EPC vs. EPCM in Construction Projects: Limiting Costs, Assessing Risks, and Determining Contractor Involvement

Description

COVID-19 intensifies existing challenges in the construction market, such as fragmentation, low profitability, and concerns shared by owners and contractors alike about time and budget overruns, lengthy claims procedures, and escalating disputes. Effective claims management and disputes avoidance is paramount during these extraordinary times and will require a high level of constructive engagement between all parties, and where possible, creativity and flexibility from all stakeholders.

Understanding the risks and benefits of a project’s management and procurement structure is critical to effective claims management and disputes mitigation. Although EPC and EPCM contracts have been used in the construction sector for many years, there remains confusion about the differences between these contracts, the role each party is required to play, and when to use one arrangement over the other. The fundamental difference is the role of the EPC or EPCM contractor.

EPC contracts provide a fixed-cost and limitations on change orders, as well as hard deadlines. While this benefits owners and developers, it puts contractors at risk due to potential delays and cost overruns. In contrast to the EPC model, the EPCM contractor is not directly involved in building and constructing the project but is instead responsible for the detailed design and overall management of the project on behalf of the owner or principal. The EPCM contractor has a duty to ensure that the project's engineering and design comply with the project's technical and functional specifications.

For projects in the early stages of selecting a procurement and management strategy, both EPC and EPCM have advantages and disadvantages but can be beneficial when used in the right circumstances. The objectives, scope of work, and risk profile should be clearly understood in choosing which method to use as the cost implications of choosing the incorrect form can be substantial for both parties.

Likewise, for projects already well underway and facing mounting delays, cost overruns, and other challenges due to COVID-19 disruptions or other causes, the best solutions to these problems may vary depending whether the lead contractor has EPC or EPCM responsibilities.

Listen as our panel of construction practitioners addresses the EPC and the EPCM contracts' ins and outs and provides guidance on when to utilize these agreements. The panel will discuss critical clauses, how to mitigate contractor liability, and when each contact should be utilized.