Near single point responsibility for the delivery of the working facility

• Avoids coordination and integration issues;

• Avoids a scope/services gap;

• Clearer liability; and

• Simplified administration due to fewer interfaces.

Employer loss of control

• Design responsibility is passed to the EPC contractor, meaning less control transparency for the employer;

• It is expensive to intervene/vary during the project;

• Cannot remove all interfaces: ie, specialist trade contractors and consultants, manufacturers, contract administrator, operations and maintenance (O&M), government, permitting authorities, etc; and

• Risk of blurring the lines of responsibility if the employer tries to intervene/implement its rights, such as reviewing and commenting on the design.

Faster delivery

• An EPC contractor can be appointed and make a start before the design is complete. An overlap of critical stages results in faster delivery.

Design and performance risk deferred

• Encourages premature start/early commitment; and

• Lack of transparency for the employer as the design develops creates risk in out-turn performance, which can create a claims risk.

Encourages innovation

• Closer collaboration between design specialist and specialist contractors maximises the opportunity for innovation and efficiencies.

Stifles innovation

• EPC contractors want the lowest cost/tried-and-tested solution that complies with the contract. ‘Why take any risks…?’; and

• EPC contractors prefer to staff with the cheapest in-house resource rather than pay for outside specialists or expat premiums within its own resources.

Low cost/Price certainty

• Interface, design, programme and buildability efficiencies drive lower costs;

• Bankability – lenders are more comfortable with fixed price EPC, which is often the deciding factor for procurement if the project is to be financed;

• Appropriate risk transfer to the best party to control risk, ie, the EPC contractor; and

• Price obtained and fixed in competition.

Expensive

• Employer pays a premium for EPC but still does not get price certainty: the fixed price is just the first downpayment because there are so many routes to additional costs (eg, change orders/variations, instructions, price escalation clauses, unforeseen ground conditions, etc);

• Insufficient capacity and skills, especially for the mega projects, and lack of competition drives the price up;

• Limited appetite for risk on fixed price lump sum basis means a reduced pool of contractors with the balance sheet able to support fixed price EPC;

• The appointment of contractors who do not have the requisite skills drives price up or quality down;

• Duplication in management resource between the employer and contractor team;

• Some contractors are no longer willing to bid on fixed price lump sum basis, so there’s a risk of not receiving sufficient tenders;

• (Any) change becomes expensive and potentially divisive;

• Contractors cannot control all the risks, which encourages claims; and

• Increased risks of claims, less control over cost adjustment.

Protection of employer’s investment

• Payment by milestones, and only once the single milestone is completed and such completion as ‘state of art’ is certified;

• Bonds guarantee the carrying out of the works correctly and the subsequent promised performance of the relevant infrastructure; and

• ‘Bankability’ – lenders preferred procurement method so more likely the project can attract project financing.

False security

• Milestones require understanding as to actual scope and nature of the work and for the milestone to be appropriate, measurable and relevant;

• Bonds can be counterproductive because in instances where there is true concern as to the performance of the contractor and/or as to their solvency, the temptation for the employer is to call the bond and recover monies/reduce loss. This may in turn create more significant issues. It also raises the issue of the difference between on-demand and on-notice bonds; and

• The world banks, etc, are only just beginning to take a proper interest in the projects they are lending against by the insistence on the use of dispute adjudication boards (DABs), review of payment terms and monitoring of projects. This raises the question as to how well informed the funders are, and the extent of expert advice they seek/take?