Difference among EPCM, Multiple Packages and EPC Contracts (2)

In the last post we discussed Contract Classification based on the Mode of Project Delivery (i.e. Level of Integration). We read that depending upon the mode of project delivery; contracts are classified as EPC, EPCM and Package Contracts. Further we discussed EPC Contracts in more detail in the previous post. Please click here to read that post: http://www.rkstrainings.com/difference-among-epcm-multiple-packages-and-epc-contracts/

In this post we wish to discuss EPCM and Multiple Package Contracts in further detail. Both posts together shall bring out more clarity on the distinguishing features each type. A careful analysis and comparison among EPC, EPCM and Multiple Package Contracts shall reveal the appropriate usage of each one

Contract Classification based on Mode of Project Delivery:

Please re-read the example of Construction of Ramesh’s House in the previous post by clicking the above link

EPCM and Package Contracts in more details:

B) Multiple Packages Contracts

In the last post we discussed that EPC Contracts are best option if Owner intend to award the entire scope of works to a single agency. This is done to minimize the interfacing issues and holding single agency responsible for completion of the entire job within agreed cost and timelines.

However, another Owner may not prefer to award the entire scope of work to a single agency. This Owner may be cost conscious or desire to have better control on the project. Further, a single agency (i.e. EPC Contractor) may not have enough experience in all disciplines of the project. Accordingly, such EPC Contractor also ends up subcontracting certain parts which are outside his portfolio.

In view of the above, Owner may find it better to split the work into various packages keeping in view the nature of work and/or availability of contractors (e.g. Civil, Mechanical, Electrical, Supply, Installation etc.). As a result, Owner may appoint a separate agency for the execution of each package.

In the above contracting mode, Owner supervise the work of each contractor. Further, Owner also assumes responsibility for coordination and interfacing between different contractors. Under Package Contract, each package is executed separately as per the scope under individual packages and communication between various contractors is through the Owner.

C) EPCM Contracts:

EPCM means Engineering, Procurement and Construction Management.

This is not a third type rather it a modification of other types to remove its disadvantages. Multiple Package Contracts offer advantages of overall lower cost. This is because Owner is awarding each package directly to an entity who is most competitive for the given scope under individual package. However, coordination between so many agencies and resolving interfacing issues is a major problem in this model.

EPCM is a hybrid model and could help the Owner to take the benefits of Multiple Package Contracts plus the convenience of resolve interfacing issues. Under EPCM Model, Owner appoint EPCM Contractor in addition to various Package Contractors and place him in between Owner and Packages Contractors

EPCM Contractor work as agent of the Owner; complete the design; support the Owner in procurement of Project Plant and Equipment and manage the Construction Services. Construction Contractor work under the supervision of EPCM Contractor. EPCM Contractor responsible for interface management and advise. Owner Responsible for all technical and commercial matters associated with the Project  

EPCM Contracts are most suitable for smooth execution of project when;

i) Owner does not have enough experience for execution of similar projects
ii) Owner is not very skilled in monitoring the contractors
iii) Owner lacks expertise in resolving interfaces between various agencies
iv) Owner intend the cost the construction cost and ready to take reasonable risk

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Difference among EPCM, Multiple Packages and EPC Contracts

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. Package 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 Contractor, 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. This is because there are no interfacing issues and 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.

Difference among Supply, Service and Works Contract (2)

Hi Readers In the last post we discussed briefly the types of contracts under the broad category called Nature of Transaction. We discussed that based on the Nature of Transactions; contracts are classified as Supply, Service and Works Contracts. Also we further explained supply contracts and their key characteristics.  To read the post again, please click: http://www.rkstrainings.com/difference-among-supply-services-works-contracts-1/

In this post, we are going to discuss other two types: Service Contracts and Works Contracts. Eventually two posts together will bring out the underlying differences among Supply, Service and Works Contracts

Service Contracts

These are the contracts for PROVISION and RECEIPT of SERVICES between the parties. The party who provides the SERVICES is known as Service Provider. Party who receive the services is known as Service Receiver.

The Finance Bill provides the Definition of “Service” under Service Tax Act as follows: Service means any activity carried out by one person for another for consideration but does not includes: a) an activities which constitute merely: 1) transfer of title in GOODS or IMMOVEABLE PROPERTY by way of sale, gift or in any other manner; or 2) a transaction in money or actionable claims; b) a provision of service by an employee to the employer in the course of or in relation to his employment; c) a fee taken by any court or tribunal established under any law for the time being in force

Now the Service Tax Act has been replaced with GST Act

Under service contacts, service provider does something of some value, benefit or advantages to service received for money consideration and transaction between them is known as Provision of Services. The key differentiator is that in Service Contracts nothing moves physical from one party to another and there is no transfer of property between the parties.

Services are intangible products rather than physical goods. Services include all such actions, deeds and effort performed by one person for another to satisfy a need/desire (of another person) in the course of business or commerce. Service Contracts involves only the exchange of services between the parties without any involvement of sale or purchase of goods between them

Examples of Service Contracts

We deal with Service Contracts daily sometime consciously or sometime even not know that we are doing so. Few examples of Service Contracts are as follows;

  • Receiving transport facility such as cab, bus, train and flight for moving one place from another; requesting someone for installation of AC, rectification of electrical fault or cleaning our house are typical examples of a service contracts in our personal life.
  • In our work life, we engage design consultants, manpower consultants, legal advisors, Installation Contractors and Transport Agencies as required. These are good examples of service contracts in work life
  • All above examples are pure service contracts which do not involve physical possession or transfer of anything between the parties

Works Contract

Works contracts are nothing but integrated contracts of supply plus services. These are called composite contracts wherein scope involves the supply of goods and provision of services. This is not a third category, but, a combination of supply and services. In certain situation, it may not be possible to divide the scope of work into goods and services. Moreover, sometime one does not intend to break the scope into supply and services. So Works Contract seems ideal type for such situation

Under Work Contracts, the contractor supplies the materials and also render the services to the Owner for money consideration and transaction between the parties is knows as Execution/Performance of Work

Examples of Works Contracts:

We deal with Works Contracts daily sometime consciously or sometime even not know that we are doing so. Few examples of Works Contracts are as follows;

  • Repair of a computer along with supply of damaged parts; repair of house-hold electric fault including supply of damaged item; painting the house with supply of required paint are typical examples of Works Contract in personal life.
  • Design, supply & installation of a Power Plant on Turnkey Basis and Construction of a Residential Building with supply of all materials and permanent plant are typical examples of Works Contract in our work life

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