EPCM: Are you ready for a new form of engineering procurement?

IChemE has published the first standard form EPCM contract (the “Blue Book”). EPCM (or “engineering, procurement and construction management”) allows the Purchaser to retain control over their project whilst delegating the management aspect to its engineering consultant. It has been well-established in the UK for a number of years in the construction of manufacturing plants and heavy engineering facilities. However, some of the benefits this model offers means that it has become increasingly popular internationally in the energy, agriculture, chemical, pharmaceutical and food and beverage industries. 

The availability of IChemE’s Blue Book now provides a baseline for how EPCM projects will run in the future. There is likely to be greater consideration of using EPCM as a viable option for future projects particularly for those already familiar with EPC models.

Why choose EPCM?

There are many reasons why a Purchaser may choose EPCM as a method of procurement:

1. the nature of the project is such that it is considered too high risk/costly to be structured as an EPC contract
2. the Purchaser is more involved in the project and can have a more bespoke service
3. the Purchaser wants to use an existing supply chain
4. the project is very technical and this range and/or level of expertise is not available from a single contractor and
5. a contractor is unable or unwilling to shoulder the total liability of the project, due to its size and/or complexity

The combination of price fluctuations, labor shortages and contraction in the insurance market has meant that EPCM has become increasingly common in recent years.

What is EPCM?

Under this procurement method, the EPCM Contractor has no contractual responsibility for the supply of materials or the construction works. Instead, the EPCM Contractor assists the Purchaser in the procurement of contracts for the supply of materials and works (the “works contracts”) and the Purchaser contracts directly with those suppliers and contractors.

The EPCM Contractor’s role is limited to design (to the extent needed for the individual project), managing the procurement of the works contracts and the management of the construction process. To allow the EPCM Contractor to manage the works contracts during the construction period, the EPCM Contractor will be appointed as the project manager for the purpose of administering the individual works contracts on behalf of the Purchaser. This project management role of the EPCM Contractor is key to the EPCM structure – this can extend to oversight of the budget for the Project as well as day to day administration of the Project. Understanding how and when the EPCM Contractor reports to the Client is key to a successful EPCM procurement. 

The EPCM contract itself also requires administration (for example, the certification of payments due to the EPCM Contractor, extensions of time and variations to the EPCM Contractor’s services) so a contract administrator, referred to as the Purchaser’s Representative, is appointed to undertake this role.

The EPCM Contractor works closely with the Purchaser to create the design documents, agreeing how the works should be broken down into packages and agreeing the short-list contractors for tendering the works contracts. The Purchaser is expected to produce the base terms of conditions for the works contracts and the EPCM Contractor and the Purchaser should agree how any works contract negotiations should be undertaken.

Where an EPCM structure is used, the Purchaser needs to carefully consider the forms to be used for the works contracts and how these need to be adjusted for an individual project. IChemE has not drafted specific works contracts to integrate with the EPCM Contractor’s Blue Book but basing these on other IChemE standard forms ensures that a similar structure to the EPCM Blue Book is included in the base document and minimizes the amendments needed to make the works contracts compatible with the Blue Book.

The IChemE Blue Book 2023

The IChemE Blue Book has been designed so that it is suitable for UK and international use. It is primarily for the process industry, but can be adapted to cater for many other industries.

1. Structure

The contract follows the structure of the IChemE EPC contracts (the Green, Burgundy and Red Books). It comprises a Form of Agreement; General Conditions (comprising 50 clauses); Special Conditions (which are bespoke to the Project); relevant Optional Conditions from the Blue Book; the Specification; Schedules and an Annex (which is used to identify the documents that form part of the contract).

• The Form of Agreement lists the conditions and documents that form part of the contract. It also sets out the information that needs to be completed on a project specific basis eg, choice of governing law, dispute resolution procedure, the Initial Budget or Target Price and any limits of liability.
• The Specification contains a detailed technical definition of the Plant, what the standards will be and what output is required.
• The Schedules are quite extensive for IChemE contracts and the Blue Book is the same. They include schedules to define the services, documentation approval, responsibilities of the parties, information relating to testing procedures, the EPCM Contractor’s reporting obligations, times for completion and payment provisions.

The Blue Book also contains a number of items to assist with compiling and administering the contract – including guidance notes on how to complete the Annex, Schedules and Specification, guidance notes on some key contractual issues, some contract process flowcharts and sample certificates.

2. Pricing

A project can start with an Initial Budget and Initial Project Programme and there is scope for these to be developed as the works contracts are finalized. The EPCM Contractor’s price can be based on a wide range of possible costings, such as fixed, target or reimbursable, with target price being covered through the optional clauses in the Blue Book.

3. Design

The EPCM Contractor is typically the main provider of basic design engineering. The Purchaser may itself have design responsibilities and in some instances may even provide a fully-designed specification. If there is specialized detail design and technology from the works contractors, then the EPCM Contractor is responsible for coordinating and checking design documentation.

As for the IChemE EPC contracts, the Blue Book sets out a detailed process in relation to documentation approval.

4. Intellectual property

It is common for the intellectual property in a process project to be highly confidential and commercially valuable. The Blue Book defines confidentiality, patents and other protective rights and clarifies what constitutes the EPCM Contractor’s intellectual property and includes expectations as to how the intellectual property owned by suppliers/contractors under the works contracts should operate.

The intellectual property and confidentiality clauses are good examples of the importance of ensuring that the works contracts and the EPCM contract conditions are properly coordinated – for example, Sub-clause 19.4 places an obligation on the Purchaser to ensure that all of the relevant Works Contracts contain the confidentiality obligations set out in this sub-clause.

5. Works contracts

The works contracts deal with the supply of materials, plant and construction. For an EPCM project, the Purchaser will separately enter into the works contracts with each supplier/contractor and the EPCM contract with the EPCM Contractor. As part of the EPCM contract, there will various management obligations that the EPCM Contractor is responsible for, which apply across the whole Project and therefore require timely and appropriate input from the suppliers/contractors. As a result, each works contract needs to be compatible with the Blue Book, so that the lines of reporting, testing and dispute resolution practices are consistent and operate together.

Management of the interfaces between the various works contracts and between the works contracts and EPCM contract is a key issue for EPCM projects. This should be considered prior to the EPCM contract or individual works contracts being entered into and if required, the Blue Book/works contracts tailored as needed.

6. Take over and performance testing

The EPCM Contractor has responsibility for the Site until the achievement of Take Over (either for the whole plant, or in sections). The tests to demonstrate that the plant is ready for Take Over and remedying any defects identified by the tests, are coordinated by the EPCM Contractor.

Upon satisfactory testing and the achievement of Take Over, responsibility for the site passes to the Purchaser. This may be done in sections, with the EPCM Contractor having overarching responsibility to see that this is suitably coordinated. The Purchaser then manages the operation and performance testing of the Plant. The EPCM Contractor may remain in attendance if necessary and assist in the management of this process as well as management of defects arising during the defects liability period.

Conclusion

Although the Blue Book is an entirely new form of contract, it instils confidence from being 5 years in the making, having input from industry experts and utilizing the best practices from other IChemE contracts. It brings standardization that can integrate with other IChemE contacts but has been drafted to permit flexibility where possible. Having an established contract for EPCM will provide parties with greater assurance and satisfaction in an already popular method of contracting, which exchanges some of the contractual security obtained from an EPC contract’s single point responsibility, to give the potential for reduced project costs, greater purchaser control and a more attractive contracting method for the market.