ABSTRACT
EPC (Engineering, Procurement, Construction) and EPCM (Engineering, Procurement, Construction Management) are contract models for the construction of complex projects and large facilities. These two agreement models differ from each other in terms of scope, quality, duration, price, and can involve different demands of the owner. This article discusses the features, intended use, and differences of these agreement models. In light of the risks and responsibilities on the owner and contractor arising from these differences, the article covers how owners can select between the agreement models and the effects of this choice on the construction process. The main purpose of the article is to show which of the EPC and EPCM contract models are more convenient for owners for the completion of their project, considering the demands of the owner, the current situation, and the nature of the project in question.
I. INTRODUCTION
With the progress of technology today, the need for constructing complex projects and large facilities is increasing in sectors such as production, industry, energy, infrastructure, telecommunication, and transportation. In order to meet this need, there are different agreement models covering design and construction. The most common of these are the Engineering, Procurement, Construction (EPC) and Engineering, Procurement, Construction Management (EPCM) contract models1. The common purpose of these models is to complete the construction of a project an owner requires. The difference between the models is mainly the distribution of risk and responsibility during the construction process. In the EPC contract model, the EPC contractor undertakes a turnkey result in a specified time by assuming all risk and responsibility while in the EPCM contract model, the EPCM contractor provides consultancy services during the construction process and does not undertake the actual construction. To provide a guide to the selection of an agreement model in line with the demands and priorities of the owner, the features of the two agreement models and the points that distinguish them are explained below.
II. EPC AGREEMENTS
An EPC contract is an agreement of work within the scope of the Turkish Code of Obligations No. 60982. One party to the agreement is the owner requesting the construction of the project (work) subject to the agreement, and the other party is the EPC contractor employed to create this work. During the construction of the project, the only agreement concluded by the owner is the EPC contract, whose counterparty is the EPC contractor. The EPC contracting company, on the other hand, concludes various agreements with the contractors, subcontractors, and suppliers such as design, engineering, construction, and procurement in order to perform the necessary works for the completion of the project3. Regulations regarding the EPC contract model are included in the FIDIC (International Federation of Consulting Engineers) Silver Book.
EPC contracts are turnkey agreements considering both the purpose of their conclusion aim and the nature of the work agreement, and the EPC contractor guarantees the working capacity and efficiency of the resulting facility4. The turnkey date is set by the parties and, usually, there is a specific date or time limit. The EPC contractor undertakes to deliver a facility operating at the agreed capacity and performance to the owner by the end of the period agreed in the agreement5. This commitment constitutes the EPC contractor’s main obligation under the agreement.
While the parties to an EPC contract are the owner and the EPC contractor, the EPC contractor is party to all other agreements made with contractors, subcontractors and suppliers required for the construction of the project. The EPC contractor is responsible for regulating provisions such as price, duration, condition, guarantee, etc. in these agreements and ensuring that the other parties fulfill their obligations in these sub-agreements in accordance with the period specified in the agreement. In addition, an important part of this responsibility is to select the parties with whom the sub-agreements will be concluded from among those that have the necessary qualifications to complete the work properly and on time. In this case, the experience of the EPC contractor regarding construction agreements plays a part.
Since the EPC contractor is a party to all kinds of agreements required for the completion of the complex project subject to the EPC contract, it is also the party that undertakes all the risks that may arise from these agreements. Where problems occur with contractors, subcontractors and suppliers, for example, delays in the performance of the works, defects, or the operation of the completed facility having a capacity or efficiency lower than that committed to in the EPC contract, the owner’s only addressee is the EPC contractor. The owner, who is not a party to any of the sub-agreements, directs any demands in the event of any damage caused by them to the EPC contractor.
In these contracts, the agreement value is paid in return for the completion of the project on time and to the agreed performance6. This price, the "lump sum price", is usually determined at the signing of the agreement and is fixed. In cases where a price cannot be determined on the date of signing, the agreement is concluded with an estimated price valid until the time that the price can be determined. Where the lump sum price is determined, any risk and cost changes related to changes that the owner requests within the scope of the project are the responsibility of the owner. For this reason, presenting as detailed and precise a design as possible when the agreement price is determined increases the likeness of the price initially determined to the real price. If the agreement price is not determined on the date of signing or within the terms of the agreement, a payment method in the form of "cost plus" may be preferred. In this way, the owner pays the EPC contractor an amount, decided by the parties, in addition to the agreement prices concluded with the contractors, subcontractors, and suppliers. The owner requests a guarantee from the EPC contractor, to an amount to be determined, over the total price of the agreement within the scope of the EPC contract against possible risks during the completion of the project or situations such as the facility having a lower working capacity after the completion than agreed upon. The guarantee covers all kinds of deficiencies and defects that may arise at different stages such as engineering, design or construction of the complex project, the quality of the materials supplied, and the efficiency of the completed facility. The owner is able to request compensation from the EPC contractor, regardless of the stage of the problem or with which contractor, subcontractor or supplier the problem arises. As previously mentioned, the EPC contractor is the sole addressee of the owner, and as long as the fault is not caused by the owner, all responsibility falls to the EPC contractor7.
The FIDIC Silver Book regulates four mechanisms for the owner against possible problems that may arise within the scope of EPC contracts. First of all, it should be reiterated that, due to the nature of EPC contracts, the EPC contractor is responsible for situations such as errors, defects, and delays that occur within the scope of the project. The four mechanisms discussed here are the rights granted to the owner if the defects are not remedied under FIDIC and in some exceptional cases. The responsibility of the EPC contractor is not limited to those mentioned here. Timing is critical in complex projects subject to EPC contracts and the first of the rights granted to the owner within the scope of the Silver Book relates to delays. The Silver Book stipulates that the EPC contractor must pay a delay penalty based on a daily delay rate to the owner8. Another commitment made by the EPC contractor is a performance guarantee in line with that agreed in the contract. In accordance with Silver Book Article 12.4, in the event that this commitment is not met (or deemed not to have been met in accordance with the Article), the EPC contractor is liable to indemnify the owner for any damage incurred. Thirdly, FIDIC regulates optional rights for the owner if the defect is not properly remedied by the EPC contractor within a reasonable time. These rights are the elimination of the defect by the owner provided that the EPC contractor is liable for the costs, the reduction of the agreement price, and the termination of the relevant part or all of the work depending on the scope of the defect. Finally, the owner has the right to terminate the agreement if the conditions specified in Silver Book Article 15 are met. This right can be used if the EPC contractor is notified fourteen days in advance, and then the owner may complete the work itself or have it completed by another contractor9. Additionally, the owner has the right to terminate the work for no reason, provided that the work is definitely terminated and it is not continued by the owner or any other10. In addition, Article 7.5. of the Silver Book grants the owner the right to reject the project. This right is an alternative to a repair request. Where the project is made in a defective way or in a way other than that agreed in the contract and this situation is not corrected by the EPC contractor within the given time, the owner may reject the work upon notification of the said defects to the EPC contractor11. This right granted to the owner is generally excluded from EPC contracts as it puts the EPC contractor in a difficult situation if used.
III. EPCM CONTRACTS
EPCM contracts are service agreements defined in Article 393 of the Turkish Code of Obligations. The owner concludes an agreement with the EPCM contractor in order to receive services in the management of the agreements of the project such as engineering, procurement, construction, and coordination of the project12. It should be noted that although there is no standard form of the EPCM contract model within the scope of FIDIC, it is clear that the EPCM contract is not a construction agreement. However, there is no source that fully defines this model. Explanations of these contracts are made through a comparison with EPC contractors and the obligations of the EPCM contractor13. Even though this situation may cause confusion, it would be appropriate to say that the responsibility of the EPCM contractor to the owner under the agreement is to develop the project design and manage the construction process on behalf of the owner.
The EPCM contractor provides consulting, engineering, design, construction management, and post-construction process management services. The owner is party to the agreements made for all the works required for the completion of the project in question14. The management obligation in this model includes checking the compliance and the functionality of various agreements that the owner has concluded with contractors, subcontractors, and suppliers15. There is therefore no time commitment regarding any delivery or fulfillment of obligations under the EPCM contract.
Since any agreement to be concluded regarding the completion of the facility will be concluded between the owner and the contractors, subcontractors, and suppliers, the EPCM contractor does not have any liability within the scope of these agreements. Thus, the risk and responsibility under each agreement fall to the owner. The obligation of the EPCM contractor is the selection of the contractors and suppliers with whom the owner will sign an agreement, the preparation of tenders, and the coordination of these parties16.
There are generally two ways to pay the agreement price under the EPCM contract model. The first of these is a monthly fixed payment in addition to an advance payment to the EPCM contractor, and the second is a payment in addition to an advance payment to be made upon the completion of certain stages of the construction17. The amount of collateral to be requested for the agreement is calculated over the relevant agreement price. In the EPCM contract model, collateral is calculated over the EPCM contract price, and the agreement prices to be concluded by the owner with other contractors, subcontractors or suppliers are independent of the collateral that can be requested from the EPCM contractor. In this case, the security price obtained from each agreement is below the total cost of the project. If damage occurs under any or more of the agreements other than the EPCM agreement, it is likely that the damage incurred within the scope of the project will be above the security price. Therefore, the amount of the security price provided may be insufficient to cover the resulting damage. Another point regarding the issue is that it is not always possible to determine under which agreement or agreements the damage occurred within the scope of the project. In these circumstances, the owner may experience problems in both determining the source of the damage and the amount of compensation.
IV. COMPARISON
EPC and EPCM contracts are two different methods to achieve the same result. The purpose of both agreement models is to complete a complex project requested by an owner. The main difference is determined by the roles of EPC and EPCM contractors under the agreement. On the one hand, the EPC contractor undertakes all kinds of work up to the turnkey date agreed at the beginning of the project, while on the other hand, the EPCM contractor is responsible for the design and management of the project. This difference within the context of liability has a direct effect on who undertakes the risk and responsibility. In an EPC contract, the EPC contractor is responsible for every stage of the construction and undertakes all the risks within the scope of the project. In this case, the owner does not need knowledge or resources regarding the selection of qualified contractors, subcontractors, and suppliers to conclude sub-agreements with. On the other hand, in EPCM contracts, all the risk and responsibility involved in completing the project lies with the owner.
The difference in the distribution of risks and responsibilities arising in the EPC and EPCM contract models is also reflected in the agreement price. The EPC contract model, in which the responsibility undertaken against the owner accumulates with one person, is costlier than the EPCM model, in which the risk is distributed among the contractors, subcontractors, and suppliers.
There is a difference between the two agreement models in terms of the person to whom the requests regarding the problems that arise during the project or the desired changes are directed. While in the EPC contract, the owner directs all kinds of requests to the EPC contractor, in the case of EPCM contracts, the owner has to deal with the relevant contractors, subcontractors, or suppliers depending on the content of the request.
EPC and EPCM contract models also differ in terms of flexibility. While EPCM contracts give flexibility to the owner in many respects, EPC contracts are determined from the date of signing, and the construction is carried out in line with the design requested by the owner within the agreed time. In the case of EPCM contracts, the agreements concluded are spread throughout the project construction process. Instead of fixed agreement terms, price, and duration determined at the beginning of the agreement, the negotiation processes are carried out directly by the owner during the construction period, increasing the share of flexibility. This may also enable the project to be completed earlier. Also, in cases where changes may occur in the procurement process, the EPCM contract model provides the owner with a wider range of possible action18.
These two agreement models also differ in terms of force majeure, changes in the law, and the effect of unexpected problems that may occur in the supply chain. While the EPC contractor bears all of these risks in EPC contracts, these risks are undertaken by the owner in EPCM contracts. The experience of the owner in project construction, the budget they allocate for the work, and the risks and responsibilities they can afford to carry determine the choice of agreement model19.
In addition, the rights granted within the scope of the FIDIC Silver Book to the owner as a result of situations such as defect, fault, delivery of work different from the agreement under the EPC contract model, are not in question for the EPCM contract model. This is not due to the fact that the EPCM contract model is not regulated within the scope of FIDIC, but is essentially due to its nature as the responsibility lies with the owner. Where problems arise within the scope of the project, the EPC contract model provides the owner with different solutions.
V. CONCLUSION
This article explains the features of EPC and EPCM contract models, their usage in the construction of complex projects, and the differences between them. Although agreement models are parallel in terms of their conclusion purposes, the characteristics of the agreements differ in terms of the risk and responsibility undertaken by the owner and the contractor. While in the EPC contract model, the contractor undertakes a turnkey facility with a performance guarantee within a certain period of time, in the EPCM contract model, the contractor undertakes to provide management and consultancy services to the owner throughout the project. Both agreement models have aspects that can be considered advantageous and disadvantageous in terms of the owner’s expectations, demands, and priorities within the scope of the concrete project. EPCM contracts can be preferred as they provide flexibility to the owner in terms of agreement price and duration. However, EPC contracts provide greater convenience to the owner as all liabilities related to the project are arranged with a single agreement. The important factors to be considered are the experience of the owner, the budget, the scope of the risks the owner can carry, and the characteristics of the project the owner requires. While the EPC contract model is mostly used to meet the demands of the owner without incurring any risks and on a turnkey basis in a certain time, EPCM contracts are preferred in cases where the owner aims to follow the construction process more closely, to keep the total cost lower, or when the design is not clear at the time of signing the agreement. By evaluating the mentioned elements by the parties, the most suitable way can be found for both the owner and the contractor. Although the EPC contract model has been in use for longer than the EPCM contract model, both agreement types are currently preferred to meet the different demands of the owners and contractors in complex project construction.
BIBLIOGRAPHY
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FOOTNOTE
1 “EPC/EPCM Definition & Comparison”, 02.11.2009, Construction Management Guide, http://www.cmguide. org/archives/1979 (Date Accessed: 17.02.2021).
2 Turkish Code of Obligations No. 6098, Article 470
3 Eyal Leshem, “Constructing industrial facilities: EPC vs. EPCM”, Meptagon. https://meptagon.com/ articles-%E2%80%A8epc-vs-epcm/ (Date Accessed: 11.02.2021)
4 “5 Features of EPC contracts”, Opus Kinetic, 15.06.2020 https://www. opuskinetic.com/2020/06/5-featuresof-epc-contracts/ (Date Accessed: 09.02.2021)
5 “What is the Constructual Structure of EPC Contracts”, Opus Kinetic, 25.03.2020 https://www.opuskinetic. com/2020/03/what-is-the-contractualstructure-of-epc-contracts/ (Date Accessed: 02.02.2021)
6 Jonathan Hosie, “Turnkey contracting under the FIDIC Silver Book:What do owners want? What do they get?”, Mayor Brown, November 2007 https://fidic.org/sites/default/ files/hosie06.pdf (Date Accessed: 09.02.2021)
7 “EPC or EPCM contracts?” Hogan Lovells, January 2016 https://www.hoganlovells.com/en/publications/epcor-epcm-contracts (Date Accessed: 11.02.2021)
8 FIDIC, Silver Book Condition of Contract for EPC/Turnkey Projects, Second Edition 2017 Article 8.8.
9 FIDIC, Silver Book Article 15.2.4.
10 FIDIC, Silver Book Article 15.5.
11 FIDIC, Silver Book Article 7.5.
12 Ron Douglas, “EPC or EPCM Contracts”, Ausenco, 11.10.2016, https://www.ausenco.com/en/ epc-epcm- whitepaper (Date Accessed:18.02.2021).
13 Phil Loots, Nick Henchi, “Worlds Apart: EPC and EPCM Contracts: Risk issues and allocation?”, Mayor Brown, November 2007, https://fidic.org/sites/ default/files/epcm_loots_2007.pdf (Date Accessed: 11.02.2021) p. 2.
14 Zeynep Sozen, İnşaat Sözleşmelerinin Yönetimi, First Edition, Istanbul 2015. p. 5-6.
15 Phil Loots, Nick Henchi, Worlds Apart: EPC and EPCM Contracts: Risk issues and allocation? p.5.
16 Sozen, İnşaat Sözleşmelerinin Yönetimi p. 6.
17 “EPC or EPCM contracts?” Hogan Lovells.
18 “EPC/EPCM Definition & Comparison”, 02.11.2009, Construction Management Guide, http://www. cmguide.org/archives/1979 (Date Accessed: 17.02.2021).
19 Pawl Piotrowski, Nicola J. Ellis, “COVID-19: EPC and EPCM in Large Construction Projects Post COVID-19” The National Law Review, Volume 10, Issue 211, Year 2009 https:// www.natlawreview.com/article/ covid-19-epc-and-epcm-large-construction-projects-post-covid-19 (Date Accessed: 02.02.2021).
