Engineering, procurement and construction

STEPS INVOLVED WITH A MAJOR INTERNATIONAL DESIGN BUILD TURNKEY PROJECT

On deciding to propose a Design Build (DB) Turnkey Contract as an EPC which is a common form of contracting arrangement with the construction industry, the Contractor/Proposer must consider if they intend to be the Primary General Contractor or if that decision will be made after submittal of the Proposal. In most cases a Project Manager will be required to maintain overall project coordination.

With an EPC proposal, the Contractor/Proposer (EPCC) agrees to deliver an EPC proposal, which stands for ENGINEERING, PROCUREMENT AND CONSTRUCTION proposal to an Owner/Client

1. Background

Under an EPC contract, the Contractor /Proposer designs the project/installation, procures the necessary materials, equipment etc and builds the project, either directly or by subcontracting the work. In some cases, the contractor carries the project risk for schedule as well as budget in return for a fixed price called lump sum turnkey or LSTK depending on the agreed scope of work.

When the scope is restricted to engineering and procurement, this is referred to as an EP or E and P contract. This is often done in situations where the construction risk is too great for the Contractor or when the Owner does the construction.

Some EPC contracts terminate at Mechanical Completion but before Commissioning while LSTK contracts always include Commissioning. EPCs are increasingly common worldwide.

Potential advantages of an EPC contract to the Client/Owner include:

   •    Single point of contact for owner simplifies communications (usually the PM or Project Manager).
   •    Ready availability of post-commissioning services
   •    Clearly defined responsibility and accountability
   •    Ensures quality and reduces practical issues faced in other ways]
   •    Owner protected against changing prices for materials, labour, etc.
        (unless there is provision in the contract)
   •    Cost is known at the start of the project

In addition to the project location, in an EPC contract the Owner defines:

   •    Scope and the specifications of the plant
   •    Quality
   •    Project duration
   •    Budget Cost
   •    Owners choice of General Contractor or Consultants if he has any, otherwise it reverts to the                                                                                            .       Contractor/Proposer 

  VERY IMPORTANT  -  The cost (the price to be paid to the EPCC,  LSTK or alternatives)  is negotiated, finalized   and paid in mutually agreed installments), the first of which is an advance start up fee usually calculated at 50% to 90% of the cost to prepare and submit the proposal but this may vary, and may be in more than one payment. This mobilization and initial enabling works,  is usually taken as 5-10% of the assessed total  development/construction cost.

2. Functions

    Engineering Functions											       	 

Initiation

   •    Implementation
   •    Planning & Programming
   •    Estimating
   •    Elemental cost plan
   •    Design

Procurement Functions

   •     Purchasing
   •	 Expediting
   •	 Receiving
   •	 Invoicing
   •	 Reconciliation and recommendation

Construction Functions

   •     Construction Schedule
   •	 On-site Material Handling
   •	 Construction Activities
   •	 On-site Client Communications
   •	 Valuation & Cash flow and monthly payments
   •	 Commissioning and testing
   •	 Closing

3. Owner and Contractor Liabilities

Once an EPC contract is signed, the EPC contractor becomes liable for completing the project according to the tender or bid conditions. The EPC contractor, in turn, may hire sub-contractors or sub-vendors in addition to those specifically agreed at the beginning with the Owner to complete different portions. Payment commensurate with the work completed (in addition to an advance) is normally by way of Monthly Valuations normally preferred by the Contractor.

   Projects are more likely to succeed when the Owner:

Defines guarantees

   •    Defines milestones meticulously
   •    Defines scope and quality very carefully
   •    Defines Bonus clauses
   •    Defines Liquidated  Damages (LD)  penalty clauses
   •    Makes payment terms very specific
   •    Delegates all design and construction related agreements to the Contractor Proposer’s PM

The contractor also has ways to improve project success:

   •    Adopts similar terms and conditions as Owner  regarding quality, guarantee etc.,                                              .            for subcontracts/vendors
   •    Do not keep terms open-ended
   •    Coordinate vigilantly to reduce chances of errors at site.

 VERY IMPORTANT-To maximize the success of the project the Owner must sit with the Contractor Proposer and the Project Manager  for him to confirm the names of the Consultants, Suppliers and the General Contractor (local where appropriate or otherwise) of choice proposed by the Contractor/ Proposer, after which the Schedule and Elemental Cost Plan can be developed.  This is when supply of local materials and subcontractors can be agreed with the General Contractor prior to any agreements being signed.

4. Global Arena

An EPC contract is a complex agreement. In a global context, EPC management is more complex. The EPCC must have data and expertise in all the required fields. Some important areas are:

   •    Local market conditions for materials and labor availability and capabilities
   •    Local code, statutory etc., requirements
   •    Availability of local supervisory personnel
   •    Availability of local engineering services
   •    Local and global subcontractor experience and performance

5. Cost Certainty

One main reason an owner may prefer an EPC arrangement is “certainty of cost”. An EPC contract binds the contractor. However, changes to specifications initiated by the owner (better finishes for example) may be incorporated through changes and these changes/prices are recorded in the change order document.

6. Owner Responsibility

To ensure quality, the owner must select an experienced EPC contractor. Changes in scope of work can affect project schedule, cost and risk. Such changes are the responsibility of the owner (See 3 above).

7. Definitions of Turnkey Acronyms and Types

A. EPCM stands for Engineering, Procurement and Construction Management is a common form of contracting arrangement for large projects within the infrastructure and construction industries. In an EPCM arrangement, the Client or Owner selects a General Contractor who manages the whole project on behalf of the Client. The EPCM contractor coordinates all Design, Procurement and Construction Work through experienced Consultants and ensures that the whole project is completed as required and in time. The EPCM contractor may or may not undertake actual site work but it is often included. The General Contractor is often a local company with experience of local conditions but is not necessarily required to have detailed knowledge of the plant being constructed such as in the case of a refinery.

An EPCM contract is a natural progression for an EPC contractor as, if one is able to do an EPC for a project, then getting a bigger EPCM job is advantageous. It helps to tap the already present competencies while ensuring better control over the project. Also, the value of the project managed through an EPCM contract is far greater than the individual EPC contracts.

Normally, an EPCM contractor completes the basic work such as site surveys, getting clearances from authorities, doing the basic engineering and preparing the site for the subcontractors. Subcontractors are chosen by the EPCM company, but they have an agreement directly with the final customer.

B. EPCI stands for Engineering, Procurement, Construction and Installation and is a common form of contracting arrangement within the offshore construction industry where the plant is of a specialist nature. Under an EPCI contract, the contractor will design the structure(s), procure the necessary materials, undertake construction and transportation, and set it up at the site.

The contractor does this either through own labor or by subcontracting part of the work. The contractor carries the project risk for schedule as well as budget in return for a fixed price, called Lump Sum or LSTK depending on the agreed scope of work.

In EPCI contracts, the contractor rarely carries the project risk unconditionally. Rather, contractor and customer have detailed discussions on the division of the risk. Risk of delays and cost overruns due to situations beyond their control such as weather windows, is an example of a typical risk that may be borne by the Owner rather than the contractor

C. EPCMI stands for Engineering, Procurement, Construction Management and Installation and is combination of EPCM and EPCI, where specialist system suppliers install or supervise the installation of their equipment and organize the commissioning of that equipment.

D. LSTK Lump Sum Turnkey is a combination of the business-contract concepts of lump sum and turnkey. Lump Sum is a phrase which means a complete payment consisting of a single sum of money while turnkey is an adjective of a product or service which means product or service will be ready to use upon delivery. In the construction industry, LSTK combines two concepts.

The LS (lump sum) part refers to the payment of a fixed sum for the delivery under for example an EPC contract. The financial risk lies with the contractor. TK (turn key) specifies that the scope of work includes start-up of the facility to a level of operational status. Ultimately the scope of work will define just exactly what is needed.

E. Progressive Very Large Lump Sum Turnkey Projects PLSTK may be split into phases where a fixed price (lump sum) is agreed at the start of each phase. This reduces the overall project risk taken on by the contractor at the start of the project, and increases flexibility on the part of the project owner to adapt the project to changing circumstances.

8. References

1. Loots, Phil; Nick Henchie (November 2007). "Worlds Apart: EPC and EPCM Contracts: Risk issues and allocation" (PDF). Mayer Brown. Retrieved 2009-04-15.

2. Jump up "Project Management Dictionary". Projectauditors.com. Retrieved 2014-04-02.

3. "RICS draft guidance note - Comparative construction and engineering contracts": 1.3.5 The 'turnkey' approach". RICS Consult. RICS Consult. 2013. Retrieved 2 July 2015.

4. Jump up "Five Turnkey Construction Basics". Katahdin Cedar Log Homes. Katahdin Cedar Log Homes. Retrieved 2 July 2015.

5. Jump up "turnkey". Schlumberger Oilfield Glossary. Schlumberger Limited. Retrieved 2 July 2015.

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