Mark Stockman | Frantz Ward
Most of us involved in the construction industry are familiar with the Design-Build model of project delivery, and how it differs from the “standard” Design-Bid-Build model. But increasingly certain industries are embracing a slightly different model – the Engineering, Procurement, and Construction delivery model, or EPC for short.
What is EPC Contracting?
EPC contracting is similar to Design-Build in that an owner has a single contractual relationship with only one party – the EPC contractor, who has sole responsibility for the design and construction of the owner’s facility. But EPC contracting goes beyond Design-Build in that it allocates far more responsibilities to the EPC contractor than even a Design-Build model would, permitting the owner to merely specify the desired outcome and generally leaving it up to the EPC contractor to deliver a project that meets the owner’s criteria. This model is increasingly being used in industrial process and energy production projects (including solar and biogas production) where what the project ultimately produces is more important to the owner than how the project achieves these goals or what the project looks like.
How Does it Work – Benefits to Owner and Contractor?
In an EPC project, the owner typically provides a detailed set of requirements for the ultimate performance of the project. For example, the owner may require the project with an input of “X” deliver an end product with “Y specifications” with a required efficiency of “Z”. In other words, the owner may specify that it will be converting one product (say, natural gas, sunlight, or farm waste) into another product (electricity of a required amount per time period) with a requirement that the process meet a stated minimum efficiency in said conversion. It is then up to the EPC contractor to determine how to reach these goals, what equipment to purchase, how to install it, and how to operate the facility to get the owner their desired result. The finished facility is more like a product than a custom-built building, and the owner’s major concern is just that the facility works as desired, now how the decisions were made to get to that result. The final product is delivered fully completed, tested, and up and running in a “turnkey” status, where all the owner needs to do is supply its own raw materials and staffing to run the project.
Owner Provides Performance Criteria and Contractor Provides “Turnkey” Project
From an owner perspective, there is a lot less for an owner to do. The owner will need to provide specific details as necessary regarding the desired performance parameters, required output quality and quantity, life cycle cost requirements, completion schedule, project warranty requirements and the like. The EPC contractor will take these criteria and return a complying facility and may even provide training to owner’s employees as to how to operate the facility to ensure the designed performance is continuously met. The owner should take the time to fully understand its real, bottom-line requirements and ensure they are met, but also must know when to let go and allow the EPC contractor to make decisions so long as the criteria are met. The overall schedule may be quicker and compressed, as the EPC contractor usually will have significant experience in delivering facilities in the subject industry and may be able to know exactly what equipment to order ahead of time while the project itself is being designed. The owner may ultimately have less input, but also will waste less time on administrative tasks and reviewing the EPC contractor’s design and work along the way.
EPC Contractor Has Complete Control of the Project
The EPC contractor will be solely responsible for engaging any architects, engineers, consultants, and others needed to conceptualize and design the facility. They will be solely responsible for sourcing the equipment needed to build out the process and may have long-standing supply sources that can deliver quickly. The EPC contractor will then fully construct the project, get it up and running, test it for all required performance and efficiency requirements, make sure the output is as the owner desires, and potentially even train the owner’s staff. In a perfect project, the facility will be up and running at capacity, and the EPC contractor will simply turn the functioning project over to the owner in a fully functioning capacity. The EPC contactor will have more control over suppliers, supply chain sources and timing, than even in a standard design-build project. However, together with this flexibility comes increased risk, as essentially all risk ultimately falls on the contractor, and there may be liquidated damages agreed to if the project is not delivered on time or does not ultimately meet the required performance criteria – and the costs of making the project work as promised will all fall on the contractor.
Premium Price but Minimum Disruption to Owner
EPC projects are most often delivered for a fixed price, allowing the contractor to cover its heightened risk by increasing the price to account for these risks, but the owner benefits from having a known price ahead of time, with little room for price increases or changes do to design or construction errors or omissions. The parties may negotiate a “cost plus with guaranteed maximum price” pricing structure, or may set a maximum price, with savings to be split between the parties if the project is delivered for a lower price.
In an EPC project delivery model, the vast majority of the owner’s work is at the very beginning, in the drafting of complete and detailed performance requirements. The owner should note if there are any required limitations on consultants, products, manufacturers, etc., because otherwise the contractor will have free reign. The owner should provide detailed criteria as to what will be required for the project to be considered complete and may impose liquidated damages for failure to both meet scheduling milestones and performance criteria. The owner may specify exactly what tests are to be conducted, how often and for what reasons the contractor should communicate back to the owner, and if there are any specific items that require owner’s approval.
A Win-Win Solution for Energy and Industrial Projects
After these basics are established, the EPC contractor will run with it and do what is necessary to deliver a conforming project for the set price by the set date. The added flexibility allowed the contractor may allow them much more latitude to be able to efficiently and economically deliver the project, and as long as the owner’s bottom line criteria are set forth at the beginning, the owner can be relieved of the day-to-day efforts to manage construction of a new facility and can concentrate on running their existing facilities. For these reasons, I expect to see the EPC model continuing to be utilized in a growing energy and industrial facility market.
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