EPC vs EPCM

EPC / EPCM Definition & Comparison:

Many different terms are tossed around the construction industry loosely describing the different methodology used to design and construct new facilities and turnarounds. Unfortunately, there are no tried and true definitions for the different methods and numerous variations of each of the most popular methods.

Determining the correct form of construction contract to pursue can have a great effect on the cost and risk associated with the construction project. The cost of construction varies inversely with the amount of business risk the “owner / financers” are willing to accept. The less business risk the owner wishes to assume, the higher the cost of construction and management. This follows the “risk-reward” motto for business.

The two most common types of construction contacts are EPC “turn-key” and EPCM. Each of these methods have variations that can be adapted to each project as needed; example (EPCC Engineering, Procurement, Construction, and Commissioning, EPCI Engineering, Procurement, Construction, and Installation), etc.

EPC (Engineering, Procurement and Construction): means the company is contracted to provide engineering, procurement and construction services by the owner. Think Design & Construct style contracts, where the project is largely Contractor managed and the cost risk and control are weighted towards the Contractor and away from the Owner. The EPC contractor has direct contracts with the construction contractors.

EPCM (Engineering, Procurement and Construction Management): means the company is contracted to provide engineering, procurement and construction management services. Other companies are contracted by the Owner directly to provide construction services and they are usually managed by the EPCM contractor on the Owner's behalf. Think Professional Services contracts, where the project is largely Owner managed and the cost risk and control is weighted towards the Owner.

EPC and EPCM contracting are both very prevalent types of contracts within the construction industry. Dependent on the level of risk the Owner of a project is willing to accept, budget constraints, and the Owner’s organization core competencies, will determine which method is best for their project.

EPC contracting tends to be more expensive, to the Owner, due to the shift of project risk away from the Owner and to the EPC Contractor. On average, a project’s cost 10% - 20% more using EPC style of contracting than a project using the EPCM style of contracting. This is due in large part to the project’s risk being more evenly distributed between the Owner and contracts / suppliers.

Construction contracting trends have been leaning towards the EPCM style of contracting and away from EPC contracting for several reasons but both methods have their place in business today.

EPCM Advantages:

• Lower Overall Cost
• Staff’s Sense of Ownership
• More Control over Process
• Better for less defined projects with anticipated changes to scope of supply
• Less Legal Litigation (Identify issues early and remedy situation before larger problems arise)
• Owner’s Financing Flexibility

These are just a few of the advantages of EPCM style of construction contracting.

EPC contracting has it place in the construction industry as well. Under certain situations, it makes better sense to use this type of construction contracting than other methods.

EPC Advantages:

• One Stop Shopping "One point of Contact"
• "Hands off" approach to project
• Minimal Staffing Requirements
• Minimal Legal Risk
• Best for Well defined projects with Detailed Engineering Complete before EPC Contractor selected (Minimal Unknowns).

As stated before, these construction contract methods can be tailored to the individual projects / owner’s needs. Some companies can go as far as breaking up each portion of the EPC / EPCM (Engineering, Procurement, Construction / Construction Management) to separate companies. One company can do the engineering; another can do the procurement, while still another can do the construction / project management).

Each company must decide for themselves, with the advice of legal and financial counsels, as to which method of construction contracting is best for their particular project and situation.

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