Project Management Models - Rev 2
Project Management Models - Rev 2
(Model)
EPC
One approach for a project is to adopt a fixed-price, turnkey approach known as an engineering,
procurement and construction (EPC) contract, often referred to as a lump sum contract. In this model,
a single contractor assumes responsibility for all elements of design, construction and procurement.
In theory, this model can provide the Owner with a degree of certainty in cost and schedule required
to undertake a project but in practice, this only occurs when a significant amount of design has already
been completed. Under this model, Project risk is generally transferred to the Contractor. However,
this can come with a substantial price “risk premium” since the Contractor bears the risk of
performance across all subcontractor work packages and equipment supply. It is difficult to accurately
price the construction work if the design has not been substantially completed.
One major drawback with the EPC model is that the responsibility for detailed design lies with the
Contractor; hence the Owner needs to ensure that the functional and performance specifications are
clearly specified to guarantee the delivered installation is of the required standard, quality and
delivers a successful operation. On large complex process orientated projects this can be difficult to
achieve up-front, as issues invariably arise as the engineering design progresses, that were not
apparent at the start. This leaves the Owner open to cost overruns through contract variations
where the Owner is locked in to negotiate with the one very large contractor. There is also a risk
that the final delivered operating plant is not what the Owner requires to provide, a cost effective,
efficient operation for the life of the resource / plant.
EPCM
During the recent resources boom, the engineering, procurement and construction management
(EPCM) model was the norm for large design and construct projects. The EPCM project management
model is a professional services contract, where a single contractor has responsibility for all aspects
of design, procurement and construction management.
Of note is that all construction contracts and equipment purchases for the project are still between
the Owner and the suppliers or construction contractors, with the EPCM contractor acting on behalf
Engineering, Procurement,
Commissioning Contracts
Construction
Subcontractor
Loots & Henchie (2007) of Mayer Brown (an international law firm) argue that this industry wide
change from EPC to EPCM style contracting was driven by market forces rather than by any actual or
perceived benefit in the EPCM approach. They argue that traditional (EPC style) engineering
companies prefer EPCM since the project risk is transferred back to Owners (and lenders) and reflects
the stronger bargaining position of many engineering companies due to the high demand for their
services at this time. The change in the economic climate however has seen this situation reversed,
with the bargaining power now more favourable for Owners.
One distinct advantage of the EPCM model over EPC is that it allows the Owner’s Team to have more
input into the specifications and design of the new plant and to deal with changes more efficiently.
Remembering the purpose of a project is to deliver a plant that provides a low cost, efficient operation
for the life of the resource / operation, this is an advantage of the EPCM project model. This model
also promotes the future operations team having ownership of the installation / design.
Limitations
EPCM projects were very lucrative for engineering companies, evident from the large increases in the
market value of many engineering companies during the mining boom. For Owners however, there
• There is little or no commercial risk for the EPCM contractor for cost and schedule overruns.
• The final contract for the supply of equipment and construction services is between the vendors
/ contractors and the project Owner, not the EPCM contractor. This generally requires both the
EPCM contractor and the Owner to have procurement / contract departments, systems and
processes. This can easily result in considerable inefficiencies and duplication of effort in the
project management team.
• The engineering companies typically do not assemble the commercial terms and conditions for
the equipment and construction contracts. These are completed by the Owner thus restricting
the ability of the EPCM contractor to put in place and negotiate, the commercial terms
efficiently.
• Inaccuracies in the EPCM target cost and the project schedule. This is especially important in
the case where the company who completed the feasibility study is retained by the Owner as
the EPCM contractor to execute the project. The tendency is for the EPCM company to reduce
the estimate to meet the hurdle rate as they do not take the risk on the project costs and are in
the best position to execute the works on a EPCM schedule of rates basis.
• The EPCM model can result in at least three layers of management, Owner, EPCM contractor,
and vendors / construction contractors. If subcontractors are included, this becomes four
layers. This often results in a large, inefficient project management team with unclear lines of
responsibility and high overhead costs.
Three examples of EPCM structured projects are:
• A $2Billion Mine Extension - a project to install a new mine adjacent to a current operational
mine. This project was completed in 2013 well above the original budget and well behind
schedule.
• A Brisbane based service centre for a large Australian mining company - an integrated office for
planning, executing and optimizing multiple projects over an extended period. An EPCM project
management model was used but has since been disbanded, despite having one of the world’s
largest and most experienced companies as the EPCM provider.
• The 2.6Billion Wiggins Island Coal Export Terminal (WICET) expansion – The EPCM contract was
removed due to cost and schedule overruns and an Owners team put in place.
Converting the MNC project budget to 2017 costs this equates to a budget of $750million which is
well under the 2billion spent on the new underground mine completed in 2013. One marked
difference was the number of people engaged on the two projects. Moranbah North Coal had less
than 15 people as their core team (excluding procurement) whereas the PCM contractor for the 2013
project peaked at well over 120 personnel. Interestingly both project teams had very capable,
experienced personnel but were structured very differently.
The MNC project management team consisted of a few Owner’s personnel (Shell staff), augmented
with experienced contract project personnel. The Owner’s personnel focused on the quality of the
installation, ensuring that it would provide a cost-effective operation for life of mine. The experienced
project personnel focused on ensuring the project was delivered safely, to budget, and to schedule.
The Owner Team project model / structure was recently put into practise on a brownfield project at a
copper processing plant in Laos.
Project Description
Key outcomes
This project structure and approach works as proven in the coal and hard rock
mining industries.
Project Set-up
Based on the proven success of the Owner’s project management team as described above, an
“Owner’s Team” would develop and implement a Project Execution Plan, based on the following
recommendations and objectives:
1. A detailed procurement / contracting strategy for the project is required up front to provide
clear direction to the project team. E.g. What equipment is to be purchased up front to
provide vendor data to allow the design work to be completed efficiently? How are the
1. Once the various options have been defined in the feasibility studies, adequate time is to be
allowed to establish a good design that incorporates ownership by the future operations
personnel. Once construction starts, changes in design are extremely expensive.
2. The engineering design is completed to the “Issued for Construction” (IFC) stage including
receipt of the “Approved Certified Vendor Data” before finalising and awarding lump sum
construction contracts. This includes a review and sign off on the IFC drawings by the Owner’s
operational personnel.
3. Preferred equipment lists are developed at the start of the project to reduce procurement
and engineering schedules / costs. This is particularly relevant for brownfield operations
where the mine operations personnel need to take into consideration life cycle costs for spare
parts and maintenance. E.g. standard pumps, electric motors, valves, PLC’s etc. The typical
EPCM approach of tendering all of the equipment supplies down to low-level miscellaneous
equipment, and then waiting for the Certified Vendor Data results in a longer, more costly
engineering / procurement phase.
4. A concise Project Execution Plan including the contract / procurement plan (strategy) is put in
place (approved) before the detailed design phase is started.
Confidence in a project estimate is required up front with the following points to be considered in
relation to the project cost and schedule estimate:
• The company that provided the estimate usually has no commercial consequence for
providing an inaccurate estimate. Further, if that company is expecting to perform the
EPCM role on the project, there is an incentive to provide a low estimate to increase the
likelihood that the project will be approved. Under the EPCM project management model
the EPCM contractor typically do not take on any major commercial risk.
• Project Owners often try to reduce the estimate provided rather than ensuring that the
work scope is accurate and that the costs are all inclusive. The driver for this is often to
meet a specific hurdle rate to show that the project is economically viable. If the project
is not viable then look to invest in a better project.
• The engineering company providing the estimate via the feasibility study, typically obtain
quotes from equipment suppliers and construction contractors who provide indicative
(low) prices to improve their chances of receiving a tender when the project is approved.
These suppliers / contractors typically have no obligation to maintain their quoted prices
at tender stage with increases of 20% over the quoted price not uncommon1. To reduce
As an example, when the Front-End Engineering and Design (FEED) study was completed for an LNG project in
1
NSW it was found the actual tender costs received were, on average, 20% higher than the original quotes
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this risk, it is recommended full tenders are issued for the larger pieces of plant. This takes
more time in the study phase but saves time if the project goes into execution.
• Project estimates are typically reviewed by comparison to other feasibility study
estimates, rather than using actual project costs.
• Budgets are typically calculated within an accuracy range based on engineering industry
standards. Schedule estimates however, do not normally have the same level of rigor or
standardization applied. Given the impact of schedule blowouts on the final project cost,
the project management team need to gain a high level of confidence in the schedule.
• The engineering company that provided the feasibility estimate is usually engaged on an
EPCM basis by the Owner to deliver the project. This is problematic since there is no
independent review of the project costs. As a result, overruns in cost and schedule are
often not realized until after the construction contracts tenders have been received,
which is difficult to rectify at this stage of the project. This also puts the EPCM project
management team in a compromising position of defending the estimate as opposed to
delivering the project.
1. The disruption to the existing operation is minimised where possible, even if this requires a
new plant to be constructed as opposed to upgrading the existing plant.
2. The battery limits and responsibilities are clearly defined between each contractor and the
operations team. Commissioning of the new plant is a critical area that needs to be
considered and clearly understood by all parties at the start of the project.
3. The responsibility for Health & Safety is clearly defined. The preference is to augment the
existing site operational safety system with the specific (new) project risks so that all
personnel are following the one safety system on site during construction and commissioning.
4. Scheduling of work needs to be completed in close alignment with the operations team. Tie-
ins, is one area that requires in depth planning with the construction team ready to take
advantage of unplanned shut down opportunities if possible. Specific drawings with pictures,
P&ID’s (before and after), detailed material lists, bagged materials per tie and pre-erected
scaffold as some of the items to be set up for a successful program.
5. The project team includes some key personnel from the future operation to assist with
developing and managing the project and to help focus on delivering a cost effective and safe
operation for the plant life. Being an integral part of the project Owner’s Team will require
the operations personnel to be committed to deliver to the project time frames and costs.
Conclusion
An independent Owner’s Team significantly reduces overhead costs through reduced layers of
management, better communication and clearer lines of responsibility. Utilising one set of systems
and processes, the Owner’s Team approach provides an efficient structure for managing project
risks. This is particularly important for brownfield sites and outage projects.
received during the feasibility stage. Since the general terms and conditions of contract are typically not
issued during a feasibility study, the likelihood of cost increases at the tender stage is high.
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The Owner’s Team is independent from the engineering, construction and supply contractors
engaged on a project, the team is only focused on what is best for the project. This independence
provides the leverage required to hold the contracted organisations to account, ensuring that the
Owner’s interests are always the priority.
The Owner’s Team management model is flexible enough to be able to select the best practices from
the alternate project management models and incorporate them into the Owner’s Team project
management plan. This results in a flexible and dynamic Owner’s Team truly invested and focussed
on the best outcome for the Owner.
The Owner’s Team management model puts the correct structure in place to provide a safe work
site with simple management and reporting structures, clear lines of responsibility and a common
safety system throughout the site.
The Owners Team model has been well proven, within a variety of mining and processing industries.
The one independent Owner’s Team, with the responsibility, accountability and authority to
deliver a project provides an optimum project management model for success.
Bibliography
1. Loots, P., & Henchie, N. (2007). Worlds Apart: EPC and EPCM Contracts: Risk issues and
allocation. London: Mayer Brown.
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