How Does an EPC Contract Work?

One of the earliest and most important decisions to be made for any capital project is the project owner’s selection of a project delivery system (PDS). A frequently utilized project delivery systems is engineering, procurement, and construction (EPC), also referred to as design-build or turnkey.

In this article, we will provide important information on how an EPC contract works, including its advantages, when to utilize an EPC contract, typical components of an EPC contract, common pricing models, and an overview of the role of an EPC contractor throughout the project lifecycle.

How Does An EPC Contract Work?

After the EPC contract is bid out, an EPC contractor works under a single contract with a project owner, planning and executing all design, procurement, and construction activities to deliver an efficient and effective turnkey solution. The early and frequent collaboration between estimating, engineering, procurement, and construction teams is a key defining factor for this approach. 

Every PDS offers unique benefits to project owners—and the EPC approach is no different. Project owners are likely to see benefits such as those detailed below:

• A potentially faster timeline due to the elimination of the bidding process for different project phases and the ability to overlap those project phases
• Risk transference from the project owner to the design-build contractor
• A generally reliable budget and high certainty of maintaining ROI
• Streamlined communication
• Reduced management efforts

EPC contracts are often used for schedule-driven capital projects with tight timelines as well as for large-scale, high complexity, private-sector capital projects.

What Are the Typical Components in an EPC Contract?

Components commonly included in an EPC contract include insurance requirements, payment terms, contractor expectations, and project requirements, as detailed below. 

• Insurance requirements: In an EPC contract, the contractor may be required to maintain insurance that covers bodily injury, sickness or death, loss or damage to property, contractual liabilities, and motor vehicle third-party liability. The project owner may be required to provide builder’s risk insurance that covers all losses of or damage to property, equipment, or fabrications provided by the contractor. 
• Payment terms: EPC contracts typically include terms of payment, including what is required from the contractor to receive payment from the project owner (e.g. invoices). The costs included in the contract price will also be laid out and may consist of overheads, profits, transportation, handling, storage, and equipment. Payment terms may also include the right of the project owner to deduct from the contractor’s payment any money that is due from the contractor to the owner.
• Contractor expectations: The anticipated work and responsibilities of the contractor are also outlined in the contract. For example, the contractor may be required to provide procurement and fabrication services, on-site and off-site management, and delivery and transport scheduling of all equipment. Contractors may also be expected to ensure that all hired employees and subcontractors are suitable, fit, and adequately trained for the type of work they will be performing. Additional responsibilities may include ensuring existing structures in facilities are protected from damage.
• Project requirements: An EPC contract will also provide execution requirements for each phase of the project, including mechanical completion dates; materials, equipment, and vendors to utilize; design and engineering packages to be provided by either the contractor or project owner; and inspection and testing. 

What Are the Most Common EPC Contract Pricing Models?

When working with an EPC contractor, owners must decide on a pricing model. Typically, owners will choose between a time and materials (T&M) model and a fixed-price model. Both pricing models have a time and place, and owners often have a preference based on experience. Here are the key differences:

• T&M: T&M models bill project owners for work scope based on hourly rates of labor. Owners are charged for the number of hours spent on a specific project in addition to the cost of materials. T&M contracts are based either on a predetermined rate sheet or a set of rates built into the contract. A rate sheet is a predetermined hourly schedule of rates for labor, owned construction equipment, and predetermined markups for subcontractors, procured items, and construction materials. 
• Fixed-price: Fixed-price models are single-sum or lump-sum contracts in which the contractor is responsible for completing the entire project within the approved total cost and schedule. The main difference is that a T&M contract is an estimated final price, whereas a fixed-price contract has an agreed-upon fixed final price. 

What Does An EPC Contractor Do?

As we mentioned before, the EPC contractor provides all services necessary to complete the project, providing a single cohesive flow of work from engineering to completion. An EPC contractor typically provides detail engineering and design, procurement, and construction services; however, some EPC contractors also offer front-end planning services as well as fabrication services.

Front-End Planning

An EPC contractor is not necessarily selected before front-end planning occurs. Planning may occur internally or with another contracting company. However, bringing in an EPC contractor during the front-end planning stage helps increase schedule and cost predictability, reduce future scope changes, improve operational performance, and help owners better achieve business goals.

Front-end planning, or front-end loading, is a highly valuable process in the capital project lifecycle that creates the framework for project success. It includes the development of strategic information and key documentation necessary for project owners to address potential project risks, decide whether or not to move forward with the project and commit resources, and maximize the potential for project success.

Detail Engineering and Design

Once project scope parameters, such as timeline, site, and budget, have been clearly defined, engineering and design can begin. All project team members work together in this stage to develop the optimal design for the project’s success to maintain a balance between efficiency and budget. The end product from this phase is a set of highly disciplined drawings that will be used for construction.

Procurement

Procurement is a highly detailed and complex process that involves all sourcing, purchasing, and inspecting of products, materials, services, and equipment required for construction. The EPC contractor’s procurement team should be involved from the beginning of the project to develop a detailed and strategic procurement management plan. 

Fabrication and Construction

Not all EPC contractors have in-house fabrication capabilities, and sometimes this is not necessary depending on the nature of the project. However, working with an EPC contractor who can perform fabrication in-house helps maintain the cohesive workflow and communication stream while providing greater schedule certainty. This can also allow them to prefabricate or pre-assemble some project components off-site when appropriate.

With strategic planning and cross-department communication, the construction team may complete the construction of various project components while work packages are still in the engineering and design or fabrication phase of the project. The remaining construction activities required to meet predetermined deadlines and goals per the scope of the project, including all civil, structural, piping, equipment, electrical, and instrumentation activities, take place during the construction phase.

Aside from phase-related responsibilities, EPC contractors are also responsible for several important aspects of project management, such as those listed below:

• Risk Management
• Project Controls and Reporting
• Safety Management
• Change Management

H+M Industrial EPC: Delivering Capital Project Success Since 1988

For more than 30 years, H+M Industrial EPC has provided leading capital project management services to the energy, chemicals, and terminal and logistics industries using our proven EPC approach, highly established work processes, and highly experienced team.