Practical Risk Management for EPC / Design-Build Projects. Walter A. Salmon
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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 advice to the Contractor regarding these unacceptable (and added risk) situations is twofold:
1 Never accept the words ‘fixed price’ in the Conditions of Contract, and most certainly not in conjunction with the phrase ‘lump-sum’.
2 Always insist that adequate clauses are added that will entitle the Contractor to reimbursement for Employer-directed Variations. This is especially so if the Employer is adamant that such clauses are missing because no Variations will be allowed (which should be regarded by the Contractor as a ‘red flag’ that major problems are sitting just over the horizon).
2.8 Selecting the EPC Contractor
In an effort to select the best Contractor for an EPC Project, the Employer will normally issue a suite of appropriate bidding (tender) documents to a group of prequalified construction-focused bidders that are highly experienced in, and can demonstrate satisfactory execution of, EPC work. Those bidding documents set out the specific requirements of the Employer for the work to be performed, as well as the requirements for the end outputs from the completed facility. The bidding process itself is frequently divided into two distinctly separate parts (the Technical Bid Proposal and the Commercial Bid Proposal), where the Employer will not proceed with considering a Commercial Bid Proposal until the corresponding Technical Bid Proposal has been found to be acceptable.
The Contractor's preparation work for its Bid Proposals will usually be undertaken under the direction and control of its Proposal Department, and it will also involve a range of different people from the company's corporate workforce (i.e. personnel who are part of the main office's permanent staff and who will not usually be allocated to work on any specific Projects). A tremendous amount of work