EPC & EPCM Contractual Agreements

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EPC & EPCM Contractual
Agreements
Report
6/13/2019

EPC & EPCM Contractual Agreements
Table of Contents
Introduction............................................................................................................... 2
EPC & EPCM Contractual Agreements.............................................................................2
Comparison & Contrast................................................................................................ 2
Advantages & Disadvantages of two Arrangements..............................................................5
EPC Contracts......................................................................................................... 5
EPCM Contracts...................................................................................................... 6
Recommendations to the Organization..............................................................................7
Conclusion................................................................................................................ 8
References.............................................................................................................. 10
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EPC & EPCM Contractual Agreements
Introduction
There are numerous construction projects that a large-scale capital-intensive organization is
looking to invest in. The Chief Executive Officer of the organization needs to determine the
type of contractual arrangement that shall be applied in the next major project undertaken by
the organization. It is necessary that the project delivery is made on time and the CEO has
identified the two types of contracts that may be used for the purpose. These include EPC and
EPCM contractual agreements. The report covers the explanation of the two types of
contracts and also comprises of the difference between the two.
The respective advantages and disadvantages that each of the two contracts will offer to the
organization are also covered. The recommendation on the contract type that shall be used is
also given.
EPC & EPCM Contractual Agreements
EPC Contract stands for Engineering, Procurement, and Construction contract and it is the
contract option in which the EPC Contractor is provided with the primary responsibility for
all the tasks and activities. These activities include design, procurement, and construction
activities so that the delivery of the assets may be made to the owner or the client. The
contract is also referred as design and construct contract and it is a lump sum contract
(Micheli and Cagno, 2016).
Engineering, Procurement, Construction, and Management (EPCM) is the contract type that
includes the professional services and the primary set of services that are provided by the
contractor include design, procurement, and management of the construction services. Also,
the overall project coordination is carried out and is provided to manage the construction
tasks and activities (Chattopadhyay and Mo, 2010).
Comparison & Contrast
The two contract types as EPC and EPCM are different from each other in numerous aspects.
The primary point of difference is equipment supply and process warranties. The EPC
contracts are the ones that provide single warranty between the business owner and the EPC
contractor. The warranty in this case is provided in the form of a performance bond. The
warranties are managed with sub-contractors and suppliers. In the case of EPCM Contract,
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EPC & EPCM Contractual Agreements
the negotiation of the warranties is conducted by the owner with each of the supplier and the
contractor involved directly (Bu, 2016). There is usually multiple performance bonds
involved as a result. This is the parameter in which EPC Contracts win over the EPCM
contracts. It is because the presence of a single warranty statement and performance bond
ensures higher level of clarity.
The second parameter that is used to compare the two contract types is project budget risks.
In the case of the EPC Contract, the cost risk is borne by the EPC Contractor. However, in
the case of the EPCM Contract, the risks are handled by the owner. Therefore, the EPC
Contracts are preferred in terms of this parameter since the owner would not want to handle
the budget risks and the issues of cost overrun.
Project financing is the third parameter which is used to compare the two contract types. The
project owner is required to pay substantial amount of payment to the EPC Contractor before
the actual project activities begin. On the other hand, in the case of EPCM Contracts, there is
any combination of down payments that may be involved. There is also credit that may be
obtained from numerous suppliers and investors. On the basis of this parameter, the EPCM
Contracts shall be preferred by the owners as there is higher investment cost that may be
associated in the case of EPC Contracts.
Performance risk is the fourth parameter that is associated with the comparison of the two
contract types. EPC Contract is the contractual agreement in which there is a single point of
accountability that is involved (Kabirifar and Mojtahedi, 2019). The performance and
warranty of the project execution process is handled by the EPC Contractor and all of the
risks associated with the contractual documents are also handled by the contract documents.
EPCM Contract is the one in which there is a concept of risk sharing that is involved.
However, there is a Project Manager that may be hired by the owner to determine the terms
and conditions around the sharing of these risks. From this aspect, EPC Contract is the one
that shall be preferred by the owners.
Timely performance measurement is another factor that is involved with the comparison of
the two contract types. There are uniform set of tools and techniques that may be applied to
keep a track of the project performance. The reporting tools can then be easily integrated with
the specific project attributes, such as project costs, schedule, materials, and likewise. In the
case of EPCM contracts, the tools that are used for measuring and keeping a track of the
project performance may vary from simple measures to highly automated tools. These may
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