EPC vs. EPCM in Construction Projects: Limiting

Costs, Assessing Risks, and Determining

Contractor Involvement

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WEDNESDAY, APRIL 7, 2021

Presenting a live 90-minute webinar with interactive Q&A

John M. Frega, Attorney, Troutman Pepper Hamilton Sanders LLP, New York

Joshua M. Lindsay, Counsel, Crowell & Moring, Washington, D.C.

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FOR LIVE EVENT ONLYProgram Materials

The EPC Project Method

John M. Frega

Troutman Pepper Hamilton Sanders LLP

New York, New York

• Overview of the EPC Project Method

• Phases of the EPC Project

• The EPC Project Scope of Work

• Engaging the EPC Contractor

• EPC Contractor and Owner risks

Discussion topics

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ProcurementEngineering Construct

EPC Project Delivery Method

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EPC Project Phases

• Engineering

• EPC Contractor will be responsible for all aspects of design

• Concept Design

• Schematic Design

• Detailed Design

• Construction Documents

• Owner/Client’s basic engineering documentation used as a basis for design

• Differs from a typical construction arrangement

where the design team is engaged directly by the Owner.

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EPC Project Phases

• Procurement

• EPC Contractor is responsible for engaging material and

equipment suppliers.

• EPC Contractor must account for long-lead time materials and

equipment.

• EPC Contractor generally owns risk of procurement delays/impact

on overall Project Schedule.

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EPC Project Phases

• Construction

• Most closely resembles traditional general contractor role.

• EPC Contractor will generally not perform labor with its own forces.

• EPC Contractor is responsible for engaging and managing subcontractors.

• EPC Contract is generally performed for a single lump sum.

• EPC Contractor owns the risk of delivering the Project within the Project Schedule

and the Project Budget.

• Clearly defined Scope of Work is vital to protecting the Owner from excessive

additional costs in the form of Change Orders and protecting the EPC Contractor

from cost overruns.

EPC Contract Scope of Work

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EPC Contract Scope of Work

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• Properly defining the Scope of Work is

vital to ensuring the Project remains on

schedule and within a reasonable

budget.

• Overly numerous change orders during

the Project are detrimental to Project

success for both Owner and EPC

Contractor.

Engaging the EPC Contractor

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• Important considerations when engaging an EPC Contractor:

– Project location.

– Project scope and complexity.

– Budget.

– Project schedule.

• The EPC Contracting firm will generally have greater expertise in engineering,

procurement and Project management functions.

EPC Contractor and Owner Risks

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• Standard of Care.

• Cost Risk.

• Schedule Risk.

– Milestone Dates

– Liquidated Damages.

• Performance Risks.

– Key Performance Indicators.

– Associated Liquidated Damages.

• Credit Security

– Bonds vs. Letters of Credit vs. PCG

EPCM contracts

Josh Lindsay

Crowell & Moring

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ProcurementEngineeringConstruction Management

EPCM contract: an agreement for services

• EPCM responsibilities & project structure

• Phases of an EPCM arrangement

• EPCM advantages, disadvantages, and risk factors

• EPCM fee structures

• Considerations for structuring EPCM arrangements and for handling disputes

• Case study

• Special considerations concerning COVID-19 impacts

Discussion topics

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Procurement of equipment, materials, and works package

contracts

Design & Engineering

Project Management

&

Construction Supervision

Duty to ensure compliance w/ functional and

technical specifications

Does not build

EPCM contractor roles & responsibilities

• Delivery of the project by certain key milestone dates

• Care and custody of the works

• Project delivery within the project budget

What the EPCM contractor is not responsible for**typically

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EPCM Model 1

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EPCM Model 2

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Feasibility Studies

Front-End Engineering & Design

Project schedules, budgets, and

work packages

Basic engineering & design;

sometimes detail design

Procure materials, equipment,

and construction works

Scoping and drafting

construction works contracts

Establishing and executing

tendering process

Negotiating commercial terms of

construction works packages

and supply contracts

Owner’s “Engineer”

Project management and

construction supervision

Coordination and interface

management

Change and claims management

Testing and commissioning

Defects liability/warrant period

Design & Engineering

ProcurementConstruction Management

Phases of an EPCM arrangement

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• Disadvantages

– Greater risks retained by Owner

– Diluted legal remedies

– Owner’s later choices limited by earlier

decisions

– Significant demands on owner’s resources and

skills (or EPCM contractor may have conflicts

of interest)

– Complex project structure

– EPCM works best within established

relationships between experienced parties

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• Advantages to Owner

– Lowest cost method

– Fastest procurement method

– Better market access for works contractors

– Greater control and flexibility

– Insolvency and performance failure risks are

spread

Advantages and disadvantages of EPCM contracts

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Project type, size, &

location

Industry type

Market conditions

EPCM size &

capabilities

Owner capabilities

& level of involvement

EPCM contracts risk factors

• Agreements among/with works package

contractors

– Shared bonus pool based on project outcome

– Obligations to cooperate and mitigate

– Consolidated dispute resolution procedures

• EPCM contract features

– Duty of skill and care obligation

– Key Performance Indicators (“KPIs”)

– Share in gain/pain based on project outcomes

– Blended remedies—reperformance as well as

some liquidated damages for deficient services

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• Clearly defined and documented owner

requirements

– Project brief, signed by owner and all end

users

– Allow sufficient time for early planning/design

• Thorough project planning and procurement

strategy

– Number and size of packages, with

appropriately skilled works contractors

– Sequence of works & site layout

Risk mitigation in EPCM contracts

• Lump sum

– Agreement to pay contractor fixed amount to perform a defined scope of services

– Less common among EPCM contracts

• Unit rate

– Agreement to pay specified rates for services, with the final price depending on the quantities required

to complete the services

– EPCM contractor is paid an upfront sum, with additional payments made upon completion of specified

phases within construction process

• Cost-reimbursable plus fixed fee (“Cost-Plus”)

– Agreement to reimburse contractor for incurred expenses plus a specific amount of profit

– EPCM contractor is paid an upfront sum, with additional fixed monthly payments

EPCM fee structures

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• Cost-plus percent-of-cost

– Compensation (above costs) is based on percentage of costs

• Cost-plus fixed fee

– Compensation (above costs) is based on a fixed sum, regardless of costs

• Cost-plus incentive fee

– Initial compensation agreed, then adjusted by formula based on performance, often determined around

project costs

– Specifies a target cost, a target fee, minimum and maximum fees, and a fee adjustment formula

• Cost-plus award fee

– Allows for awarding a fee based on good performance

– Key Performance Indicators (“KPIs”) can establish metrics, but require clarity as to project scope and

owner requirements

Types of Cost-Plus contracts

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• What EPCM fee structure is appropriate?

• How is the EPCM scope defined? Is it broken into phases?

• What level of design should the EPCM contractor perform to be tendered to the works contractors?

• What works contract fee structure is appropriate?

• How many works packages are required?

• How should procurement of the works be sequenced?

• Are nominated subcontractor specialists necessary?

Front-end considerations: EPCM contracts & project procurement strategy

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• Maximum liability typically much lower than under fixed time and cost arrangement

• Remedies for breach often limited to re-performance of defective services

• Liability frequently limited to 5-20% of total EPCM remuneration (or limited to value of the profit)

• There are important carve-outs for these limitations on liability:

– Fraud

– Willful misconduct

– Gross negligence or recklessness, particularly in respect of the professional nature of the EPCM

consultant’s services

– Limitations voided by local law (especially in civil law jurisdictions)

Back-end considerations:EPCM consultant liability

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Master planning, engineering, and

design

Procurement, project management,

and construction supervision

Self-appointed Engineer for works

contracts

Testing and commissioning

Massive, complex project

Project management team of 2-3

people

Sophisticated in its line of business,

but not in major construction projects

EPCM lump sum contract for fixed

duration, with liability limits

Low-definition master planning

Fast-track owner approval deadlines

Preliminary designs sent to tender

Owner directly engaged works

contractors

Lump sum works contracts

EPCM conflicts of interest

All-inclusive EPCM scope

Inexperienced and under-

resourced ownerImbalanced risk

Case study: “Pigs get fed, but hogs get slaughtered.”

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• Disputes avoidance and mitigation

– EPCM typically are not liable for liquidated

damages (w/ certain exceptions)

– Disruption to one works contractor may cause

knock-on disruptions to interfacing works

– Most EPCM (and works) contracts will not

have anticipated wholesale disruptions to

supply and labor supply—force majeure,

change of law clauses do not quite fit

– Disputes mitigation and resolution may require

outside the box (and outside the contract)

approach

• Front end considerations

– EPCM offers greater flexibility for sequencing

work around disruptions

– EPCM typically is lower cost because the

contractor does need to price in risk, which is

much higher due to current uncertainties

– Multiple works contractors spreads the risk of

disruption

– Consider a bespoke COVID-19 disruption

clause that defines the parties’ rights and

remedies

EPCM contracts & COVID-19

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