1
The Specifications of the E.P.C Turnkey Contracts in Major Project
Management
Siamak Nouri*, Mostafa Jafari*, Majid Farahani*
Department of Industrial Engineering, Iran University of Science & Technology (IUST), Tehran-Iran
Noury@mail.iust.ac.ir
Department of Industrial Engineering, Iran University of Science & Technology (IUST), Tehran-Iran
Jafari@mail.iust.ac.ir
Petropars Ltd, No10, North Naft Ave., Mirdamad BLD, P.O Box: 15115/1547, Tehran ­Iran
Farahani@ppars.com
Abstract
The application of the new project management structures and procedures is something
inevitable in large industrial schemes such as oil & gas projects, power plants, and
infrastructure schemes that technological plans affect apparently. The project managers
are to exploit the latest scientific break-through in this field, and to rid themselves of the
ineffective traditional methods so that they can utilize new procedures to accomplish their
executive projects within a specific time and certain budget. What is quite tangible is the
necessity of utilizing and ameliorating new procedures and structures of the project
management due to the increasing trend of investment in large projects especially the oil;
gas and petrochemical industries in order to achieve the social-economic development
plan objectives. EPC Turnkey procedure is one of the new procedures of the project
management and implementation. Although some specific restrictions are made for the
owner in this method but the contractor is obliged to effectuate the entire project
activities such as Engineering, Procurement, Construction, installation and start-up
operations, ergo. Then the owner is released from the painstaking management
responsibilities and the implementation of such projects that comprise such specialized
and complex technological matters that are beyond the client's field of activities.
Furthermore, engineering and construction stages will be performed harmoniously and
integratively, ergo, it will be possible to commence executive tasks before the finalization
of the design, consequently, the project period will be minimized. This article is a report
of a research performed at the Master of Science level that deals with the necessities,
straightened circumstances, and the strategies for utilization of EPC Turnkey method in
major projects after analyzing various common contracts in developmental projects.
Keywords: Project Management, EPC Projects, Turnkey, Procurement, Design-Build
contracts, Responsibility for the Process, Fast Track Construction
1. Introduction
When the owner intends to analyze the type of the project contract, must assess one's
own capabilities and weaknesses (from the technical and management aspects).
Contracts of any ilk can affect the allocation of responsibilities and needs of the owner to
make coordination in project. The owner can make the contract price proportionately
with the project risks by allocating the responsibilities appropriately.
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The two chief aspects that the owner must take into account when adopting an
appropriate procedure consist of allocation of the engineering responsibility and the
allocation of the coordination responsibility.
The first step that the owner adopts is to identify the project designer. This factor changes
the requirements and obligations of the owner into practical schemes. This factor may
originate from the owner's internal organization, an independent consulting engineer or
the contractor. Each person/contractor that performs a part of the design must have
mastery over the project up to some extent so that can ensure the appropriate integration
of the scheme and the maps.
The next step in decision-making is to allocate the coordination responsibility in the
optimum manner. The design and performance factors ought to be harmonized in an
appropriate manner so that one can rest assured of the effective project progress. This ilk
of coordination comprises the management of the imported equipment/material and
warehouses, the performance of the tasks by the owner's work force, and the
subcontractors, the testing and supervision staff of the owner, or the associated owners.
The owner himself, the contractor or any other third persons such as the management
owner can make coordination. The owner is to take into account the quotation setting and
payment methods in the contract.
Connoisseurs and specialists of the project management and contracts have presented a
diverse classification manner in the developmental schemes management. Various
contractual procedures and the features of each one have been expressed to clarify the
EPC Turnkey procedure, and then some conclusions will be drawn with regard to the
conditions ruling the developmental schemes management in major projects
2. Contracts types for executing the major projects
.
2-1- Various sorts of contracts as viewed from Joseph A. Huse attitude [1]:
Design-Bid-Build
Management Contracting
Build-Operate-Transfer
Design-Build and EPC Turnkey
2-2- Various types of contracts from P.D.V Marsh's attitude [2]:
Traditional Client Coordinated
Management Contracting
Full Turnkey Contract
Partial Turnkey contract
2-3- Various types of contracts from J G. Perry's attitude:
Separate Design and Construction
The Management Contract
The Construction Management Contract
The Design and Management Contract
Fee Contracting
EPC-Turnkey, Package Deal, Design and Build
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A) Design-Bid-Build Contract / the traditional procedure / separate design & construction
This procedure is performed traditionally in the executive contracts. The owner assigns
the designer to outline and delineate the project based on the owner's requirements so
that can provide a collection of the required maps for the bid, tender and the task
performance. There are some shortcomings, and potential defects concerning the
performance-bidding-design contract form. For instance, the project accomplishment
duration will lengthen because the design and performance stages are separate.
Furthermore, the performed designs may not match the owner's technical capabilities,
ergo; loan providers will not accept this procedure, when loans finance most of the
project.
B) Management Contracting (MC)
Management Contracting is a relatively new approach that concerns engaging an owner
whose role is to make coordination and manage the project. The above owner is burdened
with the task of time management, cost, and the quality control and concludes some
contracts with subcontractors to achieve the tasks. The management contractor plays the
role of the owner's manager in the traditional design-bid-build contracts. Thus, the
management contractor relives the owner of some the accountabilities and duties.
According to this procedure:
The management contractor is paid by cost-plus fee method.
The executive tasks are usually classified into petite proportions and fierce competition
occurs in the tender.
The design of each section hat is being posed in the tender must have already been
completed.
The designer ought to make up one's mind in numerous cases in the preliminary stages in
this ilk of contracts as compared with the design-construction method.
C) Construction Management Contractes
According to this procedure, the executive manager is assigned for the task of the project
management in accordance with the contract that signs directly with the owner and the
executive manager ought to act within the predetermined time and cost. The owner
concludes the entire contracts of other consultants and contractors.
D) Design and Management Contract
This approach is actually a type of management contract that has entrusted the owner
with the responsibility of detailed engineering, ergo; it will bear the ensuing similarities
with the Design and Construction Contracts.
The owner will conclude only one contract.
Design and execution management is performed in an integrative manner.
The project implementation time will dwindle at the preliminary stages of design
and performance
The practical aspect of the designs escalates increasingly.
Nonetheless, the design and management contracts will have the ensuing differences with
the Design-Build contracts.
They are paid similar to the Management Contracts.
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The owner will control the procedure more than ever; however, will be liable for
the technical tasks up to a minor degree.
The relationship between the owner and the contractor concerns the most
advanced technical professional expert designs.
The design and management contractor does not perform any executive task and
accepts fewer practical risks.
Alterations occur in a simpler manner in such contracts and just negotiations can
be held about the price modifications.
E) Fee Contracting:
The contractor will be accountable for the executive tasks, management services
(primarily before the execution), provision of any design-related data or information or
design input and occasionally the design process management. In these types of
contracts:
The payment will be compensated plus some wages as management fee.
The owner opts out the designer and measurers.
The total project budget will be specified during the engineering and construction
tasks.
Conclusion of the second-hand contracts is quite common in such procedures.
F) Build-Operate-Transfer (B.O.T) procedure
BOT contractual procedure consists of assigning the development and commissioning
license of a governmental sector project to a company under the title of "Project
Development Company" for a specific period. The above company will finance the
project. Then it will take action to design and construct the facilities in question. Then it
will exploit the factory and the related equipment and facilities in compliance with the
duration reciprocally agreed in the contract and will return it to the government
eventually. Hence, BOT is not an independent procedure for the executive contracts,
rather it is considered as a method to finance the project. Such projects are becoming
increasingly popular because of the two ensuing reasons: first , shortage of the
governmental investment sources and second , the opinion that the private sector has a
better management. Theoretically speaking, BOT scheme is able to pave the way for the
implementation of the infrastructure projects at the least expenditures inflicted upon the
government in the developing countries. Nonetheless, BOT projects inflict high
expenditures and risks for the private sector.
G) Design-Build and EPC Turnkey
The EPC Turnkey method is also known as the package deal, design and construct, and
clean-main and the owner is burdened with the responsibility of engineering,
procurement & construction so that when the project is completed, the owner or client
just turns the key in the lock hole to inaugurate the facilities commissioning. Ergo, the
owner and his or her consultants will only participate in the tender process and supreme
supervision of the contractor's job. EPC Turnkey method is the utmost symbol of the
entrusting the design and construction to the contractor. Hence, it is not necessary to
specify whether the defect originates from improper design or weak construction. The
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contractor is accountable for any defect or failing that occurs within the defined limits
and scope.
The utilization of the EPC Turnkey method diminishes the owner's accountability with
regard to the engineering and construction process as compared with other contractual
methods up to a drastic degree. Ergo, the owner merely manages the contract, reviews,
and approves the designs based on the predetermined terms and provisions.
Fig.1 illustrated the level one process of the main contractor in EPC project. The main
contractor will do the entire owner requirements such as the engineering, procurement &
construction of the project. The client satisfaction would be the result of this process.
When design responsibilities occur simultaneously with the construction, the total project
completion duration will dwindle or "Fast Track" construction may occur. Furthermore,
paving the way for economic design and construction can diminish project costs.
The bidding or tender stage is vitally important in the EPC Turnkey method. Here the
owner ought to try the best and use plenty of sources to ensure the contractor's
capabilities and the quality of their suggested schemes. Likewise, the contractor must
make enormous endeavors to provide his or her proposal and to ensure its pragmatism
and the profitability of the proposed price. Usually the contractor that can execute the
Engineer-Procure-Construct projects is named General Contractors (GC). The situation of
G.C's in EPC projects as shown in Fig.2 determines that the GC's should use various
vendors & subcontractors to execute the EPC projects.
Fig. 1
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The construction industry appears to
be following other industries by
reforming their vendors &
subcontractors relations. Williams
(1995) summarizes the direction of
vendor's relations in the
construction industry by stating: All
the groups, engineering,
procurement, construction,
operations, and the vendors, must be
integrated as one team. When the
individual groups are all working
together helping each other out,
recognizing and compensating for each other's weaknesses and highlighting and taking
advantage of each other's strengths, then the team is united. When all of the team
members feel that they will all succeed or fail together as a team, then a fast-track project
is viable [3].
Each division of main GC responsibility for project completion (Engineering,
Procurement & Construction) would be divided into some processes & disciplines like
Fig.3 & the GC will complete the project by planning & controlling these processes that
would be executed by vendors &
subcontractors.
The owner may use the EPC
Turnkey contract for a specific
section of the project, which is
known as the partial turnkey or
semi-turnkey. In fact, the
owner's responsibility escalates
together with the task amount
that performs on one's own or
by having, other contractors and
consultants perform them
independently from the EPC
contractor, ergo, the duties and
coordination tasks of the EPC
contractor will increase. This ilk
of contract will guarantee the
ensuing points.
In this method, the payments occur as lump sum or the unit price list.
Complete technical clear specifications ought to be provided at the preliminary
design stages.
The owner specifies the technical and contractual requirements and obligations at
the commencement stage.
Fig. 2
Fig. 3
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The owner often will adopt a minor stance in the discussions and negotiations that
occur after the contract conclusion.
Some measures have to be taken so that the expenditures of the designs performed
by the contractor are taken into account at the bidding or tender stage too.
The scope and the control procedure of the design tasks performed by the owner
can cause disputes.
The owner's requirements and obligations about the project start-up must be
written down in the contract.
2-4- The decision-making criteria on the contract type selection
Here some criteria and factors that the owner must take into account about the selection
of the contract type have been enumerated. Generally, the ensuing cases have to be
ruminated over.
The nationwide laws and regulations
The investment procedure (financing)
The size and complexity of the project and the owner's sources
The required time for the project completion
Considering the economic factors in design and commissioning expenses
Ensuring the finalized expenditures of the project
2-4-1- The nationwide laws and regulations
The above factor will affect the owner's decisions to opt the contract strategy in the
ensuing order:
Accentuating the final price of the projects concerning, the budget that will lead the
owner to procedures bearing fixed lump sum prices.
Sometimes the EPC Turnkey method is practically impossible in the developing countries
because the executive tasks are assigned to the local contractors and it is extremely
difficult for the contractor to bear responsibility of such contracts.
The traditional method coordinated by the owner will be appropriate in case the tasks are
assigned contractually at the presence of various contractors and the engineering
department of the owner or the consultant engineering companies perform the design
tasks.
2-4-2- The investment procedure (financing)
When the owner is to finance the project, can opt out the most appropriate method.
Otherwise, loaners and suppliers of the project can affect the selection of the contractual
method in accordance with the procedure predetermined for the project financing, based
on one of the ensuing manners.
If an international agency provides a loan, it will naturally tend to conclude a contract for
the engineering, procurement & construction operations separately. The loan-providing
agency permits the EPC Turnkey contract in exceptional cases that the special processes
that have to be implemented exist in the project or factory.
If the project is a finance one, the loan giver is willing to conclude an EPC Turnkey
contract because this method will decrease the risks involving any extra expenses and one
can lay assured that the project will be commercially exploited at the determined date.
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2-4-3- The project size and complexity and the owner's sources
The project size and complexity will affect the owner's decisions to select the contract
procedure, because of the required qualitative and quantitative management and technical
sources and the related experiences that the owner may possess.
Provided that the project has been simplified or minimized as compared with the owner's
current sources, the traditional method coordinated by the owner is preferable.
On the contrary, if the project is huge and complex with regard to the owner's sources,
the EPC Turnkey method or the management contract procedure will be appropriate.
Anyway, the owner either must have the required sources to opt out the proper contractor
or can use the consultants to provide a project summary to assess the received proposals.
2-4-4- The required time for the project accomplishment
In projects, whose objectives consist of profit increase or cost saving the amount of time
that can be saved in EPC Turnkey contract or the management contract must be
compared with the traditional method.
The time saving quantity can be collated with the cost saving quantity of the traditional
methods (and it can be classified into tiny sections) and appropriate decision can be
adopted. When we need facilities to save time in a particular date, time saving will play a
vital role in this regard.
In our case study, every one day delay in phase 1 of the south pars gas field development
project in Iran will cause disadvantage of 1.5 million US$ .As a result selecting the EPC
procedure for executing this project was too commendatory
2-4-5- Considering the economic factors in design and commissioning expenditures
When the consultants or the owner's engineering department makes designs
independently, the schemes will be conservative, upstream, and non-economical.
One solution is to entitle the owner to combine design and construction so that they can
present their own proposals based on their own designs in bidding and tenders. The
owners are increasingly utilizing the consulting engineers to make designs at the stage of
presenting proposals based on the EPC Turnkey contracts in recent years. Ergo, the
consultants have adopted more economic policies as compared to the previous years.
Nonetheless, we should not ignore its negative effect upon the commissioning and
maintenance expenses. Generally, the owner must make endeavors to keep the project
expenditures as low as he or she can and must certify that commissioning and
maintenance charges including the spare parts required during the useful life span of the
project have been evaluated and taken into account.
2-4-6- Ensuring the final project costs:
When the owner is thoroughly aware of himself or he requests and no essential alterations
occur consequently due to the requirements or obligations, then he can avail himself of a
EPC Turnkey lump sum contract because in this way the complete responsibilities and
risks are transferred to the contractor. In addition, the owner's engineers will have the
least time amount to make alterations, and no extra charges will be inflicted.
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3. EPC Turnkey contract features:
Now that the status of each one of the contractual procedures and decision-making
criteria have been specified for the implementation of the developmental projects, we will
examine and analyze the specifications of the EPC Turnkey contracts.
3-1- Generalities
Most of the major projects all over the world are implemented as EPC contracts. Such
contracts are being put forward increasingly in the developmental schemes and an
independent legal person bears responsibility of the project performance and design. It
can be a company on its own or a combination of several companies collaborating with
each other (Joint Venture). The General Contractor that takes measures to implement the
EPC projects, should not necessarily have the entire design and construction facilities on
its own. A GC may assign a second hand contractor to make design and engineering tasks
or an engineering company may perform the construction tasks as a second-hand contract
by means of a qualified contractor experienced in executive tasks.
Some of the Design-Build contracts are also named EPC Turnkey contracts. According to
such contracts, the contractor must not only bears responsibility for the project design and
construction but also must ensure the owner that the established project will act in
compliance with his or her needs and wishes and will be ready for commissioning. The
Turnkey phrase originates from the fact that the owner will turn a key to inaugurate the
project and it will commence to function successfully afterwards.
The EPC method is different from the method in which separate contractors make design
and construction, as regards the client. One difference is that the contractor guarantees
the design, procure & construct of the entire task in the design and construction aspects
but in the second mode, the executive contractor is accountable for the proper work trend,
and the designer is only liable to observe the technical specifications based on standards
and does not bear any guaranty responsibility for the whole task. The second important
difference is that in the second mode the designer is professionally interested in reporting
the predicaments of the contractor
and the executive group for the
client. However, the above
willingness is vice versa in the EPC
procedure, ergo, the contractor who
is accountable to perform the tasks
is not willing to inform the owner of
the executive predicaments and
obstacles. The steps of work with
the responsibilities based on above
explanations in major projects have
shown in Fig 4.
Experienced derived from EPC
Turnkey contracts indicate the
ensuing advantages.
The executive group will
participate actively during
the design process, and most often results in an economic and frugal scheme.
Fig. 4
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The design and construction staffs can easily communicate, consequently, the
total project duration will be minimized, and the engineering concepts can easily
be changed into practical plans.
The owner will be more satisfied because one specific contractor is responsible
for the entire tasks and will not be forced to spend his or her time to settle the
claims originating from the designer and contractor's discrepancies.
3-2- Outstanding features of the EPC Turnkey contracts
Two significant factors ought to be taken into account on such contracts:
The first one is the contractor's responsibility for the process.
The second is the type of the financial agreements, (whether the payments are
lump sum or other methods are being utilized),
3-2-1- The contractor's responsibility on the system process
One of the essential factors that determines the philosophy and relations of the EPC
contracts is to allocate responsibilities of the system process between the owner and the
contractor. The process of a major project can be so specialized and complex that the
owner team's expertise level may be much higher than the contractor's engineering team.
Ergo, the owner will be accountable to start-up the system process. In this case, the
contractor does not make any basic designs and will commence the task from the detailed
design stage.
In the second case, the system process design is within the contractor's expertise field
and may be the sole wielder of such technology or knowledge. Ergo, the contractor
performs the task from the preliminary stages and will be responsible for the process
function, start-up, and the system commissioning guaranty. Ergo, the EPC Turnkey
contract will be logical due to the contractor's high expertise. Based on the EPC project
life cycle[6] that has shown in Fig. 5, the general contractor will be at the helm of project
design and construction, start-up, qualitative and quantitative operation guaranteed during
a specific period. In such contracts, it is often necessary that the contractor train and
educate the owner's personnel so that they can operate the project when it is completed.
The project process functional responsibility can be divided or jointly shouldered. The
owner may be only at the helm of the appropriate chemical formula provision or the
theoretic system process and the contractor designs different type of equipment and their
Fig. 5
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relations so that the above process is set into effect. Generally speaking, the less distinct
the owner's and the contractor's responsibilities are, the harder it will be to settle the
claims based on the contractual items when they occur.
The contractor's accountability in the project process function will affect the nature of his
relations with the owner and other subcontractors. For instance, when a contractor is not
in charge of such cases, prefers to view the project from the aspect of the time quantity
that the staffs dedicate to the project, and tries to minimize its own risks in other aspects.
Ergo, when an engineering company is requested to design and construct a major project,
it prefers to conclude an engineering-procurement-construction contract separately so that
minor executive subcontractors will not be legally bound in this case.
When the contractor is at the helm of guaranteeing system process function, in fact the
price that accepts for the project implementation will embody some of the risk factors
too.
3-2-2- The nature and the ilk of the financial agreements
Financial agreements are the second outstanding feature of such contracts. The payment
method will affect the contract so intensely. There are two common methods in the major
project implementation, which are as ensues: cost-plus and lump sum. Here their
applications in EPC projects have been examined. In addition, another combination
method is known as cost-plus along with the guaranteed target cost level and it includes
most of the advantages of the both methods from the owner's attitude. Ergo, when the
expenditures exceed the predetermined amount, the contractual relation will change into
lump sum, thus, the payments will be disbursed as percentages of the work progressed.
However, in cases that there are no dangers of expenditures exceeding the guaranteed
limits, and then the target guaranteed cost rule would not apply and the contract will
proceed in accordance with a sheer cost-plus one.
As for the EPC Turnkey contracts that are signed or concluded before the engineering
tasks have commenced or before the proceeding of the engineering task, it is not
reasonable to set the payment method as lump sum or target cost, because the
construction cost will be based on guesses.
3-3- The reasons why the EPC projects are attractive for the contractors
The contractor can rest assured of the fast-track performance of tasks and
receiving the due payments punctually because of the fast nature of such projects.
The specifications of the EPC contracts are in a way that they will not depend
upon the timetable and activities of others.
The contractor can freely opt out the executive techniques and equipment.
Nonetheless, the last case is not considered as a disadvantage for the contractor because
although a contractor may reduce the quality aspect by choosing cheap low quality
facilities, knows what type of facilities can surely perform the tasks. If the equipment
does not work properly and accurately, the contractor bears responsibility for not
receiving the last payment & also the 10 % Good Performance Guarantee (G.P.G) and the
risk of losing future job opportunities.
4. Conclusions
There are contractors all over the world who are quite adept and skilled in the entire
executive engineering aspects. What matters for the owner is to exploit the contractor's
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skill and experiences in projects so that it can improve the project speed and frugality.
The contractor encounters plenty of questions when intends to set the owner's
requirements into effect. For instance, diverse comments on technical specifications and
other sources, which are, included the standards, engineering experiences, and suchlike.
Ergo, the owner must ensure at the detailed design stage that the contractor has not
swerved from his or her duty and has not lowered the project standards.
The project implementation must essentially be based upon the logical comments on the
tender documents, fundamental designs, technical specifications, standard engineering
experiences that the contractor has performed in other projects, the utilized codes and
standards, so the contractor sets them into effect based on one's own skill and
experiences.
When the owner and his consultants adopt the EPC Turnkey method, they have trusted
the contractor's experiences and skills. Ergo, it is not necessary to interfere in the
contractor's duties or examine the contractors' proposals after long procrastinations if the
general contractor does not swerve from his or her duties. The above case applies
especially if the owner's requirements have been fulfilled, and the tasks have proceeded
in accordance with the international engineering experiences and the related construction
and equipment have been supplied through the manufacturers and sources.
Time is very valuable in the application and the legal matters of the EPC contracts. Both
the owner and the general contractor must observe the commitments. Ergo, standard
contracts are concluded with the impression that the only important matters in each stage
of the task whether design or engineering is to discuss the facilities purchase, goods
provision, and installation and no procrastination should occur while the project is being
performed.
Generally, the EPC contracts have to be managed different from traditional contracts and
the general contractors must precede the tasks as they accept risks in this regard except
the cases where safety concern occur. As this practice has become quite common all over
the world, we should not allow the EPC contracts to be changed into tools for trying
engineering trial and errors because in this way they may lead to results far from what has
been contemplated as the contractor's scope of activity and duties.
References:
[1] Hues Joseph A. Understanding and negotiating EPC Turnkey contracts, London, 1997
[2] Marsh P.D.V. Contracting for Engineering and Construction Projects, England, 1995
[3] Williams, Gareth Vaughan, (1995) "Fast Track Pros and Cons: Considerations for
Industrial Projects," Journal of Management in Engineering, Vol. 11, September/October,
pp. 24-32.
[4] Friedlander Mark C. A primer on Industrial D/B Construction Contracts, 2000
[5] The technical assistant of Iran's planning and management organization, the criteria
published with regard to the technical executive system of the developmental plans until
the end of 1379, the explication for the provision of major industrial schemes, 1380
[6] Al Samman, Bassam, the First Project Management Driven Organizations
Conference, Beirut, 2004
[7] Kvaerner Procedures for South Pars Gas Field Development-Phase1, Petropars Ltd ,
Iran , 2003