EPC (Engineering, Procurement and EPCM (Engineering, Procurement and Construction) Construction Management) Negotiated & signed between

Owner and Equipment Supply Negotiated & Signed solely between Supplier /with EPCM contractors advise and Contracts EPC contractor & Supplier assistance Negotiated & signed between Owner and On-Site Construction Negotiated & Signed solely between Contractor /with EPCM contractors advise Contracts EPC contractor & Supplier and assistance Suppliers chosen solely by EPC Suppliers chosen by mutual agreement of Supplier Selection contractor with no input from Owner Owner and EPCM contractor EPC Contract only as good as the Owners can modify project specifications original project specifications presented with little or no trouble. Owner, with the during bidding process. Changes to assistance of the EPCM contractor can specifications / scope of supply after negotiate independent contracts with Scope of Supply awarding of contract can be expensive, suppliers / vendors at any time due to the due to EPC contractors sole contract fact that project is under multiple with Owner and Owners inability to (independent) contracts and not one (1) all Shop Around for multiple quotations encompassing contract from independent contractors / suppliers Warranties negotiated by Suppliers & EPC contractor and issued to EPC Warranties negotiated individually with each Contractor directly. Equipment Supply supplier by Owner with EPCM contractors Warranty to Owner from EPC contractor Warranties advice. Issued directly to Owner from the is negotiated separately between Owner suppliers and contractors and EPC Contractor and issued to Owner by EPC Contractor Task / Issue Warranties negotiated by Suppliers & EPC contractor and issued to EPC Warranties negotiated individually with each Contractor directly. supplier by Owner with EPCM contractors Warranty to Owner from EPC contractor advice. Issued directly to Owner from the is negotiated separately between Owner suppliers and contractors (Usually in the and EPC Contractor and issued to form of a Performance Bond) Owner by EPC Contractor (Usually in the form of a performance Bond) Site Safety solely the responsibility of Site safety is monitored by EPCM contractor the EPC contractor and sub contractors; but site safety is the legal responsibility of in accordance with Contractual Owner and Sub Contractors; in accordance Agreements with Contractual Agreements Permitting is the responsibility of the EPC contractor with the exception of permits that are required by law to be issued in the name of the Owner of the project The cost risks for a project are borne by the EPC contractor. Any cost overruns, for equipment and/or services within the EPC contractors scope of supply, are for their own account and can not be passed onto Owner unless change conditions occur or contractual

Process Warranties

Construction Site Safety (General Liability Insurance, Workmans Compensation, Accident, etc.) Permitting (Environmental, Construction, etc.) Project Budget Cost Overruns

Permits are issued to the Owner directly with EPCM contractor assisting in filing the necessary paperwork The cost risks for a project are borne by the Owner. Any cost overruns, for equipment and/or services are for the Owner account (with the exception of fixed price supply contracts) i.e. Final equipment pricing bids / on site cost higher than originally budgeted.

Project Budget Cost Savings

agreements to the contrary The cost risks for a project are borne by the EPC contractor. Any cost savings, for equipment and/or services within the EPC contractors scope of supply, are for their own account and are not passed onto Owner unless contractual agreements to the contrary

The cost risks for a project are borne by the Owner. Any cost savings, for equipment and/or services are for the Owner account ie. Equipment/Services bids are returned lower than budgeted.

Project Day-to-Day Expenses

Project Financing

Legal Cost

Administration

The day-to-day expenses for the project are borne by the Owner but are managed and The day-to-day expenses for the project, administered by the EPCM contractor (up to within the EPC contractors scope of pre-determined quantities, without Owners supply are borne by the EPC contractor. need for intervention). Usually a small fund is established by Owner for day-to-day expenses Project Financing can be any combination of Project Financing is usually down payments, open accounts, and accomplished by substantial down Irrevocable Letters of Credit from Owner to payment by Owner to EPC contractor suppliers / contractors; whatever method is and the remainder of the fees issued negotiated during contract negotiations. with Irrevocable Letter of Credit (with EPCM contractor will assist in all partial payments) from Owner to EPC negotiations on Owners behalf. This allows Contractor. This requires Owner to Owner to have partial financing in place at have all financing in place at the onset the onset of the Project with the remainder of the Project so as to secure letter of available as needed, dependant on credit (LC). contractual requirements. Legal Costs are low for Owner. Owner negotiates only one detailed supply contract with EPC contractor. Legal Costs are higher for Owner. Owner EPC contractor must negotiate negotiates multiple supply contracts directly individual contracts with suppliers / with suppliers / contractor; with the vendors. EPC contractors legal costs assistance of EPCM contractor. are high due to multiple contracts. In the event of legal action is taken, Owner In the event of legal action is taken, must bring legal action against individual Owner must sue EPC contractor, who in suppliers / contractors. (Usually a shorter turn must bring legal action against process than EPC legal actions) appropriate suppliers / contractors. (Usually a longer process than EPCM legal actions) Owners administration costs are higher with Owners administration costs are low EPCM contracts. Substantial staffing levels with EPC contract. Only minimal staff needed to assist/compliment EPCM (management, QC, legal, etc.) needed contractor in administering/monitoring to administer/monitor project. May have project. Promotes ownership feeling within negative effect on project ownership Owners organization. Project staff often feeling within Owners organization transferred to operational staff after project (Hands off). completion.

EPC / EPCM Definition & Comparison

EPC (Engineering, Procurement and Construction): means the company is contracted to provide engineering, procurem and construction services by the owner. Think Design & Construct style contracts, where the project is largely Contractor

managed and the cost risk and control are weighted towards the Contractor and away from the Owner. The EPC contracto has direct contracts with the construction contractors.

EPCM (Engineering, Procurement and Construction Management): means the company is contracted to provide engineering, procurement and construction management services. Other companies are contracted by the Owner directly t provide construction services and they are usually managed by the EPCM contractor on the Owner's behalf. Think Professional Services contracts, where the project is largely Owner managed and the cost risk and control is weighted towa the Owner.

Included is a simplified Chart showing the differences in the type of contracts and how each would differ under the same situations: The list below is not a complete list of differences between EPC and EPCM contracts but it does address many the major contractual differences. The way each of these issues is handled can be modified during contract negotiations to the situation and overall goals of the project.

EPC and EPCM contracting are both very prevalent types of contracts within the construction industry. Dependent on the level of risk the Owner of a project is willing to accept, budget constraints, and the Owners organization core competencies, will determine which method is best for their project. EPC contracting tends to be more expensive, to the Owner, due to the shift of project risk away from the Owner and to the EPC Contractor. On average, a projects cost 10% 20% more using EPC style of contracting than a project using the EPCM style of contracting. This is due in large part to the projects risk being more evenly distributed between the Owner and contracts / suppliers. Construction contracting trends have been leaning towards the EPCM style of contracting and away from EPC contracting for several reasons but both methods have their place in business today. EPCM Advantages: Lower Overall Cost Staffs Sense of Ownership More Control over Process Better for less defined projects with anticipated changes to scope of supply Less Legal Litigation (Identify issues early and remedy situation before larger problems arise) Owners Financing Flexibility These are just a few of the advantages of EPCM style of construction contracting. EPC contracting has it place in the construction industry as well. Under certain situations, it makes better sense to use this type of construction contracting than other methods. EPC Advantages: One Stop Shopping One point of Contact Hands off approach to project Minimal Staffing Requirements Minimal Legal Risk Best for Well defined projects with Detailed Engineering Complete before EPC Contractor selected (Minimal Unknowns).

As stated before, these construction contract methods can be tailored to the individual projects / owners needs. Some companies can go as far as breaking up each portion of the EPC / EPCM (Engineering, Procurement, Construction / Construction Management) to separate companies. One company can do the engineering; another can do the procurement, while still another can do the construction / project management). Each company must decide for themselves, with the advice of legal and financial counsels, as to which method of construction contracting is best for their particular project and situation.