Practical Law

PLC Construction recently received an enquiry asking for information about EPCM contracting. Our thoughts below give an overview of how EPCM contracting operates and what distinguishes it from other forms of procurement, particularly EPC contracting.

What is EPCM contracting?

EPCM stands for “engineering, procurement and construction management” (or “engineer, procure and construction manage”) and is a form of construction procurement used in engineering and infrastructure projects.

On an EPCM project, the EPCM contractor provides engineering, procurement and construction management services, but the employer directly employs construction contractors (sometimes called trade contractors) to build the project. The EPCM contractor usually manages the construction contractors for the employer. On one analysis, the EPCM contractor is more like a professional consultant than a contractor, providing design and construction advice (rather than building the project itself).

Comparing EPC and EPCM contracting

EPCM contracting contrasts with EPC (engineer, procure and construct) contracting because, in EPC contracting, the EPC contractor is responsible for construction and it, rather than the employer, enters into direct contracts with the construction contractors.

EPC contracting appears to be more common that EPCM contracting. This is because employers often regard EPC contracting as favouring their interests over those of the contractor. There are several reasons for this, including:

• Cost certainty. EPC contracting shifts risk away from the employer and towards the EPC contractor, in theory giving the employer greater cost certainty than other forms of procurement. An EPC contract typically prevents the contractor from increasing the agreed price except in very limited circumstances.
• Single point of responsibility. The EPC contractor is responsible to the employer for the entire project, so there is no confusion about who the employer should pursue in the event of a defect or other problem.
• Turnkey nature. An EPC contract is turnkey, meaning that, on completion, the employer will simply be able to “turn the key” and operate the finished facility.  This is particularly attractive to an employer with little experience of running a construction project or with inadequate resources to oversee such a project.

Equally, there are several reasons why an employer may prefer EPCM contracting over EPC contracting:

• Lower cost. EPCM contracting offers potential savings on project cost. EPC contractors usually charge more because of the extra risk they take on from the employer. In EPCM contracting more risk stays with the employer, so prices should be lower. In addition, the employer has the benefit of negotiating each construction and supply contract itself, rather than relying on an EPC contractor to get the best price.
• Flexibility. Compared with EPC contracting, the employer has greater freedom to change the project during the works. Under an EPC contract, variations to the agreed specification can easily lead to large increases in project cost. In EPCM contracting this may be avoided because the employer can negotiate directly with contractors and suppliers.
• Speed. Compared with EPC contracting, the employer may be able to complete the project more quickly. EPCM contracting allows the employer to engage the necessary contractors to begin work, without necessarily finalising the detail of the project right away or entering into contracts for works or equipment that will be needed later.
• Funding. EPC contracting usually requires the contractor to have all its funding arranged at the outset of the project, in order to secure a letter of credit in favour of the EPC contractor. In contrast, EPCM contracting allows greater flexibility, so the employer does not necessarily need to have all funding in place before works begins.
• Quality. EPCM contracting may offer a higher quality result than EPC contracting. This is because EPC contracting (like design and build construction) leaves the EPC contractor to decide how it will meet the employer’s requirements for the agreed price. It is in the EPC contractor’s interest to meet the employer’s requirements at the minimum cost, thereby maximising its own profit. In contrast, EPCM contracting allows the employer to take an active role throughout the project, advised by the EPCM contractor. In theory this allows the employer to control the quality of the project. Even if there is no measurable qualitative advantage to EPCM contracting, the employer often feels a greater sense of satisfaction with the completed project because it has had “ownership” of the project throughout its course.

Overall, the employer’s role in negotiating contracts and funding burden it with greater responsibility in an EPCM project. However, this is tempered by the fact that the EPCM contractor is available to advise the employer throughout the project, together with the increased control the employer has over its project.

Disadvantages of EPCM contracting

The advantages of EPCM contracting are balanced by some significant drawbacks. In general, these can be summarised as a transfer of risk and responsibility to the employer. Two of these drawbacks are key to understanding EPCM contracting:

• No single point of responsibility. EPCM contracting has no single point of responsibility, so in the event of a defect in construction the employer may have to pursue several contractors and suppliers to recover its losses. Whether these parties are jointly and severally liable will depend on the precise wording of their contracts and the jurisdiction governing them.
• Management time and expense. Even with the EPCM contractor’s assistance, an EPCM project requires the employer to commit significant resources to it. The employer should consider whether those resources could be better invested elsewhere in its business.

One other disadvantage of EPCM contracting is the absence, at the moment, of any standard form of EPCM contract. Many engineering contracts, even those that are bespoke, take a standard form contract as their starting point. For example, many bespoke EPC contracts are based on the FIDIC Silver Book.

The absence of a standard form deprives the parties of a point of reference as to the “normal” commercial and legal position, as well as increasing the legal costs of the project. In any case, the employer is likely to incur higher legal costs on an EPCM project, simply because it has to negotiate multiple contracts, rather than a single EPC contract. While this may be a minor inconvenience for a large and experienced employer, it is a significant drawback for a smaller and less experienced employer.

A final word of caution

Parties should remember that procurement terminology is not subject to universal rules about its meaning (except, arguably, in the field of public procurement). One party’s understanding of EPCM contracting may differ from another’s and, in any case, employers often tailor a procurement mechanism to suit the needs of a particular project. Terms such as EPCM and EPC are a useful shorthand, but parties should clarify their precise meaning for each particular project.