In the last post we covered Contract Classification based on the Nature of Transactions. We discussed that based on the kind of transaction, contracts are classified as Supply, Services and Works Contracts. Please click here to re-read last posts: http://www.rkstrainings.com/difference-among-supply-service-and-works-contract-2/
In the business world, every business entity is dependent on other firms for procurement of goods, services or works. Organizations undertake such procurement activities through mutually agreed Contract Agreements. However, the contracting philosophy of each organization may be different. One organization may prefer to appoint a single agency for entire scope of work and the other one may choose to break the scope into number of work packages. In the second situation, organization prefers to break the scope based on the nature of work and availability of good number of contractor for that work. As a result, they wish to appoint a separate contractor for each package
So depending upon whether Owner intends to execute the work by integrating or breaking the scope, contracts are classified as followings;
A) EPC Contracts
B) Multiple Packages Contracts
C) EPCM Contracts
In this post, we shall cover EPC Contracts. Multiple Packages and EPCM Contracts shall be covered in next post
Contract Classification based on Method of Project Delivery
Let us try to understand the concept of Level of Integration with a common example. Suppose Ramesh want to construct his dream house on 500 SQM plot. He may prefer to execute the work by awarding a single integrated contract for the entire scope of work. In this situation there will be only one contractor (called EPC Contractor) who will be responsible for design, supply of all materials and provisions of all services that are necessary for the construction of house including foundation, structural works, finishing and MEP works etc.
Alternately, Ramesh may divide the works into 3-4 packages based on the nature of work e.g. Civil Works (Foundation and Structural Works), MEP Works and Finishing Works and could award each package to three separate contractors. Further, there is a third approach which is in between and a mixture of the two. Here, Ramesh may follow multiple package approach and additionally could also appoint an experienced consultant, in between, to undertake engineering services, for supporting the owner in procurement and to act as Owner’s advisor to manage the construction contractors. This consultant is called EPCM (Engineering, Procurement and Construction Management) Contractor and type of contract is called EPCM Contracts
Now let us discuss each type in further details
A) EPC Contract
EPC Contracts are the contracts entered between the parties for turnkey execution of works. The party who execute the work on turnkey basis is called EPC Contractor and party who is the owner of the work is called Owner or Employer. Under EPC Contract, owner intends to award the entire scope of the work to one contractor and such contractor is a single point responsibility for design, construction and completion of the project in all respect so that owner could operate the facility just by the turn of a key.
As the entire work is being done by a single agency, EPC contracts are fully integrated contracts. Mostly these contracts are executed through two parties approach, i.e. Owner and Contractor so as to reduce the interfacing and associated risks. Under EPC contracts, Owner does not interfere much and only concerned with on-time completion of work and within agreed Contract Price. Under this type of Contractual arrangements, Contractor takes all risks and remain fully responsible and accountable to meet the critical project parameters such as time, cost and quality. In-fact, Contractor is responsible to meet the outlined or performance specification of Owner rather than detailed specifications.
As all risks under EPC Contracts are assumed by the EPC Contactor, such contracts result into higher cost for the owner. However, such contracts de-risk the owner from the contractual claims of additional cost and time to large extent. This is because there are less interfacing issues and limited/no opportunity for the EPC Contractor to blame the Owner for claiming additional cost or time. Therefore, in this type of contractual arrangements, Owner is certain about the cost and time for completion of the project.