EPC-Projects, a class of its own
An “Engineering, Procurement and Construction” or short EPC-Project is a particular form of contracting arrangement used in some industries where the EPC-Contractor is made responsible for all activities from design, procurement, construction, to commissioning and handover of the deliverables to the Owner or Operator (O/O) [https://en.wikipedia.org/wiki/Engineering,_procurement,_and_construction]. Similar concepts are “Turnkey”, “Lump Sum Turnkey (LSTK)” or “Engineering, Procurement and Construction Management (EPCM)”.
The International Federation of Consulting Engineers, or “FIDIC” as acronym for its French name Fédération Internationale Des Ingénieurs-Conseils, is an international standardization organization for the consulting engineering and construction industries best known for the FIDIC family of contract templates [https://en.wikipedia.org/wiki/FIDIC]. In December 2017, FIDIC launched the second editions of its Red Book (owner-designed), Yellow Book (contractor design-build) and Silver Book (turnkey project) model conditions for EPC contracts. Since 1999, the first edition of these model forms have been frequently used worldwide.
EPC-Projects are typically large and complex. They can be found in many industry segments, including but not limited to industrial plants, oil and gas, mining, power generation or large infrastructure. Ed Merrow, founder of Independent Project Analysis (IPA) analysed that more than half of the industrial projects of $1 billion or more around the world suffer from large cost overruns, major delays, poor operability, and far too many safety incidents. The reason for failure is usually laid out early in a projects development of the basic business strategy and timetable for the project. Other challenges are the lack of trust between the many partners engaged in EPC-Projects, technical and organizational complexity, political, social and cultural dynamics, and many other factors.
Delivering EPC-Projects is tough. Ultra large projects represent an exponentially tougher challenge than a typical megaproject, often defined as $1 billion in in value or greater. They are the preserve of the few. As the size of capital projects rises, so does the complexity of strategy, design, financing, procurement, and, ultimately, project execution. A report published by McKinsey´s Capital Projects & Infrastructure branch about “The art of project leadership: Delivering the world’s largest projects” [https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/the-art-of-project-leadership-delivering-the-worlds-largest-projects] concludes the following: “Today, the prize for executing large projects successfully is significant. With ever-increasing size and ambitions, the modern large construction project not only has a lasting impact on the organisation, but can also impact wider industry dynamics, the regulatory landscape and even geopolitical relations. However execution of large projects has historically proved difficult. On average, projects with budgets above US $1 billion, commonly referred to as “megaprojects” in the industry, are delivered one year behind schedule, and run 30 percent over budget. If this trend continues, US $5 trillion in value will be destroyed in the projects currently announced around the world. For the sake of economic prosperity and lost opportunity alone, this must change.”
The report synthesises critical elements of the art into four discrete mindsets and eight practices. The four mindsets are: 1. Lead as a business, not as a project; 2. Take full ownership of outcomes; 3. Make your contractor successful; and 4. Trust your processes, but know that leadership is required. These four mindsets need to be adopted by the majority of people in the project organisation and the broader owners’ team, not just the top management of the project itself. The owner and project directors need to create an environment where these mindsets are aligned with the natural way the team approaches their day-to-day work and how they interact with each other, contractors, and other stakeholders. The eight practices for the set-up of a project and its delivery are the following: 1. Define purpose, identity and culture; 2. Assemble the right team; 3. Carefully allocate risk and align incentives; 4. Work hard on relationships with stakeholders; 5. Invest in your team; 6. Ensure timely decision making; 7. Adopt forward looking performance management; and 8. Drive desired behaviours consistently. Unsurprisingly those mindsets and practices touch on soft skills rather hard facts, methodologies or processes.
With an innovation project focusing “EPC 4.0” [https://www.epc-4-0.eu/] a group of EPC experts intends to explore the world of EPC projects, key challenges, potentials for improvement and solutions for investors, owners and operators, EPC and sub-contractors as well as all other interested parties. Stay tuned for more insights coming soon.