EPCM – the future of mega projects?

EPCM is becoming increasingly popular

It is hard to say for sure which sector first started using EPCM (Engineering, Procurement and Construction Management) as a method procurement but it can be said that it has for a number of years been an established method of procurement for many projects in the process sector.

For many other sectors, EPC (Engineering, Procurement and Construction) contracts can often be the default approach for the procurement of projects - offering the comfort that the Contractor is contractually obliged to deliver a complete facility to the owner on a turnkey basis that is ready to start commercial operations. It may be believed that a suitably amended EPC contract gives time and cost certainty to owners and lenders, together with single point of responsibility for the design and construction of the works. For some projects, EPC will deliver this. This EPC wrap also comes with a risk premium baked into the price.

However, there is a significant shift in contracting strategies that are being considered in many sectors - both in the UK and in other jurisdictions. The message of the advantages that an EPCM approach can bring when selected for the right project seems to spreading! For some projects, considering an EPCM approach has become a consideration due to a lack of bidder interest in an EPC structure.

So what are the potential advantages from an EPCM contracting model?

Potential Advantages in using an EPCM model

• Speed through flexibility: when compared to an EPC procurement method, EPCM offers a greater degree of flexibility, by allowing some activities to be undertaken in parallel to each other (for example, design on some parts of the project to be developed, whilst some stand-alone works packages are being undertaken or early materials orders placed). This can result in projects being delivered more quickly. The EPCM Contractor can also be brought on board earlier – getting projects off the ground sooner - as there’s no need to have a detailed specification developed before the EPCM Contractor is engaged
• Potential access to the project’s risk premium: as investigated in our article Comparison between EPCM and EPC, where risks are being placed on an EPC Contractor through the EPC contract, this will attract a risk premium. For some projects and Clients, paying this risk premium may not offer best value. Breaking down the elements of the works into individual packages and using the EPCM Contractor to manage the risk and interfaces between the packages can result in cost savings
• Additional Client control: as the Client will directly appoint the works contractors in an EPCM approach (instead of appointing a single main EPC Contractor who then self-delivers or subcontracts the key works packages), the Client will have a direct contractual relationship with its key supply chain. In certain projects Clients may consider this closer direct relationship with its main supply chain to be advantageous as it affords the Client additional control over the scope and performance of individual works contractors, which may be particularly important as the overall project scope is developed

Conclusion

Is EPCM the future of mega projects? Well, what’s not to like – more Client control, reduced cost and the project being delivered faster?  There is, however, a but… For some projects, EPCM will deliver one or all of these elements. However, it does need to be remembered that much of the risk that would have been priced and programmed into a contract under an EPC contract is now with the Client (albeit some responsibilities will be picked up by the EPCM Contractor). Not all projects will be suitable for EPCM and of course, the procurement choice isn’t limited to a straight choice between EPC and EPCM.

In our EPCM hub we have a number of articles considering the differences between EPC and EPCM (Comparison between EPC and EPCM), when to select EPCM (When to select EPCM) and a number of articles focussing on EPCM specific issues. If you’re considering using EPCM, we hope you find these helpful.