Constructing industrial facilities: EPC vs. EPCM
The predominant project management approach used to champion keeping the consulting party separate from the constructing party. This approach was known as Engineering Procurement and Construction Management (EPCM)
An owner hires a company to provide engineering design services, prepare procurement lists, and manage construction by employing subcontractors and drawing up direct contracts with the owner. The owner, who for the purposes of this discussion is planning to construct an industrial plant, feels secure in engaging a consulting company that will provide management and oversight services also after the design is completed. This way, the consulting company is acting as budget watchdog, safeguarding the budget from the construction companies and ensuring that the completed facility is standard-compliant.
At face value, this is a good way of preventing conflicts of interest. The owner feels in control and enjoys the security of having a consulting firm to assist in keeping the project up to standard and on budget.
But this is where reality kicks in, and an infinite number of projects will prove that this model suffers from five key evils:
First, it does not include a process guarantee. In other words, the owner holds all the risk with no guarantee of a final product. Second, the cost-plus ststructure meansaying the consulting company costs plus an agreed profit (in EPCM this is usually based on consulting hours). This engenders a deliberate strategy on the part of the consulting company to increase bureaucracy and complexity so that the owner consumes more EPCM services. Problems three and four follow from this; namely, an open budget and procrastination. The owner, who originally hired the management services, now becomes ensnared by the fifth problem and is transformed from being the party with overall responsibility into the de-facto project manager, a role that the owner is usually not equipped to fulfill.
These cardinal issues will have far-reaching direct and indirect financial implications for the owner. Protracted schedules when erecting a manufacturing plant directly increase management costs, and what is far worse, entail lost production.
Such complications invariably spark tension between the owner, designer, and contractor. In most cases, the owner will pay the highest penalty; usually a double one because the project will have taken double the time to complete, the owner has no guarantee in hand, and in most cases will also be required to pour more money into improvements and repairs.
The past few years have seen the emergence of an alternative approach known as Engineering Procurement (EPC). It developed at construction companies who fine-tuned their in-house engineering divisions to be able to provide their clients with turnkey solutions. An EPC company will design, procure, and erect the facility for the owner, handing over at the end of the process a single operating system. All subcontractors and suppliers are engaged via the EPC company. Unlike EPCM mindset, these companies believe in collaboration and that the only way to successfully complete a complex project such as a manufacturing facility is to deepen the dialog between planners and executers.
This novel approach firmly believes in recruiting contractors’ ‘street smart’ experience and setting it to work for the theoretical engineering wisdom. Companies shrewd enough to integrate both types of expertise are recruiting expert engineering teams, and procuring sophisticated engineering tools such as advanced calculating software, simulators, and 3D imagers so they can provide contractors with visuals at the design phase. These tools are applied in the design phase to allow control and comments to refine the plan. The overall goal of this approach is to deliver a complete system that utilizes the theoretical design to mold the practices and experience on the ground.
Shifting from EPCM to EPC is a work in progress, but it is gaining momentum. The road to success lies in gaining clients’ trust, and trust can be earned by repeatedly delivering turnkey operations that run well, on budget and on schedule. EPC guarantees clients receive their facility on schedule and at a predetermined budget with a process guarantee, so the owner is not required to invest time in project management. In fact the entire responsibility is shifted to the EPC company; the owner has only one point-of-contact and can concentrate on one thing – ensuring that the EPC company is providing the most suitable product, at the agreed cost and on the agreed schedule.
*The author is head of systems and engineering in the Meptagon Group