Engineering, procurement and construction management
John Challenger BSc (Hons) CEng FIChemE FIMechE, Chairman, IChemE Contracts Committee
IN recent years there has been an upsurge in the popularity of engineering, procurement and construction management (EPCM) contracting driven by a number of factors not all of which are immediately obvious.
Whilst the Institution of Chemical Engineers has set a benchmark in publishing its Blue Book in 2023, the EPCM method of contracting has been around for more years than might be imagined. It is slightly odd that it has taken so many years for a standard form of contract to be published, but this may be because of the complex arrangements that exist between the various parties involved in this type of contract.
As with many forms of contract, the use of the EPCM method of project execution has been in and out of fashion for many years. There have been several learned articles published since 1990 which clearly describe the methodologies used and these are generally similar to those adopted in the IChemE’s contract but there is often no reference to a specific form of contract which adequately establishes a structure and format suitable for the EPCM method of working.
In recent years there has been an upsurge in the popularity of engineering, procurement and construction management (EPCM) contracting driven by a number of factors not all of which are immediately obvious.In many respects this is not surprising because, as the IChemE’s draft committee found, it is a challenging task to adequately describe the way in which the various parties must work together to successfully execute a project in a fair and balanced manner.
There are several factors that have affected the use of the EPCM approach, and these have varied over time:
- The sheer scale of projects and their cost has both in the past, and currently, been a major factor simply because contractors are increasingly unwilling to take the financial risks and hence corporate exposure of such large contracts, that far outstrip either the corporate capacity to self-insure or insurance cover that can be obtained in the market at any kind of reasonable premium.
- A second factor is the lack of technical, corporate management and project management capability particularly in the UK, with adequate experience of the range of practical skills and theory needed to manage major projects. There is also an erroneous belief that gaining basic project and general management qualification allows the manager to work successfully in any technical sector without in-depth experience of the manufacturing processes of plant used in that sector. We have in the last few years seen a myriad of company and project failures which are undermining many strategic manufacturing, infrastructure and construction activities. In the article, ‘Tackling the Project Management Crisis’, which was published in the December/January 2024 issue of The Chemical Engineer, I posed the question of whether the process industry is facing a project management crisis. The majority of readers agreed with the concerns that were raised and would like to see the steady loss of manufacturing capability in the UK reversed.
In common with all other IChemE contracts, the Blue Book contains a typical form of agreement and a set of general conditions of contract between the purchaser and the EPCM contractor. The form is structured to be able to incorporate reimbursable, fixed or target price arrangements.
- Interestingly, during the boom in biotechnology which took place in the 1980s, many ambitious start-up companies did not have the project management or technical skills to be able to convert their cutting-edge science into workable production capacity. This was a period when relatively small consultancy firms with a small but highly skilled and experienced staff provided specialist engineering support and experienced technical project management capability. They supplied the rapidly growing sector with EPCM services to deliver projects that often had very limited budgets. The consultancy firms also had limited financial resources and offered their EPCM services under various forms of services or consultancy agreements, since the full design and build contracting arrangement would have been an impossibly high liability and financial risk. Projects of this type were delivered very successfully to a range of clients both in the UK and internationally. This method of working started to disappear in the 1990s because several major contractors mounted an increasing drive to persuade both funders and corporate financiers that using small but highly specialised professional services was a high-risk strategy. As a result, EPC method of working soon became the favoured approach.
Now, the willingness of contractors to execute projects on a full design and build basis using either fixed price lump sum contracts or the more flexible target price arrangements, (typically the IChemE Red and Burgundy Books) is becoming less desirable for the reasons explained above. It was these factors that were recognised by the IChemE’s contracts committee in 2017 which ultimately led to the drafting of the Blue Book which was finally published in 2023. The terms of reference, based on the following diagram, adopted at a very early stage remained reasonably static throughout the drafting process.
The Blue Book
The success of any EPCM contract relies upon a good working relationship between the EPCM contractor and the purchaser and as a result there needs to be a great deal of cooperation between the two key parties to the contract.
In common with all other IChemE contracts, the Blue Book contains a typical form of agreement and a set of general conditions of contract between the purchaser and the EPCM contractor. The form is structured to be able to incorporate reimbursable, fixed or target price arrangements. Guidance is published with the contract, to enable users to understand how to compile the specification and the schedules to which reference is made throughout the general conditions.
Guide notes are also included to aid interpretation of some of the general conditions and to explain the possible need for certain optional or special conditions examples of which are provided in parts A, B and C. Users of the conditions are strongly advised to read the relevant guide notes before preparing the specification, the schedules and any special conditions, all of which will need to be written individually to reflect specific contract/project requirements.
Cooperation
The success of any EPCM contract relies upon a good working relationship between the EPCM contractor and the purchaser and as a result there needs to be a great deal of cooperation between the two key parties to the contract as clearly defined in clause 2 (co-operation). It is also a key feature that the EPCM contractor, to be appointed in each of the works contracts in the role of project manager (see sub-clause 9.3), therefore has a fundamental role in the successfully delivery of the project as a whole.
As the EPCM contractor is acting as the project manager on behalf of the purchaser, it is essential that there is an open relationship between both parties, as the purchaser will ultimately be entering into the works contracts as the purchaser and therefore will be liable for the commercial and operational aspects of each works contract.As the EPCM contractor is acting as the project manager on behalf of the purchaser, it is essential that there is an open relationship between both parties, as the purchaser will ultimately be entering into the works contracts as the purchaser and therefore will be liable for the commercial and operational aspects of each works contract in accordance with sub-clauses 9.1 and 9.10. The tendering, negotiating and agreement of the works contracts are intended to be carried out by the EPCM contractor with purchaser’s oversight and approval as stated in subclause 9.4.
Therefore, it is essential when drafting schedule 7 (contracting) that a thorough and accurate understanding and agreement is reached between the EPCM contractor and the purchaser in order that the requirements of the tendering and evaluation process can be effectively carried out. This will ensure that the subsequent works contracts are negotiated diligently and effectively with the full understanding and knowledge of the purchaser, the EPCM contractor and each specific works contractor.
It is envisaged that one or more forms of contract may be used as a basis of the works contracts but they must be in a format that will be fully compatible with the EPCM contract and are relevant to the process industries. Some commentators have questioned why IChemE has not drafted specific works contracts for use with the EPCM form. This was not considered necessary since the existing Red (fixed price lump sum), Burgundy (target price) and Green (reimbursable) books all have a very similar format to the EPCM contract and it has been found in practice that they can be fully integrated. It should also be noted that for relatively small-scale works, IChemE’s Orange Book (minor works contract) can also be used.
The great strength of all previously published IChemE contracts has been the integrated nature of the specification and schedules. Every process plant contract requires a specification which contains the detailed technical definition of the plant. The more precise and comprehensive the specification can be made, the greater will be the EPCM contractor’s understanding of its commitments. Whereas the specification describes what is to be built, the schedules describe how the EPCM contractor is to carry out its duties under the contract. In the case of the Blue Book, schedule 1 (description of the services and the works) should provide a detailed narrative of project management, design, procurement activities and construction management services which the EPCM contractor is to provide.
If the EPCM style of project execution is adopted and the EPCM contractor and purchaser are prepared to cooperate and communicate as the Blue Book requires, the outturn result can show marked advantages both in cost and time over the more prescriptive EPC forms while giving the purchaser more flexibility regarding the outcome of the final plant.
Clearly, the services to be provided by the EPCM contractor alone are not sufficient to enable the complete design, procurement and construction of a process plant. The works contracts, with various contractors are necessary to define the entire scope of the project and to execute the construction of the complete plant. Therefore, although the initial specification may describe the basis of design, it needs much greater detail to be developed as the project develops which will be based on the information provided as part of the procurement activity driven by the EPCM contractor and ultimately agreed by the purchaser.
This inevitably leads to some uncertainty regarding the technical definition when a contract is signed, particularly of the proprietary items to be supplied by the works contractors, unless an extremely thorough basic engineering package has been produced as part of a front-end design activity. This uncertainty is dealt with in the contract by the recognition that the overall project budget and programme may not be established initially and therefore provisions and procedures are included to finalise and monitor the costs and to ultimately develop an approved programme and budget.
The optional conditions
The inevitable development of both costs and time, led the drafting committee to incorporate an optional conditions of contract (part B) for target price for the services and the works. In clause 13 (plant cost) there is a requirement for an initial target cost to be developed within an agreed timescale, and a similar approach is adopted for the project programme.
Advantages of EPCM
Regarding liabilities, the EPCM contractor is expected to diligently carry out and complete its service as described in the contract with the reasonable skill and care to be expected from a suitably qualified and competent company. It is therefore extremely important that the purchaser pays close attention to the capability and experience of the potential EPCM contractor before it is appointed. Referring to my earlier point, it is increasingly becoming difficult in the UK for purchasers to identify contractors that are fully qualified to execute complex process projects.
The reasonable skill and care provision means that unlike other IChemE contracts, with the exception of the Silver Book (professional services), there is no fitness for purpose obligation on the EPCM contractor.
However, this is not the case if, as the Blue Book recommends, the IChemE design and construct contracts e.g. Red, Green, Burgundy books are adopted for the works contracts since they contain a clear requirement regarding fitness for purpose. It is also expected that the two most likely forms to be used would be the fixed price and target price versions since these will bring a greater certainty to the initial project budget and the final project cost.
The other reason for using the IChemE forms as a basis for the work contracts is that they are similar in format, content and philosophy to the Blue Book. This is particularly true regarding matters such as the completion of construction, taking over and testing which generally set the IChemE contracts apart from other published forms.
In conclusion, if the EPCM style of project execution is adopted and the EPCM contractor and purchaser are prepared to cooperate and communicate as the Blue Book requires, the outturn result can show marked advantages both in cost and time over the more prescriptive EPC forms while giving the purchaser more flexibility regarding the outcome of the final plant.
It also helps to widen the basis on which purchasers can appoint suitably qualified design and management teams by opening up the supply chain to a wider number of companies, thereby providing greater choice by allowing a more flexible project execution process that can better react to market forces.
Several companies both in the UK and internationally have already started to adopt the Blue Book as a core contract on which to base their future procurement methodology.
John Challenger BSc (Hons) CEng FIChemE FIMechE, Chairman, IChemE Contracts Committee