WHAT IS A MAJOR EPC PROJECT

INTRODUCTION

In my blogs I have been talking about the management of major projects. Though there is no specific criteria, but it is a generally accepted that a Major Project can be identified as a project with a minimum estimated total installed cost (TIC) of US$ 250 million and accompanied by a high level of complexity. A major project is a large-scale investment project and generally attracts a lot of public interest due to substantial impact on communities and environment. There are a variety of major projects and each project requires a distinct management approach and execution strategy requiring specialized technical skills, execution strategies and the adoption of strategic management philosophy. For example a project to construct a highway may require a different set of skills and execution strategies as compared to a large airport. Similarly the development of a housing complex may require a totally different skills and execution strategies as compared to an offshore oil drilling project.

It is observed that Oil & Gas, Energy, Process and Power projects form a distinct group requiring a common platform of project management techniques. This blog focuses on the management of this group of projects.

With the increase in technological growth and globalization of industry, the scale and complexity of projects continue to increase. The owners have started to realize that aggregating the processes, power, technology and infrastructure generally leads to significant improvements in project profitability. Only a few project managers hold the skills and processes required to plan and deliver these projects. In the following blogs, we will discuss the required skills, processes and procedures to successfully deliver these major projects in an increasingly challenging project delivery environment.

1.         What is EPC

EPC stands for Engineering, Procurement and Construction.  It is a common form of contracting arrangement for the execution of Oil & Gas, Chemical and Process industry. Under an EPC contract, the contractor takes complete responsibility of engineering the facility, installation, procuring the necessary equipment and materials; installing and constructing, either through its own labor or by subcontracting a part of the work.

E

E stands for engineering only. Such contracts are awarded in the initial phases of the project to carry out the basic design or FEED work. FEED stands for Front-End Engineering and Design. For major projects, it is becoming a common practice to split the project into two phases; in the first phase the contractor sets the design parameters that define the work scope, prepare WBS, estimates, and break the work down into work packages to a level sufficient for the award of a detailed EPC contract. The second phase consists of the EPC or EPCM phase.

EP

When the execution scope is restricted to engineering and procurement only; this is referred to as an EP contract. This is often done in situations where the Owner has a preference for doing the construction through its own resources or intends to award the construction work to a third party.

EPCM

When scope is restricted to engineering, procurement and construction management only, this is referred to as an EPCM contract.

2 .        EPC AGREEMENTS

The EPC (or EP or EPCM) agreements are of four major types:

a)         LSTK CONTRACTS

LSTK stands for Lump Sum Turn Key. It combines the Lump Sum (LS) part that refers to the payment of fixed fee under the EPC contract. The second part TK stands for Turn Key. TK specifies that the scope of work includes the commissioning and start-up of the facility to operational status.

b)         LUMP-SUM CONTRACTS

Under Lump Sum Contracts, the EPC contractor’s responsibility is limited to satisfying the agreement terms (generally till the Mechanical Completion) for a fixed fee. Some agreements cover the pre-commissioning activities as well. The owner takes over the charge of project and completes the rest of the work including commissioning, trial runs and plant operations.

c)         COST PLUS CONTRACTS

Under Cost Plus Contracts, the EPC contractor is provided a specified percentage profit over and above the actual cost of Engineering, Procurement and Construction work. These contracts are quite popular with the Oil & Gas and Petrochemical projects. Under these agreements, the owner has a good presence in the project team with most of the decisions being taken jointly.

3.         COST PLUS PROJECT TEAM

Under the Cost-Plus contracts, project team consists of the Owner, the EPC Contractor and third parties engaged on specific jobs. On account of the complex responsibility, decision making and approval process, the formation of the project team under such agreements needs a great deal of effort. It is therefore necessary to develop a detailed responsibility matrix to define the responsibility and approval process of each team member.  A detailed discussion on this subject will be done under RASCI blog.   

4.         ALLIANCE AGREEMENTS

Alliance agreement is a model of co-operative work model that had become very popular in the EPC industry during 1990’s.  Excessive cost over-runs and project delays started a re-thinking in the industry leading to the alliance agreements. The alliance contracting concept evolved as a response to two perceived failings in the traditional model of EPC business. The first was the excessively adversarial nature of the EPC contracts, driven by the traditional LSTK agreements with liquidated damages. The second was the barrier to outstanding project performance that was the need of the day.