Feature

EPC : A Better Approach

Posted on 09 February, 2010 | Tags: Cover Story

Engineering Procurement and Construction (EPC) contracts have gained momentum for project execution during the past decade across various industries in India. Oil & Gas, Power, Chemicals & Petrochemicals and Infrastructure sectors opt for EPC LSTK contracts for most of their projects. As the EPC contractor becomes a single point of responsibility, this offers better-cost realization and also promises the project delivery within the scheduled time frame. Moreover from the project owner's perspective, turnkey contracting is a better proposition as the responsibility and majority of risks involved with the project lie on the contractor. The concept of EPC has become popular in India during the past decade and many projects have been implemented on the turnkey basis

-Mittravinda Ranjan

Current Scenario
Market situation towards the end of 2008 created major concerns for EPC contractors. Demand destruction has led to premature shelving of many projects. Major swings in currency rates have resulted in reduction of profit margins and cut throat competition. In lieu of the ongoing slowdown, lengthy negotiations have been leading to delayed project closures.
Unpredictable market conditions and price fluctuations made it almost impossible to bid on EPC lump sum basis as bidding process itself requires substantial financial investments. As the EPC projects are getting more complex, timing of project awards is becoming more unpredictable than ever. With the emerging trend of short project durations, organized synchronism is required between the contractor, consultant and the vendors.
The clients intend to leverage the maximum benefit at minimal risk out of the project. Contractors at their end have to balance typical issues in terms of costs, pricing, risks and resources for the mega projects. A well-defined EPC contract can significantly reduce the cost and time overruns in real time.
 
Challenges & Risks
Contractor is required define a project in enough detail such that the owner expectations are met and the contractor are best placed to develop a proposal without having to account for high risks associated with poorly defined specifications. Another challenge in the current market is early identification and definition of long lead components so that orders can be placed early in the process
Access to project financing can be a major issue for many contractors and in this market, the owners and operators need to work towards a contract model that allows contractors to proceed in the most expedient manner while remaining cash-flow neutral.
EPC projects are no longer restricted by the boundaries of the countries and are separated by long distances and cultural divides. These projects require proper coordination between the project partners. From a technical standpoint it is important to make use of available global design tools and technologies and network with the project partners such that all the team members have access to working databases.

Recent Trends 
Some owners have preferred breaking a large project into more manageable and defined pieces.  For example, a project that includes structure and topsides fabrication, installation, and pipelines may have three major contracts awarded, one for onshore fabrication, one for installation, and one for pipelines, each to contractors who specialize in these areas.  The owner then manages the interfaces.
The contractor is expected to execute the job on vertical split basis with single point responsibility This approach has yet to undergo the test of acceptance by the respective State VAT (Indirect Tax) Authorities - as the assessments are yet to be taken up by the authorities. These contracts have huge ramifications from Direct taxation point of view in international contracts.
Other owners have developed "open book" relationships with contractors and risk-reward schemes where a project is executed against a given budget and overruns or underruns are shared. In all cases, the best results are achieved by developing a team mentality so that all stakeholders - the owners, contractors, and engineering firms- are all working together towards the same goal with all sharing in the success of a project.

Mitigating Risks
Front End Definition and an organized approach to project management and decision-making at the right time in the life of a project significantly reduces risks to an EPC contractor and best provides the owner with the desired end product.
All owners define this differently and it is different in markets around the world, but owners in most markets invest in much more front-end engineering than the owners in the Indian market do.  The decisions taken at the beginning of any project have the largest impact on the final cost of the project.  While controlling costs is always important, too much focus on squeezing upfront costs usually don't provide the best overall project result.
Good communication is a key to success along with developing a culture of quality throughout the organization. Rigorous project planning is required along with a structured but flexible system of procedures and guidelines.
Well developed procedures, processes, and guidelines are important, as these offer the individuals the flexibility to excel in their given field develops a feeling of "ownership" in the project, and this ultimately results in the best quality result at the best price.

The Future
EPC industry is already a multi billion-dollar industry and contractors are finding innovative ways to mitigate risks. Albeit slowdown has resulted delaying of projects but on the positive side, has given the opportunity to build project with best manpower available and project will deliver the results when economy picks up.