An industry first: IChemE publishes standard form EPCM contract

A market standard reference point is finally available for the engineering, procurement and construction management (EPCM) contracting model. Employers, contractors and advisers alike will welcome the first standardised EPCM form published by the Institution of Chemical Engineers (IChemE). The ‘Blue Book’ has been developed with the aim of setting out fair and balanced terms, and best practice, for collaborative contracting, covering project management, design, procurement, construction supervision and commissioning services, and which are suitable for complex process plants.  

This marks the start of a new era for EPCM contracting, with the International Federation of Consulting Engineers (FIDIC) set to publish its own EPCM form at the end of this year.

What is EPCM?

EPCM contracting is fundamentally different to the similarly named “EPC” (turnkey engineering, procurement and construction) model. Under an EPCM contracting arrangement:

• The employer directly contracts with suppliers and trade contractors to deliver the works under multiple contracts. 
• In parallel, an EPCM contractor is appointed by the employer to provide engineering and design services (which will be used in the works contracts), to procure those supply and services contracts (albeit, usually on the employer’s paper) and to manage the works contractors on behalf of the employer.
• The EPCM contractor does not actually do any construction work itself.

Under an EPC arrangement, the contractor is responsible for delivering engineering, procurement and construction and generally takes full risk of delivering in accordance with the employer’s requirements. In contrast, under an EPCM contract, the contractor is not liable for delivering the project. Rather, it is liable for delivering its services in accordance with the contract requirements, to the standard of skill and care required by the contract. So, while these procurement methods may sound similar, they are worlds apart operatively and from a risk allocation perspective.

Why do we need the Blue Book?

Whilst not a new concept, EPCM has become an increasingly popular contracting model in recent years as an alternative to more traditional EPC contracting. Drivers include:

• Employers seeking to attract contractors to a project where the resource pool is limited (in particular, for certain sectors and technologies), but project demand is high.
• Contractors seeking an alternative to taking full “turnkey” risk, in particular in a contractor’s market and where the technology risk is high, or they already have a portfolio of high-risk projects.
• Which party owns the technology – if it is the employer, EPCM may be a better fit, whereas, if you expect the contractor to bring technology solutions then the EPC contractor can develop the solution, fit the equipment and give performance guarantees.
• Employers seeking to have greater control and oversight of high-risk projects and their supply chain. 
• Employers seeking to access the perceived benefits of EPCM contracting (such as faster delivery and lower costs).

A successful EPCM structure can bring benefits to both parties: employers can avoid the large risk premiums and profits required by EPC contractors, while contractors may avoid taking on the high risks of fixed time and cost turnkey agreements. EPCM contracting models offer flexibility and may result in faster completion in that, for example, tender proposals can be responded to more quickly than in the case of an EPC request as there is no need to verify employer requirements and due to the iterative nature of delivery, the employer can instruct design changes at any stage and/or refine the strategy during project execution.

Increased control over costs, time and methods of working may also appeal to sophisticated employers, particularly for complex, high-risk projects. However, to achieve these benefits, employers must have a team capable of managing the EPCM contractor’s performance appropriately.

Uses for and structure of the Blue Book

The Blue Book has been developed with process plants and manufacturing facilities in mind but is suitable for a range of performance-related projects such as nuclear power production, pharmaceuticals manufacture, water desalination, tunnelling and high-voltage distribution.

The form provides optional payment mechanisms (reimbursable, fixed fee or target cost arrangements and variations) and gives guidance on the advantages and disadvantages of different pricing arrangements in an EPCM world. 

A key advantage of the Blue Book is that it is intended to be jurisdiction agnostic and, in addition to the “General Conditions”, includes the following “Optional Conditions” to tailor the agreement:

• Part A – Projects wholly or partially undertaken in the United Kingdom (including adjudication provisions mandated by the Housing Grants, Construction and Regeneration Act 1996);
• Part B – Execution of the contract under a target price regime; and
• Part C – Requirements specific to a project (for example, the use of alternative dispute resolution mechanisms such as dispute review boards and expert determination).

The Blue Book also contemplates the inclusion of “Special Conditions” to reflect the practices of specific industries and projects not expressly considered in the General or Optional Conditions.

The form also suggests a list of schedules and guidance for completing these, which can assist parties in structuring the relevant detail.

Conclusion

Given that the EPCM model has crucial differences from other structures like EPC contracting or traditional professional services agreements in both scope and risk allocation, until now, contracting parties have largely forged their own paths in negotiating and agreeing EPCM contracts with no standardised precedent for reference. The Blue Book provides an essential foundation as a benchmark of industry standard, setting helpful parameters at the outset of discussions, which will ideally lead to more streamlined and successful negotiations.