Demystifying EPCM contracts – What's in an 'M'?

29 April 2011

Engineering, Procurement and Construction (EPC) and Engineering, Procurement and Construction Management (EPCM) contracts are two project delivery methods commonly used in the petrochemical oil and gas, mining and power sectors. Despite the widespread use of these contract models, there remains a general level of mystification associated with EPCM contracts. By acronym alone, the two contract models appear to be similar. So what's in an 'M'?

EPC contracting

An EPC contract provides a suitable framework for projects where significant engineering expertise is required, and the principal does not need to retain design control or flexibility in execution. EPC contracts are commonly used for large scale resource developments, such as oil and gas plant projects.

Under an EPC contract, the EPC contractor develops the project from its inception to final completion. The principal provides the EPC contractor with technical and functional specifications for the project, and the EPC contractor subsequently designs, builds and delivers the project in an operational state so that it can be operated at the 'turn of a key.' This is why EPC contracts are often referred to as 'turnkey' contracts.

EPC contracts are almost always 'lump sum', where the EPC contractor is limited to receiving a fixed price irrespective of the actual cost of performing the work. The EPC contractor generally bears the risk of any cost overruns and also benefits from any savings that can be made. Additionally, the EPC contractor usually provides a performance guarantee (subject to agreed liability caps).

EPCM contracting – What's the difference?

By contrast, an EPCM contract is a sophisticated project management or agency arrangement where the EPCM contractor:

  • Is responsible for the detailed engineering and design for the project
  • Manages the project as the principal's agent or representative, including providing programming and strategic management services, and
  • Is typically responsible for breaking down the procurement and construction work into packages, managing their tender, overseeing the principal's entry into the trade/supply contracts and managing those trade/supply contracts for the principal to ensure completion of the project.

Unlike EPC contracts, EPCM contracts are almost always 'cost plus' (or 'cost-reimbursable'). The principal pays the subcontractors directly for materials, equipment and on-site works, and only pays the EPCM contractor its actual direct costs (mostly labour) for performing engineering and supervisory services, plus an agreed margin. The margin charged by EPCM contractors varies depending on the risk assumed (which is usually low), the size of the project (small projects usually have higher margins) and supply/demand position in the economy.

EPCM contracts are commonly used for the construction or expansion of large-scale heavy engineering facilities or manufacturing plants in the petrochemical oil and gas, mining and power sectors, where engineering and project management skills are more likely to be separate to construction and supply capability. EPCM contracts are not generally used for civil projects, except where the project can be delivered by relatively small, self-contained packages awarded to multiple contractors.

So what's in an 'M'?

There are, of course, many other differences between the EPC and EPCM. The fundamental difference, however, lies in the 'M'. The 'Construction Management' component of the project delivery method means that the EPCM contractor does not perform construction work and does not usually take full responsibility for delivering the completed project. As with any project delivery method, deciding whether an EPCM contract is appropriate for your project can be a complex process, and requires a rigorous analysis of project objectives, constraints and key risks to address suitability on a transaction-specific basis.

This article is from our April 2011 edition of On Site.