Engineering procurement and construction contract

Engineering, procurement, and construction (EPC) contracts, sometimes called turnkey contracts are
similar to design and build contracts, in that there is a single contract for the design and construction of
the project, but generally with an EPC contract, the client has less say over the design of the project and
the contractor takes more risk.

On a design and build project, the client may produce an outline design upon which tenders are sought.
On an EPC project, the client may seek tenders based on a performance specification and then have no
input into the design, other than if variations are instructed.

Payment can be on a lump sum, cost reimbursable basis, or some other basis, but generally
the client would be likely to seek a fixed price, lump sum agreement where the responsibility for cost
control is taken by the contractor. This gives the client a relatively risk-free arrangement, with one point of
responsibility and cost certainty. They can therefore operate the contract with the minimum resource.

The clients main risk lies in the definition of the specification upon which the contract is based. If
the specification is not well developed and concise otherwise the quality and performance of the
completed development may be compromised (see performance specification and output-based
specification for more information)

Generally, EPC contracts are used on engineering and infrastructure projects, or industrial projects,
where the aesthetics of design might be considered less important to
the client than performance and cost certainty.

The FIDIC Conditions of Contract for EPC Turnkey Projects (The Silver Book) is an example of
an engineering procurement and construction contract.

“TURNKEY” VERSUS “DESIGN AND BUILD”:

ADVANTAGES AND DISADVANTAGES WHEN IT COMES
TO A NEW DATA CENTER WHICH WAY TO GO?
Oct 21, 2015 | Data Center, Data Center Management, Data Center Planning
 By: Juan Carlos Londoño Z. – INGENIUM

When planning a new data center project, the most important decision is who we are

making responsible for such an important project. What is better? A turnkey project, same contractor designing

and building the data center or hiring an independent consultant for the design, and a contractor to build it.

Both methods have their advantages and disadvantages.

The turnkey option has been used for a long time, mainly in building civil infrastructure projects, or with public

and governmental bids, or when the project has a high level of complexity and there is a well-defined scope on
 behalf of the owner. But in recent years it has been used indiscriminately in contractual processes of IT projects,

including data centers, regardless of size, complexity and scope.

On the other hand, a “design and build” project seeks to separate the design from the construction and

implementation process. By previously creating a design – this may be conceptual or detailed engineering

drawings-, the preliminary studies and technical specifications are tailored to the requirements of the project and

of the customer, so that bidders interested in building will have enough information and adequate specs to prepare

their proposals accordingly, minimizing or eliminating assumptions that are required in order to develop this

turnkey project.

Both of these options are valid, however, there are some advantages and disadvantages on both options. While

there may be more, we present some of them for illustration purposes:

The advantages of a turnkey project, some of which are misguiding and the opposite ends up happening:
1. Reduced total time during the contractual process by having just one process instead of two separate
ones. This does not necessarily imply less construction time.
2. A seemingly “lower cost” when integrating “all” the elements under one provider.
3. Minimizing orders of change (those of which generate more costs against the contractor) during the
implementation of the project because the changes and adjustments fall under responsibility of the
only contractor.
4. This is a practical solution for smaller projects, such as communications rooms or small computer
rooms, these usually have a limited budget for the project.
5. Definitely, the main advantage of this service is the peace of mind the owner gets when it hands over
full responsibility of the project to “only one contractor”, it is much easier for the owner to manage and
communicate with one provider, which means “one neck to choke”.

The greater responsibility assumed by the only supplier, ironically is what causes most of thedisadvantages in

this contractual model:

1. A higher cost is assumed due to the higher risk that comes with total responsibility, there is less
information to prepare proposals (compared to the “Design and Construction” scheme) and therefore
bidders assume more risks. The typical way to counter the increased risk is by increasing the price.
2. There is a greater disparity when comparing offers, both economically, because each provider has
different criteria for assessing the risk, as technically, because of the different assumptions and varied
criteria when presenting solutions.
3. Usually designs are oversized due to lack of information available at the time when the offer is being
prepared, several tolerance factors are taken into consideration when referring to the capacity of the
 equipment and are factored into the assumed risks, causing higher dimensions, because of this higher
prices in the equipment are presented in the offer.
4. Despite the previous bullet, after winning the contract, these suppliers look for ways to save during the
implementation (taking the savings for themselves and not for the owner, because the price has
already been established), having detailed designs below defined standards and/or adding low quality
materials or equipment at accepted technical specifications. In this case, it becomes vital to have a
commissioning process by a qualified third party commissioning firm- knowledgeable and completely
independent from the contractor-, to minimize and eliminate this eventual disadvantage.
5. Competition is restricted because typically only “the biggest competitors” are the ones that are able to
assume the highest risks and the full responsibility of the project which implies, in general, the highest
bidding offer (the biggest companies usually require bigger margins).

Finally, when assigning full responsibility of the project, the owner gives up all rights to interfere and control

the project, and things such as topology, specs, scalability etc. as well as the materials and equipment that needs

to be employed.

On the other hand, assuming that the company that designs does not have any conflicting interests in the

implementation phase and expecting it to be really independent from the construction companies,

theadvantages of this “Design and construction” scheme, are as follows:

1. The disparity of the construction proposals is notably reduced. This is due to the studies and designs
previously made, the amount of information available helps limiting risks, the scopes, specs and even
the equipment needed is much more precise. In other words, construction offers can be better mapped
out to the necessities and scope needed for the project, setting a clearer picture of the project itself.
2. This simplifies the vendor decision process for the construction, having homogenous proposals which
facilitates the “apples to apples” comparison and making the negotiation process a lot faster.
3. A cost reduction for the owner, due to the fact that oversizing is eliminated from the solution and the
risks of the turnkey scheme are reduced, optimizing the construction and implantation process of the
data center. Allows better control and interference

by the owner regarding the technology, materials and equipment to be implemented, and there is more knowledge

gained on the capacities and scope of the physical infrastructure. In this case, the savings go to the owner and

not for the contractor.

Still, there are some disadvantages with this method:

1. Longer decision process, although once again this does not necessarily means a greater time to
execute the project.
2. More quantity of changes during the execution, due to the fact the contractor may want to add or
change specifications or equipment’s and materials, and they need to be managed and approved to
avoid extra costs to the project, making claims that may not be within the scope that was originally
defined or arguably attributing errors to the design.
3. Finger pointing between the consulting engineer that designed the project and the contractor, in gray
areas inside the scope of the project and the respective responsibilities of the designer and contractor.
The diluted responsibility may cause extra charges and delays in the execution of the project.

There is no such thing as a perfect recipe to design and build a data center, every company and team assigned to

each project will have different standards on what is more important for them and the project. For example,

complying with the budget, the time to market or have the best data center, no matter the cost or what it takes. On

the contrary, it is fundamental for the people responsible of data center projects to measure well the advantages

and disadvantages of both options, to decide which method is more convenient in accordance to the interests and

intentions of the company and the scope of the specific project.

Design-build is a popular contracting method widely used around the world,

including in the U.S. As the name implies, this type of contract combines the
design and construction, often called the project delivery, under a single
agreement. Design-build can save time over other contracting methods and can
prevent situations where the owner is caught between the designer and the
builder in contract disputes. On the downside, a design-build contract can
present some challenges, such as situations in which the final cost cannot be
easily determined or projected.

When Are Design-Build Contracts Used?

Design-build is typically used when an opportunity exists for the owner or agency
to save time by having construction begin before the final design has been
completed. By contrast, in the traditional system of design-bid-build, the owner
contracts separately with a designer and a builder, and the design must be
completed before the owner puts out a call for construction bids. By combining
both aspects of project delivery under a single agreement, and thus a single
bidding process, design-build can save time and, in some cases, money for the
owner.

In addition to projects on tight schedules, design-build is often preferred by

federal agencies with a need to fast-track projects, so that the return on
investment can be capitalized sooner.

Characteristics of Design-Build
The defining characteristic of design-build contracts is simply the presence of
only one contract. All other types of standard construction contracts include at
least two contracts. Design-build is often described as "single-source" or "sole-
source" contracting. If there is a problem or change with either the design or the
construction, the owner works with a single source—the contractor—for
resolution or approval.

Under a design-build contract, designers and builders work hand-in-hand to

produce construction drawings and analyze a logical construction sequence. This
single-source collaboration allows for both the design and construction to be
completed in stages rather than working from a complete design from the outset
of the project.

Advantages of Design-Build Contracts

Design-build contracting offers several potential benefits:

 Reducing design time

 Simplifying construction drawings
 Leaving value engineering alternatives open for discussion and analysis
throughout the project
 Shortening the construction calendar
 Limiting communication channels to a single point of contact
 Minimizing change orders
 Fast-track schedules
 Customizing the design to actual site conditions more easily
 Identifying long lead items earlier
 Allowing for the project to be repeated

Drawbacks of Design-Build Contracts

Design-build contracts can also produce some downsides to consider:

 The project outcome might not produce the expected result.

 A project that is not scheduled properly might be substantially delayed.
 The contract doesn't impact labor costs.
 Final costs can be reasonably higher than original estimates.
 Design-build eliminates the possibility of using an integrated design.
 The counterweight between a contractor and the design team might be
reduced, and some conflicts might appear.
 The architect’s vision may appear to favor the contractor.
 If the project’s inspector and the team are not experienced, problems could
become frequent and costly repairs may be needed.
Variations of the Design-Build Concept

There are several variations on the standard design-build contract:

 Bridging: Owner develops a preliminary project design at a level of 30%

to 50%
 Turnkey: Owner requires outside expertise and then allows the entity to
turn over the keys at project completion
 Design-Build-Warranty (D-B-W): Combines a warranty provision with
design-build
 Design-Build-Maintain (D-B-M): Combines maintenance provisions with
design-build
 Privatization: Private entity designs, builds, and maintains a section of
roadway in turn for a toll or fee

Design and Construction within

Turnkey Delivery
Turnkey delivery offers a more effective process for designing
and constructing new facilities than a traditional Design-Bid-
Build (DBB) procurement.

Turnkey delivery offers a more effective process for designing and

constructing new facilities than a traditional Design-Bid-Build (DBB)
procurement. Turnkey delivery consolidates multiple contracts into a single
point of accountability, provides early risk transference with certainty of
schedule and cost, and results in accelerated delivery, while integrating the
Agency as an active participant in the design process.

Greater Accountability and Risk Transference through Contractual Alignment

The turnkey delivery process contractually aligns real estate (development),
design (architect), and build (contractor) team members through a single
source contract, creating greater accountability to the Agency by the private
sector (see facing page). Delivery risk is assigned by the Agency to a turnkey
delivery team that is positioned to effectively manage the risks inherent to
building new facilities. A typical turnkey delivery team is comprised of a
developer that manages the team’s performance of development activities,
such as site acquisition, entitlements, utilities, permitting, public relations and
end-user coordination, and a Design-Builder that is responsible for the design
and construction activities employing a Design-Build method.

“Turnkey-Design-Build commonly results in schedule

reduction of 20% or more, which equates to 10
months or more on most projects.”
Understanding the Design-Build method within the turnkey delivery process
begins with the role of the Agency. As represented in the graphic on the facing
page, with a traditional DBB, the Agency is central in orchestrating and
managing the process. The Agency holds multiple contracts and is
responsible for managing the contractual process between all the various
parties involved. With this, the Agency assumes the delivery risk, and is
ultimately responsible for cost and schedule overruns. Once the building is
complete, the Agency is responsible for building operations & maintenance
(O&M).
A turnkey delivery approach offers the Agency a single source, fully integrated
and effective way to manage the development, design and construction
process. The turnkey delivery team is responsible for overseeing the facility’s
development at a fixed cost and schedule, eliminating Agency risks of
schedule delays and cost overruns (see page 14 for a cost and performance
analysis produced by Caltrans). This approach enables Agencies to do more
with less staff and to tailor their level of involvement on a specific project to
meet their broader organizational needs.

Schedule Savings via Turnkey-Design-Build Delivery

With a turnkey delivery approach, development, design and construction

activities overlap, allowing for fast-track delivery of facilities with no additional
risk to the Agency. Turnkey-Design-Build commonly results in schedule
reduction of 20% or more when compared to traditional Design-Bid-Build
delivery. This equates to 10 months or more on most projects. Integrated
design and construction teams are better equipped to realize solutions to
complex building problems by promoting close collaboration through a
contractually defined process. This consolidation of expertise allows for tasks
such as permitting, submittals, inspections, and quality control processes to
occur simultaneously with construction.

Leveraging Private Sector Expertise Frees Agency to Focus on End-Product

Goals

Turnkey delivery does not remove the Agency from the equation; they are
present throughout the Design-Build process, attend all design and
construction meetings, and exercise a large degree of control over the
direction of the project. While profoundly involved throughout the entire
process, the Agency’s time is leveraged by the expertise of the development
team for greater efficiency. With the aid of the development team, the Agency
avoids the minutia of the process while maintaining focus on their end-product
goals. Design approval is verified through a design review process, where the
Agency has the opportunity to review and approve the design packages
created by the Design-Build team. During construction, the Agency can retain
3rd party inspectors and commissioning agents to independently verify that
the Design-Build team is meeting all the requirements of the agreement. In
this way, the Agency can maintain laser focus on meeting all of the objectives
of the project end-users.

Keys to a Successful Design-Build Process

Critical to the success of the design and construction component of turnkey

delivery is organization and management of the design process. Creating a
framework for collaboration between the various team members is key. Under
a turnkey delivery, the Design-Build executive manager assumes
responsibility for leading the design effort and coordinating the design with the
Agency. Establishing a regular place to host design meetings is a crucial
feature of the Design-Build process because it promotes teamwork and
improves efficiency. Also important is creating a central repository of critical
information that is online and accessible to key project stakeholders.

Active Agency Involvement – No Loss of Control

A typical concern raised by Agencies when contemplating turnkey delivery
and the Design-Build process is loss of control over design. Our experience
suggests that this concern is overstated. Active involvement from the Agency
throughout the design process is integral to achieving success. In addition, at
key stages in the design process, packages are created for review and
approval to ensure the design solutions created by the project team meet the
requirements of the Agency. A formal process for recording feedback and
resolving design matters is essential for validating the design and moving
forward with construction.

Because design and construction activities overlap, early construction phases

involving sitework, foundations, superstructure and the exterior enclosure can
be built while the remaining building interiors and mechanical system designs
are being finalized. At this stage of the project, the Agency is in the field and is
actively engaged in the building process while the design is being completed.
Onsite construction continues like a traditional construction process; architects
and engineers provide construction administration services and operate under
the same professional standard of care. Third party inspectors and
jurisdictional code review agencies are also involved, providing independent
reporting and quality control services.

Throughout the design and construction process, it is essential for the Agency
to establish its level of involvement. One Agency may want to actively
supervise the Design-Build process, while another may only want to be
involved during key design phases. Turnkey delivery offers varying degrees of
project involvement and consistently delivers on cost and schedule
guarantees.

Refining Design to Improve End-User Experience/Maintaining Budget

and Schedule

Another exciting feature of turnkey delivery is that it offers the Agency more
opportunity to provide input into design refinements focused on the
experience of the facility end-users. The integrated Design-Build approach of
turnkey delivery allows design refinements to be incorporated more quickly,
reducing any cost or schedule impacts to the project. As detailed in the case
study on page 15, the use of mock ups enable design refinements to be made
in real time with input from actual users of the planned space. If decisions
cannot be made regarding future refinements, the project team can make
provisions to accommodate the refinements at a later date. The use of a
collaborative team approach can extend to senior level leadership when a
special executive leadership team is established. This partnering approach
ensures all members of the project team are aligned and able to determine
the course of action when the unexpected occurs.

Effective Risk Management Through the Turnkey Design and Construction

Process

Turnkey development promotes active Agency involvement and aligns the

incentives of the designers and builders, enabling them to work towards their
shared performance goals. The resulting process is streamlined, productive
 and offers great value to institutions and the public sector that are pursuing
major facility projects.

The difference between an Engineering

Procurement and Construction (EPC)
and a Turnkey Project.
by adminApril 11, 201909091
SHARE0
Last Updated on May 8, 2019
Table of Contents
 What is EPC?
o What is a turnkey project?
 Turnkey projects examples
 What is the difference between an EPC and a Turnkey Project?
o EPC Project
o From the role & responsibility point of view
o From the risk point of view
o From an execution point of view
o Conclusion

What is EPC?
“Engineering, Procurement, and Construction” (EPC) is a particular form of contracting
arrangement used in some industries where the E P C Contractor is made responsible
for all the activities from design, procurement, construction, to commissioning and
handover of the project to the End-User or Owner.
The engineering and construction contractor will carry out the detailed engineering
design of the project, procure all the equipment and materials necessary, and then
construct to deliver a functioning facility or asset to their clients. Companies that
deliver EPC Projects are commonly referred to as EPC Contractors.
What is a turnkey project?
One of the special modes of carrying out international business is a turnkey project. The
turnkey projects meaning, a contract under which a firm agrees to fully design, construct
and equip a manufacturing/ business/ service facility and turn the project over to the
purchaser when it is ready for operation for remuneration.

The term turn-key project (Turn-key delivery) describes a project(or the delivery of such)
in which the supplier or provider is responsible to the client for the entire result of the
project and presents it to the client completely finished and ready to use.
The term turn-key project (Turn-key delivery) describes a project ( or the delivery of
such) in which the supplier or provider is responsible to the client for the entire result of
the project and presents it to the client completely finished and ready to use. In fact, the
client should be able “just to turn the key.” The supplier of a turn-key project is called the
general contractor (or main supplier, direct supplier or main contractor). Synonyms for
the term turn-key project are a turn-key solution, turn-key delivery, or ready-to-use.

Turn-key projects in practice: In a turn-key project, the supplier takes on complete

responsibility for the adherence to delivery dates, the scope and the cost of the entire
subject of delivery to the customer. The customer thus is not affected by any risks inside
the project and the result of the project is covered by one agreement.

Turnkey projects examples

Engineering Projects, large construction projects i.e Construction of Airports, Ports,
skyscrapers, Bridges, In IT (turn-key implementation of information systems)

The turn-key project is usually very complex and may involve the development and
design, the production and the delivery and set-up or installation of the project.

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What is the difference between an EPC and a Turnkey

Project?
EPC Project
EPC = Engineering procurement & construction.

These jobs for engineering, procurement and construction are useful but they can
involve some great differences. It is good to see what differences can be found
between EPC and turnkey contracting.

The first thing involves the depth of the project that is being handled. An EPC project
will involve a contractor working with basic engineering procedures. This can work to
help with ensuring that a business will be set up properly with the right engineering
plans for great needs.

A turnkey project will involve more specific rules for technical procedures. This is often
used to help make it a little easier for a person to handle more types of controls without
an issue getting in the way of things.

The next difference involves who is responsible for getting a design for EPC and
turnkey contracting ready. An EPC plan will involve the contractor getting a full design of
a system ready to where it will be more effective and easy to read. Meanwhile, a
turnkey process will involve a contractor dealing with special considerations for handling
property and the contractor designing things based solely on the type of specifications
that come with the property.

There is also the point about the contractor having to work with assigning the right
people for the construction process. An EPC process will involve that contractor working
to get another party to get the startup construction process handled. The turnkey
process will involve the contractor being fully responsible for every single part of what is
going on here. This is often used to help make it a little easier for a property to be
arranged as carefully as possible for getting engineering plans ready.

The interesting point about getting EPC and turnkey contracting plans going comes
from how they are both ones that work with getting different kinds of procedures to work
with different costs in mind. However, the total cost of getting EPC and turnkey
contracting India ready should be the same regardless of the type of control that is
being handled in the process. This is a very interesting point that makes it a little easier
for anyone to get contracting functions handled for all kinds of business purposes
around India.

The differences that come between EPC and turnkey contracting are great points that
must be seen when trying to find ways of how to get different kinds of procedures
handled. This is used as a means of helping to see how it works and whether or not a
person is going to be controlled as well as it can for the best possible needs that a
business will have.

From the role & responsibility point of view

Turnkey: You can just turn the key and start using the facility. So it indicates the
contractor scope includes all the activities and facilities required to start operation on a
single point responsible basis.
EPC: EPC indicates a contractor is responsible for the Engineering, procurement, and
construction of a particular facility/work awarded to him
Example: A hotel project awarded on a turnkey basis means the contractor is
responsible to complete all activities leading to final operation level (handing over to
operation team). You can’t divide this project into separate activities like Civil, MEP, etc.
and award on a turnkey basis to different contractors. Whereas, on an EPC, you can
award only MEP works on EPC or a Sewage Treatment Plant (STP) work on EPC.
From the risk point of view
Turnkey: An Employer can do engineering & procurement (full or partial) and appoint a
contractor to execute the work on a turnkey basis. Here, the employer can decide to
take more risk by doing engineering or procurement or both.
EPC: An employer doesn’t want to take any risk in respect of a particular work (like
Sewage Treatment Plant example given above). So he wants to keep all three
components in the scope of a single contractor. Any failure due to engineering or
procurement or construction will rest with the contractor. Also, variations to the Contract
will be minimum for an EPC contract.
From an execution point of view
Turnkey: is preferred where several activities are involved. Single party reduces co-
ordination efforts with many contractors that are required otherwise.
EPC: is preferred where complex engineering or proprietary technology is involved like
oil & gas and process plants.
Essentially an EPC project is the same as a turnkey project and combinedly called an
EPC turnkey project.

An EPC contract encompasses the E (Engineering/Design), P (Procurement) and the

C (Construction) which is the entire project from concept to commissioning (turnkey).
However, EPC is a very broad and sometimes wrongly used term. Some projects may
be EPCM where only the design, procurement, and construction management ( not the
actual construction part, just its management). Sometimes even just individual portions
of a project like only Engineering, or only procurement or construction may be handed
to a particular company.

Thus if all components E, P & C are awarded to the same company, it is, in essence, an
EPC turnkey project.

Conclusion
So in short EPC is a contract comprising Engineering, Procurement, and Construction.

A turnkey is a contract comprising Engineering, Procurement, and Construction.

If you look at the definition, you may find no difference between two concepts, but there
are some differences between two concepts as follows;

1- In EPC, an employer will provide basic engineering to a contractor and the latter shall
perform detailed design based on a received basic design.

2- In Turnkey, Employer will only provide certain technical specifications of the project
and it is the responsibility of the contractor to prepare basic and detail design of the
project.

3- In turnkey, the contractor is responsible to perform construction and commissioning,

start-up and take over of the plant to an employer, but in EPC, it may be the
responsibility of another third person to do commissioning and start-up.

References:
https://epcandturnkeycontracting.weebly.com/
https://www.quora.com
https://www.wikipedia.org/