EPC (Engineering, Procurement and Construction) and EPCM (Engineering, Procurement and Construction Management) contracts.
Which contract is better? Are you taking advantage of forming the right contract type during contract negotiations to suit the situation and overall goals of the project?
EPC and EPCM contracting are both very prevalent types of contracts within the construction industry. Dependent on the level of risk the Owner of a project is willing to accept, budget constraints, and the Owner’s organization core competencies, will determine which method is best for their project.
Let’s check some general characteristics of EPC vs. EPCM this time.
| Type | EPC | EPCM |
| Meaning | The company is contracted to provide engineering, procurement and construction services by the owner. Think Design & Construct style contracts, where the project is largely Contractor managed and the cost risk and control are weighted towards the Contractor and away from the Owner. The EPC contractor has direct contracts with the construction contractors. | The company is contracted to provide engineering, procurement and construction management services. Other companies are contracted by the Owner directly to provide construction services and they are usually managed by the EPCM contractor on the Owner’s behalf. Think Professional Services contracts, where the project is largely Owner-managed and the cost risk and control is weighted towards the Owner. |
| Establishment | Best for well-defined projects with detailed engineering complete before EPC contractor selected (Minimal Unknowns). It takes a long time to set up an EPC. | Better for less-defined projects with anticipated changes to the scope of supply. EPCM initiated quickly. |
| Client Ownership | “Hands off” approach to the project. | Sense of ownership and more control over the process. |
| Legal | Minimal Legal Risk. | Sense of ownership and more control over the process. |
| Schedule | EPC is based on a fixed implementation schedule, changes to the schedule can be very expensive. | There is the ability to accelerate or slow down the implementation of EPCM projects. |
| Cost | Tends to be more expensive, to the Owner, due to the shift of project risk away from the Owner and to the EPC Contractor. On average, a project’s cost 10% – 20% more. | Lower cost due in large part to the project’s risk being more evenly distributed between the Owner and contracts/suppliers. |
| Finance | Locked in on finance. | Can support flexible financing. |
As stated before, these contract methods can be tailored to the individual projects/owner’s needs. Some owners can go as far as breaking up each portion of the EPC / EPCM (Engineering, Procurement, Construction / Construction Management) to separate companies. One company can do the engineering; another can do the procurement, while still another can do the construction/project management).
We can discuss the contractual aspect next time. Let us know your thoughts.
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