Project Management Consultancies as to why it is that lump-sum EPC Contracts are now preferred more by Employers than they were in previous years. As a result of those discussions, I have formed the opinion that the following are probably the main reasons:
1 Employers seem to have been persuaded that an EPC Project will be delivered much quicker on account of the probable time saving in the design stage. Ordinarily, under the Traditional Contracting arrangement, the Contractor will not be able to commence the construction work until the design has been fully completed by the Employer's Design Team. This line of thinking is anchored in the belief that a Contractor will be able to start the construction work much earlier under an EPC arrangement, since any yet-to-be-completed design portions will be under the Contractor's complete control.
2 Employers believe that, under the lump-sum EPC arrangement, there is far more certainty for them about the final costs of the Project than with the Traditional Contracting approach. This belief seems to hinge on the fact that the Contractor would be responsible for calculating its own quantities for bid pricing purposes, and would therefore not be able to claim extras on the grounds that the Employer-supplied bills of quantities were inadequate and had led to unavoidable under-pricing by the Contractor at the bidding stage.
3 Employers also believe that, with the right level of quality control (usually with the help of Project Management Consultants) and the imposition of appropriate performance/reliability requirements, the final quality of the completed facility and its reliability under operation would be no less for an EPC Project than if the Traditional Contracting route were to be employed.
I conducted reasonably extensive investigations into the above points to see if the Employers' suppositions held water, but my attempts at proving the efficacy (or otherwise) of the EPC approach over the Traditional Contracting route only turned up the following.
1 Construction Projects worldwide notoriously do not finish on time.9 However, I could not determine whether or not EPC Projects finish closer to their original completion time than Projects implemented using the Traditional Contracting route, simply because I could not unearth any comparative data on the topic.
2 Likewise, I was not able to find any evidence to show whether or not Projects conducted under an EPC arrangement are less affected by increased costs for the Employer than those conducted under the Traditional Contracting approach.
3 When it comes to data showing that, in terms of quality and reliability, the completed facility resulting from EPC Projects is as good as or worse than that seen in Projects completed via the Traditional Contracting route, nothing seems to be available there either.
Since I could find no data to counter the abovementioned supposed benefits of EPC Contracts from the Employer's perspective, I have no reason to consider that the Employer's viewpoint might be wrong. In addition to the foregoing, it also seems that Employers very much like the fact that the EPC Contractor offers them a single point of contact (‘one-stop shop’) for everything on the Project. That is not just for the guaranteeing of the efficacy of the design and construction work but also for allocating total responsibility in the event that something goes wrong at any stage, whether it is with design, procurement, construction, or post-completion operations. A further added benefit for Employers is that many of the risks that would ordinarily fall to the Employer to bear can legitimately be transferred to the Contractor under the EPC Contract (at a price, of course), simply because the Contractor is given the entire Project implementation responsibility. That could never be the situation under the Traditional Contracting route.
Having worked on both sides of the fence (for Employers, both under and not under the PMC umbrella, and with/for Contractors), I long ago concluded that, on balance, lump-sum EPC Contracts benefit the Employer more than the Contractor. This conclusion was not based solely on the fact that I did not see any single one of the Contractors I had been associated with make the level of profit that was anticipated at the time the EPC bid was submitted (some even made large losses).10 More than anything, my mind was made up because I had many times observed that, provided that the Employer knew with certainty what was needed in the completed facility and avoided issuing too many sizeable Variations, the final cost for an EPC Project was far more likely to come within the Employer's original budget than if the Traditional Contracting route had been adopted. This greater certainty regarding costs for the Employer is mainly due to the fact that, under the Traditional Contracting approach, the Employer has little control over the Design Team but still has to bear all the extra costs of design changes and any extras introduced by the Design Team, plus bear the extension of time and all the associated costs any such matters cause.
On the other hand, under an EPC Project, if the extension of time for completion of the Project is not caused by an excusable delay, the Contractor has to bear the associated additional cost burden as well as compensate the Employer (by way of Liquidated Damages) for completing the Project late. I can therefore fully appreciate why Employers nowadays will want to turn more and more to undertaking new complex Projects on a lump-sum EPC basis, rather than rely on the Traditional Contracting route. All this is not good news for Contractors since, as I have just mentioned, the risks placed upon them are far greater with lump-sum EPC work than where some other entity is responsible for undertaking the design work. For the majority of EPC Projects, those increased risks tend to make it harder for the Contractors to achieve the originally intended level of profit.
For anybody wishing to obtain an easy-to-read overview of the EPC and Design-Build models and the benefits thereof from a government's perspective, there was a very helpful paper presented at the Project Management Conference held at Canada's Chateau Nova Hotel, Yellowknife.11 It provides a general discussion of the approaches and deals with the Employer's considerations, including the risks and problems involved. It also offers a range of mitigation measures that can be adopted by the Employer and/or the Contractor. In addition, it sets down a lot of questions that it would be best for the Employer and the Contractor to obtain answers to before committing to entering into an EPC or Design-Build contractual arrangement. However, overall the paper seems to be very supportive of the use of EPC and Design-Build Projects for bringing more certainty of success from the Employer's perspective. This is what helped tip the balance towards me concluding that EPC Projects favour the Employer far more than they do the Contractor.
2.7 Fixed-Price Lump-Sum Contracts
Sometimes, the Conditions of Contract proffered by the Employer for EPC Projects may contain the words ‘fixed-price’ as well as the term ‘lump-sum’; I have seen that this combination of words can hurt the Contractor. I say this, because I experienced a number of instances where the Employer's Team took the position that those additional words meant that the Contractor could not claim any additional money over and above the original Contract Price under any circumstances whatsoever. That position ignored the fact that there were many clauses in the Contract that mentioned the right of the Contractor to be reimbursed for extras arising from the Employer's side.
On one such occasion there happened to be (deliberately) no provisions included of any sort for Variations to be made, the reason being that the Employer's Team had made it clear that there was absolutely no contingency fund and no budget allowance for Variations to occur. The Contractor had understood that this meant that the Employer would not change a single thing from what had been agreed as the work scope incorporated in the Contract. However, it soon became clear that that was not how the Employer interpreted the Contract. The Employer's view had been that the Contractor should have included an allowance in the bid pricing for all the extras that the Employer would require, since the Contract Price was described as being fixed-price, lump-sum. This led to many arguments and several impasses, the majority of which were never satisfactorily resolved from the Contractor's perspective.
My
