a correct estimate.

Risk of Construction Delay and Roles of EPC project management

As the design and supply of all the required materials are in the scope of the Contractor the risk of construction delay is in the account of the Contractor. The major types of delays in the scope of the contractors in an EPC contract include (but are not limited to):

• Delay in finalizing the Architect / Structural Consultant for the project
• Delay in finalizing the prime equipment or service providers (in the case of a Power Plant it could be the supplier of the major equipment, whereas, in the case of the Hospital, it could be the medical equipment suppliers, it varies from project to project depending on the type of the project).
• Delay in performing the soil investigation and pile load tests
• Delay in the design process by the Architect/Consultants and release of drawings/specifications
• Delay due to erroneous design and redesign
• Delay in the procurement of materials and finalization of the vendors
• Delay due to error in the construction and necessary rectification
• Delay due to unprecedented price hike of any major material (and the contractor running short of funds, as they have fixed prices)
• Delay due to poor site management in terms of safety and quality control
• Delay due to poor project management process and inadequacy of skills
• Delay due to poor coordination within functions leading to unavailability of all required resources at the apt time
• Force Majeure events – in this case the contractor is entitled to get a time extension but no compensation of additional cost incurred

Effective EPC project management involves managing all the above points and on-time action to address such delays.

Risk of Cost Overrun

One possible reason for the cost overrun for the contractor is the erroneous estimate of the quantities of the items involved in the project, that we have discussed. Another reason is not being able to predict the price hike of major construction materials correctly. This can be a result of inefficient bidding performance and the unavailability of the required experience and expertise in the type of project.

Also, due to volatility in the market, the estimation of the cost increase is often unpredictable, at least while doing so at the time of bidding for the next 2-3 years of project duration.

How The Contractor Can Mitigate Their Risk?

As the risk is higher at the contractors’ end, to mitigate such risks the contractor must take proper action from the beginning. This is a continuous process that involves:

• Robust Estimate with minute detailing
• On-time selection of prime vendors based on reputation and performance
• Efficient planning with a detailed Master Construction Schedule
• Tracking of tasks and on-time action at even small delay events
• On-time, error-free design process
• High-level Supervision efficiency for safety and quality
• Efficient risk identification and monitoring mechanism

Further Reading: Top 15 EPC Construction Companies in the world (By Revenue)

Risks involved in an EPC project for the Owner

There are some risks on the plate of the owner, too. The owner’s (or employer’s) responsibility includes providing the encumbrance-free land to the contractor. Also, they are usually responsible for obtaining necessary permissions e.g. Environment clearance, Fire clearance, Forest clearance, Municipal clearance, Aviation clearance, etc. as required by the law of the land, hence the risk of delay on account of these reasons is in the ambit of the owner.

Although, EPC mode-1 type contracts now include the permissions of various authorities in the scope of the contractor. This is further reducing the risk to the owners and making it further favorable for them.

Another disadvantage of EPC projects is that the owners have very less control over the construction processes. Owners can avoid this by framing the contract conditions of quality control mechanisms and implementation of project monitoring systems.

EPC projects are expensive as the contractors face high risk in these kinds of a project. Naturally, the contractors intend to include high contingencies in the price to avoid financial losses. Project financers also need to check the criticality of the risks involved and the contingencies considered in the contract price to ensure the viability of the project.

If you have a question about the EPC contracts please comment here so that we can get back to you.