Why EPC and EPCM contracts are necessary for the completion of the project?

Why EPC and EPCM contracts are necessary for the completion of the project?

EPC is an abbreviated form of ‘Engineering, Procurement, and Construction whereas EPCM is a contract between parties where the contractor is responsible for all the activities related to the engineering, procurement, and construction to deliver the finished project to the concerned party or owner.

Some of the features of an EPC contract are:

  1. Single point responsibility
  2. Fixed contract price
  3. Fixed completion date
  4. Performance guarantee
  5. Caps on liability
  6. Security
  7. Liquidated damage
  8. Defect liability period
  9. Force majeure

What should be the responsibilities of an EPC Contractor?

  1. To design and provide detailed engineering of the project.
  2. Procurement of all the essential equipment and materials needed to complete the project.
  3. Construction of the buildings or the facility.
  4. Should handover to the owner as ‘Ready to use’.
  5. In addition to the delivery of the complete facility.

A responsible EPC contractor will deliver the project within a promised time and at a prefixed price. As stated in the performance specifications section in the EPC contract, the facility should perform at a specified efficiency level. EPC contract and turnkey contract are the two kinds of contract and are used often interchangeably. No doubt, they share little difference also. For the last several years, the EPC contract and the engineering, procurement, and construction management (EPCM) contract are considered as an essential part of the construction sector.

In an EPC contract, the EPC contractor begins the project from commencement till the final completion. The administrator of the EPC project gives the EPC contractor a detailed design including the specifications (technical and functional) so that an EPC contractor may develop and deliver the project to the “turn of the key” in a predetermined time.

This is the main reason why EPC contracts are often referred to as “turnkey” projects. The scope of work is precisely described in the contract documents. Therefore, amendments to the scope of work should be avoidable in EPC contracts. For this particular reason, an EPC contract is a fixed price contract or an all-encompassing lump sum contract.

The risk associated with costs rests with the EPC contractor that making cost control number one priority. Another noticeable component of the EPC contract is that a separate agreement is made for EPC contractors, vendors, sub-contractors, sub-vendors, and other related parties.

Thus, the EPC contractor becomes liable to take full responsibility to complete the project and in the case, any dispute arises between the EPC contractor and any party to the sub-agreements, it helps to settle the dispute without involving the principal concerned person.

In the happening of the loss or damage, the EPC contractor will be provided with a right of recourse against a party to a sub-agreement who was responsible

An EPC contract is directly linked with the building and construction of the project whereas the EPCM contractor has a responsibility to ensure that the engineering and design of the project are in compliance with the predetermined project’s technical and functional details. The chief responsibility of the EPCM contractor covers supervising, management, and coordinating construction interfaces in accordance with a detailed schedule. With the help of a tender process, the EPCM contractor becomes responsible for creating contractual arrangements on account of the concerned owner and with other contractors, vendors, sub-contractors, and sub-vendors. The owner comes into the contract with the EPCM contractor for the role of construction management while the owner or principal is bound to various contractual agreements for construction-related works. From an owner’s perspective, there lies a difficulty in being bound to several contractual terms in case of a dispute.

Mostly, the EPCM model is formulated and planned on the basis of a cost-reimbursable fee structure or a unit rate fee structure. The cost-reimbursable fee structure enables the EPCM contractor to be paid an upfront sum of money with additional fixed monthly payments, while the unit rate fee structure enables an upfront sum of money. It includes the further payments also which are to be made on the completion of specified levels while the construction process.

From the above discussion, it is clear that both the EPC and EPCM contracts are highly beneficial to accomplish the project. Selecting the inaccurate form of contract will affect the cost and risk associated with the project also. The contract should consist of a definite understanding of the objectives, scope of work, the role of each party, and the contract structure as a whole.

Conclusion:

(EPC) Engineering, Procurement, and Construction organizations deliver a comprehensive package of resources to execute and complete the infrastructure projects. EPC services typically offer a single responsible source for executing a project. Thus, EPC companies and EPC contract helps to alleviate the risk for the owner.

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