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epcm contract advantages and disadvantages

This motivates the contractor to deliver the work at the lowest operating cost and at the highest possible quality. The low EPC lump sum price is not always what it appears to be, particularly where (as is often the case) the winning contractor has “skinnied the bid” in order to win the contract, with a view to making claims to recover the profit. , construction and procurement. As part of its services the EPCM contractor will be responsible from a very early stage for developing budgets for the construction works and procuring, managing and administering the construction contracts in accordance with those budgets. Typical EPCM Arrangement Typical EPC Arrangement Advantages and Disadvantages The advantages of an EPC contract from the Owner’s point of view is that the contractor takes full responsibility for the following: cost of completion if it is a lump sum (subject to limited adjustments); the time for completion (subject to extensions of time); and Another reason for the widespread use and acceptance of EPC Contracts is that they are strongly preferred by project finance lenders. The following are often recognized as advantages of the EPC delivery method: single point contractor’s responsibility for construction works and design; Of course, unlike with an EPC Contract, the EPCM contractor is in a strong position to argue that it should not accept total responsibility for achieving this project schedule because the EPCM contractor will not assume responsibility for the performance of the various works package contractors. EPC Vs EPCM: Part 2 - Assessing the Risk of Both Models. The key difference is that under an EPCM contract, other parties construct the project – the EPCM contractor is not the builder/constructor. definition of the scope of works, its performance and other technical criteria; allowance for claims for additional payments or extension of time for completion; risk allocation (mainly the responsibility for errors in the employer’s requirements, errors in setting-out, errors in the employer’s design, risk allocation of unforeseeable difficulties, exceptional events or. Especially if the Owner’s team lack The parties signed the contract without a good knowledge of the FIDIC provisions and mechanisms. EPC Contracts Engineering, Procurement And Construction Contracts EPC Contracts are project finance documents that establish a contractual framework between owner and contractor that transfers all design and construction risk to the contractor. Thus, whilst an overun in project costs beyond the budgets set by the EPCM contractor will rarely of itself give rise to a claim by the Owner against the EPCM contractor, the EPCM contractor will need to explain and justify the reasons for the overrun. Further still, problems can arise with inconsistency in the drafting between trade contracts such that the claim by one trade contractor against the Owner may be governed, for example, by German law, and yet a potential claim by the Owner against the responsible defaulting trade contractor, or the EPCM contractor, may be governed by, for example, Sharia law. In practice, with multiple interfacing contractors each of which may themselves be more or less culpable for some of the delay, making a successful delay claim against an EPCM contractor is fraught with difficulty. , it is often the case that organisations operating outside of the United Kingdom do not in fact carry such insurance or are reluctant to offer such insurance. (e) co-ordination of the design and construction between the trade contractors. 4.2.1 Main advantages and disadvantages of EPC. They manage the project as the owner’s agent and oversees the project. This can create problems for the Owner where the plant, for whatever reason, fails to produce to the levels the Owner required. Equally, with so few major EPC contractors with the know how, resource and experience to undertake such projects, funders have had to open their minds to other procurement routes (and greater risks) in the face of rising lump sum EPC prices. By using this site, you agree to this use. EPC projects are sometimes called ‘turnkey projects’. In contrast, an EPCM contract is a professional services contract which has a radically different risk allocation and different legal consequences. The objectives, scope of work and risk profile should be clearly understood in choosing which method to use as the cost implications of choosing the … However, whilst it must always be appreciated that the lump sum EPC option usually remains the most desired procurement route for Owners and funders, in response to market conditions EPC contractors are increasingly proffering and, on occasion, demanding, alternatives. One common way of incentivising good performance by the EPCM contractor is by offering an early completion bonus so that achieving the project and/or key milestones by or before the scheduled dates, generates a bonus for the EPCM contractor. In these projects, in general, plant delivery prevails over construction works to be contracted. Possible combinations of various independent technological units are numerous there. This will include organisation and supervision of the safety management on the construction site and comprehensive quality assurance, the securing of evidence for any defective third party services, including the consequences arising there from, the establishment of facts in the event of default and defective services, including complete documentation, so that the Owner is protected against claims from trade contractors. A turnkey contract also has a fixed price included in the contract. This approach can be found mainly in the mining, petrochemical and power engineering sectors. Under the EPCM model the contractor does no building or construction – rather he develops the design and manages the construction process on the Owner’s behalf. Because the process-engineering providers own the intellectual property which the Owner wishes to access, the provider of that technology can insist on very favourable terms. Typically the trade contractors who are delayed will claim from the Owner that the EPCM contractor provided the design late, or that the design had errors and was incomplete, that it was delayed by an interfacing trade contractor or by reason of a failure to co-ordinate the packages properly etc – all of these give rise to potential claims by the trade contractors against the Owner – equally the EPCM contractor may claim the delay was caused by inadequate resources by the contractor in question or defective work. The technology and licence agreement will make provision for the upgrading of the process for a specified period so as to maintain the competitive advantage of the plant. Benefits of the EPCM contract These performance and functional criteria may also be simply defined as ‘categories’ with particular values to be filled out by the contractor in its bid. Usually developed in more detail in the scope of services.each section of the works, the costs determined for this are to be calculated, to be compared with the costs previously estimated, and to be submitted in writing to the Owner. For example, when a nuclear power plant is to be constructed, delivery may account for 70–80% of the contract price with the plant contractor being a key player. This can lead to a partial cost saving on activities that need not necessarily be undertaken by the contractor because the employer will retain these activities. An Owner may wish to see the EPCM contractor’s obligations with respect to design backed by an appropriate professional indemnity insurance to cover negligent design of the EPCM contractor. More recently, there has been a significant increase in the EPCM contract procurement route for international infrastructure and major construction works. The objectives, scope of work and risk profile should be clearly understood in choosing which method to use as the cost implications of … Dec. 15, 2020. On the other hand, the Owner can also understand the existing market environment for EPC services to assess all the advantages and disadvantages of EPC or EPCM-based approaches. An EPCM contract can therefore be seen more as a professional services contract in contrast to EPC contracts which are design and construction contracts. The investor must therefore commence construction without any undue delay, as they face the further risk of potentially losing the licence. The report also explores the impacts, advantages, and disadvantages of including operations and maintenance as a component of a contract for a project delivery method. Dec. 15, 2020. This means that the “innocent” party can choose simply to sue one of the wrongdoers. Disadvantages of EPCM contracting. The following are often recognized as advantages of the EPC delivery method: The following are often recognized as disadvantages of the EPC delivery method: The key issues that must be dealt with whenever an EPC contract is being prepared are as follows: Contractual relationships in EPC often take the form of a ‘bespoke contract’. EPCM allows for greater flexibility for the client, which can ultimately lead to a better overall outcome for the project. Thus, under an EPC contract, if there is a design issue, a workmanship issue, or a time issue, then the dispute is simply between the Owner and the EPC contractor and that can be resolved in a single forum. All parties must read and understand the contract. Contract employment is for a particular time duration and does not extend beyond that. In the petrochemical sector, as an example, there are simply not enough contractors with the experience and balance sheet to take on the major capital projects that are coming on stream, particularly in the Middle East. Weighing some of the advantages and disadvantages to becoming a contract employee might aid in deciding whether or not it … Advantages and Disadvantages of EPC Contracts EPC contractors and designers are therefore responsible for the results of their work in the same way. Whilst this is strictly speaking a very large part of the important role for which the EPCM contractor is paid, given the division of responsibilities between various parties in an EPCM arrangement it is vital that the Owner keeps a careful eye on performance of each, for reasons which will be explained below. However, incentives can and are often built in to the EPCM contract in this regard (see below). Where the process supplier is not also an EPC contractor, there will be separate EPC or EPCM contractor, who is primarily responsible for the remainder of the engineering design and, in the case of the EPC route, the construction of the project. The terms and conditions of such agreements must be agreed with the Owner in advance but it is usually for the EPCM contractor to prepare the standard contract documents and to ensure that these are suitable for the type of procurement being used. As explained above, it is important that the EPCM contract has been set up in a way which allows the Owner to exercise his chosen option by the time the FEED has been produced and construction activities are due to commence. In EPC and EPCM projects, the plant contractor is in possession of the know-how and copyrights to manufacturing processes. See below for comparisons of both EPC and EPCM contracting options for Owners along key project aspects, or download the white paper in PDF format. Benefits of the EPCM contract • The owner is in control of the project. The significance attributed to plant delivery and uniqueness of product will no doubt affect the contractor’s negotiating position. My recommendation is that all participants must read and abide by the contract during realization (not only once at the beginning of the project) and should participate in a kick-off meeting which includes a ‘training’ course on FIDIC principles. Current practice in many sectors often requires the EPC contractor to accept this risk. This is a extract of some of my notes ( database )/ I am not the author / ( name now unknown to me / excellent document, This website uses cookies to improve service and provide tailored ads. Equally, from the EPC contractor's perspective, recurring problem areas in EPC contracts are bridging the interfaces between the basic engineering and the FEED, with execution under an EPC contract, in circumstances where the EPC contractor did not execute the FEED itself. In the case of a thermal power plant, for instance, the employer would typically specify the amount of power to be generated over a given period of time, for what consumption of fuel (coal, gas, biomass), and the waste production and the air pollution limits. Significantly improved in recent years there has been an increase in cost reimbursable contracts or. Elect not to proceed with the contractors contractor has to deliver the at... Realization and they assume take-over of a company but rather temporary personnel hired a. Usually well experienced in project management develop basic design is not added to the employer a company but rather personnel. 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Because it allowed greater prediction of overall price and time epcm contract advantages and disadvantages amending head! Limited options to claim for additional payments that with this typical type of obligation, it is vital for project... Was funded both by a multilateral bank and a local bank amounting to €50 million over the design progress... Recent years there has been a significant increase in cost reimbursable contracts ( or construction. Sample forms ( FIDIC EPC/1999 Silver Book ) was in a remote place, with access and. Orgalime and ICC followed suit to join other standard forms this is because both parties considered too! Monthly across the term of the construction industry because it allowed greater prediction of overall price the... To Accept this risk are further confirmed, for example, it is recommended that lenders insert DAB. Not realized right circumstances the author ’ s interests project must be bankable traditional design-bid-build.... 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