Practical Risk Management for EPC / Design-Build Projects. Walter A. Salmon
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the design work is not complicated for Design-Build developments, there is usually a much shortened design period compared with the Traditional Contracting route, especially if the facility is of the specialist type and the Contractor itself is the design specialist. For this reason, there is also usually no need for third-party design consultants to approve the design before the Contractor orders materials, goods and equipment, or starts the foundations work. Added to this, as already mentioned above, completion of the design work can run in parallel with the procurement and early construction activities. As the Construction Industry Institute's recent research has validated,2 this therefore means that the time-frame for completing a facility is generally far quicker (and often cheaper) under the Design-Build arrangement than it is for the Traditional Contracting approach (where Architects and Engineers are required to complete all the design work before the Contractor selection process can begin).
The above is simply an overview of what the Design-Build approach comprises, whereas it is in fact a complex topic with a great variety of options as to who the contracting parties may be, where Architects and Engineers may play a bigger role, the different ways bidding can be conducted etc., none of which is the purpose of this book. A good starting point for those wishing to explore the concept of the Design-Build approach further is the appropriate Wikipedia article, since it contains a large number of very useful references for further reading.3
2.4 EPC Approach
2.4.1 EPC Project Suitability
Although the Design-Build approach can work well with simple Projects, it may not be an entirely suitable procurement route if the proposed facility is complex (with, say, a great deal of emphasis on specialised industrial engineering inputs and proprietary equipment). This is even more true if the final product must also comply with a vast amount of stringent safety regulations and environmental obligations, as well as operational and performance requirements, before being put into use. Where the Employer requires the Contractor to guarantee the quantity and quality of outputs from the completed facility in the operational phase (usually because the Contractor is required to be the entity responsible for selecting, procuring and installing the process equipment), the contractual situation becomes even more complex. Examples of such complex construction work are oil and gas pipelines, oil refineries, petrochemical plants, etc., many of which fall into the mega Project bracket (i.e. over US$1 billion).
For dealing more effectively with such complex Projects, many Employers nowadays consider it best to put as much of the risks of Project success as possible squarely on the shoulders of the Contractor, well beyond the level of risks that would usually be acceptable to a Design-Build Contractor. This is where the Engineering, Procurement, and Construction (EPC) approach comes into its own. It is far better suited for this more complex type of technical/contractual scenario from the Employer's standpoint, especially where most of the risks are to be transferred to the Contractor. The EPC arrangement also usually avoids the need for the Employer to get involved in all the many complicated interfaces and associated coordination activities that occur between the design phase, the procurement phase and the construction phase. Those interfaces can often become an unwieldy task and an awful burden (especially where utility service providers are involved). It should be noted that use of the EPC approach is not limited to complex engineering work or facilities where proprietary technology is involved. In fact, the EPC approach has also been successfully applied to many different types of construction work, including large-scale developments such as upmarket holiday resorts (often including the full fitting-out requirements, usually under what is known as a ‘turnkey’ arrangement).
Under the EPC approach, the Contractor is, just as under the Design-Build arrangement, still the one-stop shop for all implementation activities beyond the basic design work (including the Detailed Design work and, sometimes, even for undertaking the preceding Front-End Engineering Design [FEED] work). However, the EPC Contractor's responsibility will generally also extend to the suitability (fitness for purpose), functionality, quality, and performance of the finished facility, including the quantity and quality of its outputs (which Ron Douglas has elaborated in a whitepaper).4 This is despite the fact that the Employer's Team will almost inevitably be far more deeply involved in approving the Contractor's work during the implementation process than under a Design-Build approach. Such deeper involvement is primarily needed to ensure that suitable ‘checks and balances’ are employed to confirm, as far as possible, that the completed facility can be operated safely.
Of course, the transfer of such major risks and responsibilities from the Employer to the Contractor inevitably results in higher bid prices for EPC Projects compared with using both the Design-Build and Traditional Contracting approaches. However, many Employers seem happy to settle for that trade-off, in order to gain greater certainty of the overall price to be paid (at the end of the day) and the guaranteed quality of, and outputs from, the completed facility.
2.4.2 Contractor's Obligations
Following from the above, a typical EPC Project is therefore one where the Employer appoints a Contractor to:
1 assume responsibility for and undertake the Detailed Design work for a major facility, based on the Employer's detailed requirements (often referred to as the Basic Engineering Design or, in the Oil and Gas Industry, the Front-End Engineering Design);
2 procure and deliver all the necessary materials to the Project's Site location;
3 construct the facility in its entirety;
4 fully commission the facility and prepare all the operational manuals, ready for handing over to the Employer to start occupying and/or operating it immediately;
5 guarantee the quality and quantity of the outputs (and regulated emissions) from the completed facility; and
6 rectify all problems found in the defects liability period, entirely at the Contractor's cost.
2.4.3 Employer's Participation
Under the EPC approach, the Employer usually does something along the following lines (although there are many different options available):
1 appoints a Design Team (usually a highly specialised Engineering Team) to produce the preliminary design information, which could be either only the Conceptual Design and a Performance Specification or a partial or fully completed FEED, along with a Functional Specification (including full performance output requirements);
2 issues bidding documents in which the Employer places a great deal or even all of the risks squarely on the shoulders of the Contractor;
3 receives technical proposals from Contractors for (a) developing the preliminary design information into the Detailed Design information, (b) undertaking the required procurement activities, and (c) constructing and commissioning the completed facility (or at least assisting the Employer's Team with the commissioning work);
4 assesses the technical proposals from the Contractors with a view to establishing which proposals are technically acceptable in all respects;
5 receives commercial bids from the Contractors who had submitted acceptable technical proposals;
6 awards the Project implementation work to the bidder considered to be offering the best deal to the Employer (which usually means the bid with the lowest bid price); and
7 appoints either construction phase administrators (commonly referred to as a Project Management Consultant) to supervise the Contractor's work (and advise on such matters as variations and extensions of the time for completion of the construction work) or, alternatively, a ‘representative’ to monitor what the Contractor is doing (and who will not usually get too involved with the Contractor's activities, but who will act as the eyes and ears of the Employer and also as the Employer's spokesperson).