Common Engineering Contract

Types

Nov 24, 2014

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In common law legal systems, a contract (or informally

known as an agreement in some jurisdictions) is an
agreement having a lawful object entered into voluntarily
by two or more parties, each of whom intends to create
one or more legal obligations between them. (Wikipedia)
The Common Engineering Contracts Types are:

EPC
EPCM
EPCI
Lump sum turnkey (LSTK)

EPC: The EPC contractor (EPCC) agrees to deliver EPC,

which is an acronym that stands for engineering,
procurement and construction. It is a common form of
contracting arrangement within the construction industry.
Under an EPC contract, the contractor designs the
installation, procures the necessary materials and builds
the project, either directly or by of the work. In some
cases, the contractor carries the project risk for schedule
as well as budget in return for a fixed price, called lump
sum LSTK depending on the agreed scope of work.

When the scope is restricted to engineering and

procurement, this is referred to as an EP, E and P or E+P
contract. This is often done in situations where the
construction risk is too great for the contractor or when
the owner does the construction.
The keys to a commissioned plant are handed to the
owner for an agreed amount, just as a builder hands the
keys of a flat to the purchaser. (One should recognise
that some EPC contracts terminate at Mechanical
Completion but before Commissioning while LSTK
contracts always include Commissioning.) EPC is
gaining importance worldwide. It requires good
understanding by the EPCC to return a profit.
An owner decides for an EPC contract for reasons that
include:

Reduced stress for owner

Easy work and growth of the company.

Single point of contact for owner simplifies communications.

Ready availability of post-commissioning services

Ensures quality and reduces practical issues faced in other ways

Owner protected against changing prices for materials, labor, etc.

Cost is known at the start of the project

Besides the plant siting, in an EPC contract the owner

defines:

Scope and the specifications of the plant

Quality

Project duration

Cost

The cost (the price to be paid to the EPCC) is negotiated and

finalised and paid in mutually agreed installments.

EPCM: EPCM (engineering, procurement, and

construction management) is a common form of
contracting arrangement for very large projects within the
infrastructure, mining, resources and energy industries. In
an EPCM arrangement, the client selects a head
contractor who manages the whole project on behalf of
the client. The EPCM contractor coordinates all design,
procurement and construction work and ensures that the
whole project is completed as required and in time. The
EPCM contractor may or may not undertake actual site
work.
An EPCM contract is a natural progression for an EPC
contractor as, if one is able to do an EPC of a project, then
getting a bigger EPCM job is advantageous. It helps to tap
the already present competencies while ensuring better
control over the project. Also, the value of the project
managed through an EPCM contract is far greater than
the individual EPC contracts.
Normally, an EPCM contractor completes the basic work
such as site surveys, getting clearances from authorities,
doing the basic engineering and preparing the site for the
subcontractors.Subcontractors are chosen by the
EPCM company, but they have an agreement
directly with the final customer (investor).
EPCI: EPCI stands for Engineering, Procurement,
Construction and Installation.
It is a common form of contracting arrangement within
Offshore construction. Under an EPCI contract, the
contractor will design the structure(s), procure the
necessary materials, undertake construction and

transportation, and set it up at the offshore site. The

contractor does this either through own labour or by
subcontracting part of the work. The contractor carries
the project risk for schedule as well as budget in return for
a fixed price, called Lump sum or LSTK depending on the
agreed scope of work.
In EPCI contracts, the contractor rarely carries the project
risk unconditionally. Rather, contractor and customer
have detailed discussions on the division of the
risk. Risk of delays and cost overruns due to lacking
Weather windows is an example of a typical risk that may
be born by the customer rather than the contractor.
Lump sum turnkey (LSTK): Lump sum turnkey (LSTK) is
a combination of the business-contract concepts of lump
sum and turnkey. Lump sum is a noun which means a
complete payment consisting of a single sum of money
while turnkey is an adjective of a product or service which
means product or service will be ready to use upon
delivery.
In the construction industry, LSTK combines two concepts.
The LS (lump sum) part refers to the payment of a fixed
sum for the delivery under e.g. an EPC contract. The
financial risk lies with the contractor. TK (turn
key) specifies that the scope of work includes start-up of
the facility to a level of operational status. Ultimately the
scope of work will define just exactly what is needed.
Source: http://en.wikipedia.org
Thank you for reading this piece of information.
I'm also aware that different industries have different
forms of contracts which take place under different

applicable laws. What other forms of contract exists in

your industry or country?
My name is George Nwogu, an Engineer, Project
Manager/Planner/Control and Trainer from Nigeria. I'm
currently a PM Consultant at Bizville Project Management