Customer Viewpoint: IChemE Forms of Contract

IChemE’s The Blue Book provides a standard reference point for the engineering, procurement, and construction management (EPCM) contracting model. Freshfields Bruckhaus Deringer’s Hannah Smith and Vanessa Medina explain why it could not have come at a better time

WE ARE seeing EPCM (or variations of EPCM) on more and more projects thanks to a client list that features cross-sector project owners (purchasers), contractors, and advisers. These EPCMs cover energy transition projects employing novel technologies and a range of performance-related projects such as nuclear power production, pharmaceuticals manufacture, water desalination, tunnelling, and high-voltage distribution.

has become an increasingly popular contracting model as an alternative to more traditional EPC or “turnkey” contracting where contractors are typically obliged to design, build, and deliver a complete facility. The EPCM contractor, meanwhile, does not undertake actual building or construction, but is typically responsible for developing the design, managing the construction process, procuring contracts with contractors and suppliers on behalf of the project company, and managing the contractors who are constructing the building – the works contractors.

Drivers for this increased use of EPCM contracting include:

• employers seeking to attract contractors to a project where the resource pool is limited but project demand is high, where technologies are relatively new, such as carbon capture and storage, or for large-scale oil and gas refinery projects
• contractors seeking an alternative to taking full turnkey risk, particularly in a contractor’s market and where the technology risk is high, or they already have a portfolio of high-risk projects
• employers seeking to have greater control and oversight of high-risk projects and their supply chain
• employers seeking to access the perceived benefits of EPCM contracting, including faster delivery and lower costs

A successful EPCM structure can bring benefits to both parties: employers can avoid the large risk premiums and profits required by EPC contractors, while contractors may avoid taking on the high risks of fixed time and cost turnkey agreements. EPCM contracting models offer flexibility and may result in faster completion. For example, tender proposals can be responded to more quickly than in the case of an EPC request as there is no need to verify employer requirements and due to the iterative nature of delivery, the employer can instruct design changes at any stage and/or refine the strategy during project execution.

Increased control over costs, time, and methods of working may also appeal to employers, particularly for complex, high-risk projects. However, to achieve these benefits, employers must have a team capable of managing the EPCM contractor’s performance appropriately.