pwr_april-2024 - 29

PROJECT MANAGEMENT
2. Engineering, procurement, and construction (EPC) contracts: Using a hybrid process. Courtesy: Actalent
cost of the additional material (along with
some profit) without the need for a prolonged
change order negotiation.
Get an Outside Perspective. Developers
who lack the in-house capability or
bandwidth to review EPC designs should
consider enlisting the services of a thirdparty
organization, such as an engineering
firm, to provide reviews on behalf of
the developer or owner. It's a safer bet
to set aside a couple hundred thousand
dollars for an extensive contract review
when millions of dollars are at stake.
Ideally, this third-party would have no
financial stake or prior involvement in the
project; the company's sole focus would
be assessing whether the developer is
getting the final site they specified. Developers
or owners can leverage their
pre-existing relationships with other engineering
firms to do this. After all, these
companies likely know what a particular
developer expects and wants out of a project.
These engineering firms can also help
the developer or owner identify potential
change order items prior to them occurring,
so that the developer can determine
the best approach for proceeding.
Expect Relationships with Your Contractors
to Change. Though not always
the case, most developers expect a higher
price tag when using an EPC contract.
Yet, few anticipate another drawback:
strained relationships with contractors.
This can happen for a multitude of reasons.
In a traditional time-and-material
(T&M) contract, for example, a contractor
may reach out to discuss project milestones,
targets, or ideas about how to
best move a project forward. In contrast,
an EPC contractor usually calls a developer
or owner to request additional funds,
which can strain even the healthiest of
partnerships as time goes on. Unfortunately,
EPC contractors have a greater
incentive to get projects finished on
schedule and under budget than to make
friends with developers or owners.
This dynamic can be particularly
troubling if a developer or owner had a
strong relationship with a contractor prior
to deploying an EPC contract. Unfortunately,
outcomes like these are difficult
April 2024 | POWER
to avoid-so developers in this situation
should consider limiting the use of EPC
contracts to specific project types.
Alternatives to Traditional EPC
Contracts
There is no one-size-fits-all contract
for construction in the power industry.
Developers who are drawn to specific
aspects of EPC contracts, but wish to
remain involved in project design and
construction, should also consider the
following options.
Cost-Plus Contracts. This arrangement
(Figure 1) allows contractors and
developers to negotiate the appropriate
percentages used to cover the contractor's
overhead costs and profit, while
providing reassurance to the contractor
that all project costs will be paid.
By taking this approach, developers
can get insight into how an EPC contract
works, but still maintain hands-on involvement
and final approval in a construction
project. Say, for instance, a contractor is
seeking subcontracts and garners three
bids. One of those bids is from a subcontractor
that the developer feels has poor
craftsmanship. Under a traditional or fixed
price EPC contract, the developer cannot
compel the contractor to select one bid
over the other, whereas, in a cost-plus
contract, the developer can. Since the developer
will be paying the higher cost, the
contractor isn't financially incentivized to
simply pick the lowest bid.
Hybrid EPC Contracts. Some developers
have taken a hybrid approach (Figure
2) to crafting EPC contracts, in which the
first 30% of a project design is treated as
a T&M contract. This means that contractors
bill an hourly rate, while developers
provide input throughout the development
process. Marked by an iterative process of
design, this approach is flexible and often
requires fewer change orders. But once
the project has reached 30% completion,
contractors deliver developers a fixed price
to finish the project. Developers or owners
that are interested in EPC contracts tend
to welcome hybrid EPCs conceptually, as
many unknown risks are ironed out in the
beginning stages of the project.
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Hybrid EPCs can be a good fit for many
developers due to their ability to finalize
these unknown risks in the beginning
stages of the project. However, they risk
getting over-involved after responsibility
for the project has shifted to the contractor.
Since engineers and other team
members often establish collaborative
relationships with contractors early on,
this can be an easy trap to fall into.
I've
also
encountered
developers
who, in the later phases of a project,
have tried to make sweeping changes-
not to amend design flaws, but to align
the final product more closely with their
preferences. By that point, construction
workers have likely begun site grading
and pouring concrete, and moving a
single piece of equipment can require
a complete teardown and rebuild. In
this model, the cost for this teardown
is covered by the developer since the
change was identified after the design
was agreed to at the 30% stage. Lastminute
moves like these can cost tens of
thousands of dollars on a fixed price EPC
contract-and many developers become
frustrated upon discovering they must
pay extra for what they want.
Unfortunately, once developers lock
in a price, they essentially give up the
right to change their mind without expecting
an associated change order for
that change. For that reason, they should
probably have substantial experience
with EPC contracts before jumping into
a hybrid arrangement.
EPC Contracts Can Be a Powerful Tool
As industry challenges continue to mount,
knowing how, why, and when to deploy
an EPC contract can save developers
time, money, and headaches. While EPC
contracts offer specific advantages, it's
essential to address the specific needs
and characteristics of a given project. Ultimately,
a developer has to be willing to
give up some level of control. With proper
preparation, power project developers
can make strategic contractual decisions
that lead to project success. ■
-Ryan Cross is senior energy practice
manager at Actalent.
29

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