Management systems comparison

Scope and conditions of various options of contracts with the General Contractor

  • PM/РС (or PMC or CPM) – Project management
    • General management on behalf of the Investor
    • Engineering and construction are carried out by others
  • EPCM – Engineering, Procurement, Construction and Project Management
    • Responsibility for all aspects of work on behalf of the Investor/Customer
    • Construction is usually carried out by various construction contractors
  • EPC – Engineering, Procurement and Construction
    • Direct responsibility for all aspects of work, including construction as a General Contractor
    • Own-account construction or with the involvement of a subcontractor, or a combination of these two options

PM/РС option

  • “For”
    • Reduces the need for the investor’s direct involvement
    • Fit for projects with design packages of “vertical” technology/construction
  • “Against”
    • Less control/impact on the part of PM/PC
    • Risks in terms of coordination/approval of multiple design and construction contractors
    • High requirements of design and construction contractors

EPCM option

  • “For”
    • Engineering, procurement and construction management is concentrated in the hands of a single person.
    • High level of control and impact on the part of the EPCM contractor
  • “Against”
    • Applicable in the presence of many capable construction contractors
    • Partial coincidence of some services and expenses of EPCM contractors and construction contractors
    • Moderate requirements of construction contractors

EPC option

  • “For”
    • Exclusive responsibility of one contractor to the Investor
    • Maximum impact of the EPC contractor on the project results
    • Standardization of work processes, systems and tools used in the project implementation
    • Overall project costs are usually lower, the time schedule is shorter and risks are reduced
  • “Against”
    • Only a few companies can perform the scope of EPC work for major projects

Commercial terms and conditions of the Contract with the General Contractor

  • RE - reimbursable expenses
    • All expenses incurred are reimbursed plus remuneration paid on a man-hour basis
  • RE FR – reimbursable expenses plus fixed remuneration
    • All expenses incurred are reimbursed plus fixed rate remuneration as a fixed price
  • RE IR – reimbursable expenses plus incentive remuneration
    • All expenses incurred are reimbursed, while the “base” remuneration is adjusted upwards or downwards depending on the results of execution of the terms and conditions of the contract with the General Contractor for the project implementation
  • FP – fixed price for the service
    • Services under the contract with the General Contractor are secured with a fixed amount
    • The definition of the detailed scope and duration of work should be agreed upon
  • TKFP – “turn key” fixed price
    • Applicable only to the scope of the EPC contract
    • Overall project costs within the scope of the General Contractor’s work are secured by a fixed amount.
    • The detailed physical scope, description of the scope of services and duration of work should be agreed upon.
    • Guarantees may be offered for completion and performance of works, if it is necessary to provide the project funding

Cost recovery option

  • “For”
    • Savings of the cost of works/services are received by the Investor
    • The Investor may introduce changes into the project
    • Good method if the scope is not fully determined
  • “Against”
    • Increase in the cost of works/services is compensated by the Investor
    • Increased risk of exceeding the value of the contract with the General Contractor

Option – Reimbursement of expenses plus fixed remuneration

  • “For”
    • Savings of the cost of works/services are received by the Investor
    • The contractor has incentive to reduce man-hours
  • “Against”
    • Increase in the cost of works/services is compensated by the Investor
    • There is a risk of exceeding the value of the contract with the General Contractor

Option – Reimbursement of Expenses plus Incentive Remuneration

  • “For”
    • The contractor is interested in achieving the desired project results
    • The investor and the contractor have joined their efforts and work together
    • Best commercial conditions for effective “breakthrough”
  • “Against”
    • There is a risk of exceeding the cost of services
    • Incentives do not work if the planned targets are not achievable
    • Need for additional remuneration may occur

Fixed price option

  • “For”
    • Lowest risk of the cost overrun
  • “Against”
    • The scope and duration of work at the initial stage should be clearly defined
    • Significant expenses due to high contingent expenses in estimate and premium for the contractor’s risk
    • Investor/Customer’s ability to make changes is limited
    • Likelihood of hostile relations between the contractor and the Investor/Customer

Option – “Turn Key” Fixed Price

  • “For”
    • Minor risk to the Investor ... the price and time schedule are guaranteed
  • “Against”
    • Significant premiums paid out against the contractor’s guarantee, ... usually result in relatively high contingent expenses, risk premiums and bonuses
    • Limited ability to make any changes

Conclusions

  • EPCM is recommended when there are competitive local construction contractors
  • The EPC scope is recommended in remote areas where local construction contractors have limited capacity
  • It is recommended to use RE IR commercial method for combining the owner and the General Contractor to achieve the desired results of the project
  • EPC with RE IR are usually recommended to reduce overall project costs, risk and time schedule
  • TKFP is recommended, since it offers the lowest risk for the owner, but increases the overall cost of the project