Not sure what all is involved in an EPC (Engineering, Procurement, and Construction) project?
For starters, think complex and big. Like the $2.2 billion Ivanpath Solar Generating System in the Mojave Desert in California or the $4.1 billion Burj Khalifa in Dubai (the tallest building in the world).
EPC is a delivery model commonly used for large-scale infrastructure projects, such as industrial facilities, power plants, and oil and gas. In this model, the contractor provides a turnkey solution from the initial design to the finished project. While the EPC delivery model offers contractors great opportunities, there are multiple challenges and obstacles throughout the process, including construction.
How Big is the Growing EPC Market?
The EPC market is massive and growing. How big? According to a recent report, the global EPC market size is expected to grow in the oil and gas market alone from $46.60 billion in 2021 to $92.81 billion by 2031 (a 7.2% annual growth rate).
An EPC contract often involves a lump sum, which makes this type of contract high risk/high reward for EPC contractors. If they successfully manage the construction process, they can secure a higher profit margin.
However, risks abound. Procore explains: “Under an EPC contract, the contractor assumes a higher level of risk, as they are accountable for the successful completion of the project within the agreed-upon parameters. Any delay, cost overruns, or quality and safety issues can have financial and reputational implications for the contractor. A key piece of project execution for EPC contractors entails proactively identifying, assessing, and mitigating risks.”
Effective cost control starts with thorough contract management.
The 4.1 billion Burj Khalifa in Dubai
Lump Sum or Time and Materials?
Because EPC contracts are typically used on large capital projects, hundreds or even thousands of employees may be on a work site at the same time. EPC contractors must hire multiple subcontractors to complete the work. How can they ensure that each subcontractor and their team produce the work that precisely follows the contract?
To minimize the risk, many EPC contractors use a lump sum contract with their subcontractors. While the lump sum contract may reduce profits, it passes on the risk to the contractor. To be confident that they can ensure their profit margins and make a contract worth their while, the subcontractor will submit a padded estimate to cover the potential risk.
Therefore, the EPC contractor could potentially increase their profit by switching to a Time and Material (T&M) contract with their subcontractors. This can increase their profit on two fronts:
- 1. The final cost for the subcontractors may be lower than with a lump sum contract.
- 2. If the EPC contractor has a lump sum contract with the owner, the less spent on subcontractors, the greater their profit.
Timely Data Proves Critical for Success
Ultimately, having visibility is critical to delivering projects on time and on budget. How easy is that? In a recent McKinsey survey, senior project executives said their projects overran their budgets and schedules by 30% to 45% on average. McKinsey also noted that the complexity of capital projects makes them difficult to deliver on time and budget.
Lack of visibility makes it more challenging to manage a project efficiently. This makes it impossible for management to adjust in a timely manner. “It can take days or weeks for the news of execution delays to filter up through the organization,” McKinsey adds. “And when information does arrive, it may not be the right information at the right level of detail for the recipients to understand the root cause of the execution delay.”
According to McKinsey, “This lack of transparency is driven by multiple reporting issues.”
The largest spend for an EPC contractor is labor. Therefore, the EPC contractor needs to maximize spend on subcontractors to complete the project.
This requires a system for tracking head count. Force reporting, i.e., knowing how many employees are on duty and their skills (e.g., welders, pipe fitters), helps with labor planning and ensures staff use is maximized. It empowers EPC contractors to pivot as necessary, which can reduce costs and keep a project moving forward as planned.
Imagine getting accurate and timely data. Typically, the EPC contractor is left waiting days for a subcontractor to provide a force report. Therefore, they don’t have real-time visibility into total headcount, and contractor crew mixes.
Simple questions, such as do we need to bring on more staff? Shift staff around? Let go of staff?, can’t be answered with confidence. Inefficiencies can occur and continue for days. By the time accurate information is produced, it’s dated. Therefore, effective labor planning is impossible throughout a project.
Worksites on complex capital projects are large and dynamic, so compensating someone to walk the site to understand how labor is deployed is an inefficient use of spend. Also, the constant changes on a worksite make manual force reporting ineffective. 
Ensuring Safety and Compliance
Labor challenges are prevalent throughout the construction world. Because of labor shortages, it’s tempting to push crews to work extra to keep capital projects on schedule. The EPC contractor may intend to maintain a reasonable schedule for staff. However, putting that plan into action requires data.
Plenty of contractors and subs use Excel spreadsheets to note the number of hours or days employees spend on a project. Staying on top of such spreadsheets to ensure employees are not exceeding the fatigue guidelines (described by OSHA) is nearly impossible.
Ultimately, the EPC contractor has no choice but to rely on the subcontractor to handle this issue. Yet, if an issue occurs, the EPC contractor faces the consequences, including fines, project delays, and associated costs. These consequences are in addition to allowing fatigue to indirectly cause injury or worse.
If employees work at the level deemed safe by OSHA, they will, in theory, be less fatigued, which helps increase safety and productivity. It’s ultimately a win-win for the EPC contractor.
EPC contractors need real-time reporting regarding staff, not just the number of employees, but knowing who is on-site. And that information needs to be tracked, so they know employees are adhering to OSHA standards. Knowing who is on-site in real-time is also helpful in an emergency so first responders can quickly analyze a situation and help everyone remain safe.
How Predictability Helps with Profitability
As noted above, complex capital projects rarely go as planned. Both going over budget and/or falling behind schedule are likely to cause tension and frustration among the various parties involved. These issues are likely less loaded when parties use a T&M contract as opposed to a lump sum.
When working with a lump sum contract, EPC contractors may have to go back and forth with project owners and subcontractors over nickel-and-dime-type issues to maintain profit margins. Regular debates and discussions are time-consuming and aggravating for all parties involved.
On the flip side, EPC contractors will have less reason to engage in potentially tense conversations when using a T&M contract when they have real-time data. Discussions about additional monies likely occur only if scope is added or major delays occur.
So, those difficult conversations with the owner about money are less likely to happen. The relationship can be more focused on the work at hand.
In addition, close tracking of contractor behaviors, which is possible with real-time data, is bound to increase productivity. This means projects are more likely to come in on budget and on schedule. This adds a level of predictability for all parties. The EPC contractor can better determine what projects to bid on, and owners can properly allocate how they spend funds. They will have less need to borrow money to cover unexpected costs.
Stop Overruns with myTrack
The EPC delivery model is becoming more common, and it offers contractors great opportunities. To realize these opportunities and avoid the pitfalls, EPC contractors need real-time data. This information can help contractors make meaningful decisions that will save time and money.
With myTrack, contractors can measure, track, and use data to make more informed decisions. The benefits are undeniable: streamlined operations, heightened visibility, improved safety, and potent cost savings.
Not only will you add automation and data insights with myTrack, but you will redefine the way you navigate contracts, contractors, and the journey to continuous improvement.
Learn more about myTrack and how it can provide the data to minimize issues associated with an EPC contract.
