Now more than ever, the terms “cost savings” and “cost optimization” are on the proverbial lips of every oil and gas firm in the industry. Many companies are looking for ways to streamline operations to reduce risks and associated costs. One such method is through EPC contracts.
Typically, an Owner will divide the scope of work into smaller contracts to execute a project, where each contractor is only liable for their respective work. While this approach can offer negotiated cost savings to the Owner, the downside is that multiple contracts also increase the risk of poor project integration. If one contractor falls behind schedule, it can delay the work of other contractors’ work. Moreover, assigning responsibility for defects may be difficult when working with several parties.
With EPC contracts, however, Owners get a “packaged deal” through a single point of contact. The Owner hires one Contractor to assume total responsibility for the project design and execution (i.e., engineering, procurement, and construction activities) and provide a fully equipped facility that is ready for operation at ‘the turn of a key.’ EPC eliminates the added stress of coordinating project execution for the Owner because the Contractor is ‘on the hook’ for any project schedule and quality issues that may arise. This includes additional costs not accounted for as most EPC contracts are fixed price and lump sum.
While this one-stop shop arrangement between the Owner and the Contractor sounds attractive, careful considerations must be factored into the final decision. Owners may pay more with fixed price, lump sum EPC contracts due to the limited number of major EPC providers. Owners also must research the track record of EPC firms which determine the feasibility of this option. Ultimately, determining the best contract structure will depend on the project needs and the Owner’s budget.