The Engineer-Procure-Construct (EPC) contracting model has grown increasingly popular in recent years. If your organization doesn’t already use it, odds are you’re at least considering trying it on a project.
Without a doubt, there are some advantages to the EPC model. However, there are situations where those advantages can be diminished or even erased. I’d like to talk about one of those situations, which is relevant right now: a hot construction market.
The lure of transferring large project delivery risk to a turnkey EPC contractor for a fixed price greatly diminishes in hot markets because contractors are incented to push-back on high-risk contract terms and include oversized contingencies to cover those risks they do eventually sign up for. Hot construction markets give EPC contractors significant negotiating power, both at the time of award and during change order negotiations. This can lead owners to consider other procurement strategies, such as traditional design-bid-build (DBB), to shift project delivery risk back towards the owner in order to secure lower bids.
But there is good news! Alternative approaches to DBB and EPC that strike the right balance exist, offering a risk profile somewhere between these two extremes.
One of those alternative approaches is EPCM, where the “M” stands for management. The EPCM contractor performs design services and manages the construction process on behalf of the client in a professional services capacity, thereby removing significant design risk, and related contingencies, for the construction contractor. An exhaustive recitation of EPCM contracting is beyond the scope of this post, but you can find more information at http://www.minterellison.com/publications/demystifying-epcm-contracts/.
Another alternative is a modified EPC approach, which can have a similar cost reduction effect when the owner retains a designer to bring the design documents to a higher-than-typical level of detail prior to procuring an EPC contractor. In doing so, many of the unknowns that would otherwise cause the EPC contractor to include contingency cost are eliminated. This approach works best on projects where design elements by the owner’s engineer are highly likely to be utilized by the EPC contractor vs. scrapped for their own design. Otherwise, the costs associated with the owner’s design is partially wasted.
Many project owners in the energy sector prefer the EPC delivery method for its ‘one point of contact’ and reduced owner risk. This modified EPC approach preserves many of the chief advantages of EPC contracting, while providing a more balanced risk profile for cost savings.
As a side note, when the owner retains their own engineer to advance the design, either through an EPCM contract or prior to an EPC contract, there is a temptation to reduce the overall number of contracts by utilizing the design firm to perform contract administration services during construction. As a general rule of thumb, the additional time and effort needed to procure an independent owner’s construction manager is well spent. Large, complex energy projects are fruitful grounds for change orders. When the design firm has a vested interest in protecting decisions they’ve made in the past, objective resolution of change orders can become difficult. Avoiding this conflict of interest will streamline the process and foster better teamwork between the parties.
The choice of contracting methodology is one of your biggest considerations as a project owner or developer. It’s important to examine all of your options and even consider tweaking a standard methodology in order to protect your interests. Don’t let this hot construction market force your hand.
What type of contracting model do you use? How do you tweak it to meet your needs? I look forward to having a conversation!
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