How to pick the right contract model...May 10, 2023
Which contract model are you going to use on your next major project?
You might find yourself thinking, this is an easy question to answer: “EPCM, duh!” – and for the most part, you’d be right, but you might also be surprised to learn that there are a handful of other options available to you…
While an EPCM is the option a large majority of mining projects select, it’s not always the best option.
And, to be blunt, it’s not uncommon for an owner to say we “want EPCM” without fully understanding what EPCM actually entails…
But, in reality, many in the industry default to EPCM without fully understanding all of the nuance of what this entails, and what it requires from a commercial and contracts perspective.
The EPCM model often becomes the de facto option because of its commonplace throughout the industry.
In this article, we plan to unpack the EPCM model as well as a few other contract models available.
Contract models used in mining & metals include:
- Engineering, Procurement, and Construction Management (“EPCM”)
- Engineering, Procurement, and Construction (“EPC”)
- Engineering & Procurement (“EP”) and separate Construction Management (“CM”)
- Collaboration Agreements, or Integrated Management Teams, and
- Program Management (“PM”)
Before we move on, I do want to mention that there are instances where an owner will hire an engineering firm to do the design, and then self-perform the work (construction) themselves.
This is okay if the owner is experienced and it’s a small or sustaining capital project, but definitely not wise for midsized or large projects (say >USD $100mn in CapEx) unless there is a unique set of circumstances.
Owners simply don’t have the experience, systems, or resources to be a large-scale construction company.
So, if you’re an owner with a project >USD $100mn in Capex and you’re thinking about self-performing, you better know what you’re doing, otherwise you’re likely to end up in deep doo-doo.
Now, on to the different contract models…
EPCM – In an EPCM contract, the owner has a direct contractual relationship with the contractor.
The contractor is responsible for the engineering and design, which is typically performed in one of the contractor’s mining & metals base offices.
The contractor is also responsible for all of the construction contracts, and equipment/materials purchase orders for the project, which it performs on an agency basis (agents for owner). This requires the contractor to administer and manage construction contracts and purchase orders on behalf of the owner, yet they do not take on the contractual risk for the goods provided or services performed by third parties.
EPC – In an EPC contract, the owner has a direct contractual relationship with the contractor like in an EPCM. The primary difference between the two is that in an EPC the contractor is directly responsible for construction and equipment/materials purchase orders (assumes the liability of these contracts as it is now the signatory party, not an agent for the owner).
Whether the EPC contractor performs the construction themselves or subcontracts it to third parties doesn’t change their responsibilities, liabilities, and associated warranties.
EP, separate CM – Another model we see in the industry is owners having direct contractual relationships with an EP contractor, and a separate, direct contractual relationship with either a C or CM contractor.
This model is more commonly seen for small-to-mid-scale capital projects, and not too often on major capital development. The reason for this being the number of resources required on the owner team to manage both major partners, and act as the interface, the “glue” for the overall program. This is the business of the large EPC/M contractors, and rarely do we see owner organizations with this kind of bench strength across all project functions.
Collaboration Agreements or Integrated Management Teams –In these contract models, which are effectively like-for-like besides the naming convention, the contractor typically provides people, systems, and know-how to execute as an EPC/M, while the owner provides complimentary staff to the contractor’s organization to build out the remainder of the “integrated” project team.
These models have been around for decades, yet their application has grown in popularity in recent years. This is a trend I expect to continue, given the lack of qualified resources in the industry both on the owner’s side and contractor’s side alike. This model allows you to pick the best available resource to staff the complete project team.
Program Management – For extremely large capital development projects, or a large number of projects being executed in close sequence or simultaneously, Program Management is a viable contract model wherein the owner has a direct contractual relationship with the PM contractor. The PM is then responsible for managing multiple projects, or major project areas (e.g., port, power plant, process facility, etc.), under one contract.
This model can create multiple layers of management making it feel top heavy, and as a result, cost prohibitive. Nonetheless, it serves as a viable option for select applications (particularly very large and complex capital projects).
When going through the decision of which contract model to employ for a specific project circumstance, it is critical to assess the resource availability (the bench strength) for both the owner organization, and the tier of contractors qualified to perform the work.
This will often drive the model of contract (or contracts) to be used, and generally you’d like to have a strong understanding of what options exist prior to the completion of early pre-feasibility studies as it affects everything downstream.
Well, there you have it…
If you want to discuss any (or all) of these contract models in more detail shoot me a note at [email protected] to keep the conversation going.
I love this shit, so would love the opportunity to hear about your experiences as well.
To your success!
We are passionate about doing things better – no more horrifying industry statistics – there is a better way! Grab a time to meet with me 1:1 to discuss the unique challenges of your project.