EPC + Finance

Engineering, Procurement, Construction & Finance Consultancy

  • Engineering
  • Procurement
  • Construction
  • Finance

Without proper management, even the smallest construction projects can quickly devolve into wasted time and money. With so many moving parts, major construction projects can certainly seem daunting due to all the risks that come with them.
Engineering, Procurement and Construction (EPC) + Finance contracts are a type of delivery model designed to take pressure off the owner. Under an EPC contract, Governments and buyers hire a contractor to design, plan, and execute a project from start to finish. The contractor assumes responsibility for delivering a turnkey experience system or facility in line with agreed-upon quality standards, timeline, and budget. In this way, the owner is able to offload much of the time, effort, and risk involved in a construction project onto a trusted contractor. So what can an owner expect during an EPC project? Here, we’ll take a look at the major phases of an EPC project, and discuss some of the best practices that a qualified EPC firm may use to keep a project on track.

Major phases in an EPC project

EPC projects get their name from the major services provided during the engagement—that is, engineering, procurement, and construction. In addition to these services, the project will also require planning at the start of the project, and start up services at the end. Exactly how these phases are broken down will depend upon an EPC contractor’s internal practices and delivery mechanisms, as well as the nature of the individual project. Having the EPC contractor perform all of the services provides the simplest turnkey experience for the owner. It’s also common for project phases to overlap, especially for projects undertaken by experienced EPC firms. Read on to learn more about each of these phases, and the common activities, objectives, and deliverables associated with them.

Planning

The early planning phases of a project may be called by many names, such as front-end planning (FEP), pre-project planning (PPP), front-end engineering design (FEED), front-end loading (FEL), or others. All of these refer to early project planning steps that are done in order to establish the rough scope, budget, and timeline for the project, develop a solution concept, and identify risks. For some projects, this is completed jointly by the owner and an EPC contractor. In others, the owner works with a consultant to complete pre-project planning before gathering lump-sum bids from EPC firms. Many EPC projects use a front-end loading (FEL) procedure, which provides a structured process to help owners explore their options at a conceptual level before choosing a solution and refining the design. The advantage of this method is that it allows owners to consider different approaches, design modifications, and other changes early on. This minimizes the risk for change requests later into the project, when they become costlier and disruptive to execute. The FEL process is broken down into three levels, with formal approvals at critical junctures. At FEL-1, owners will review conceptual designs and select one to move on to FEL-2, where the owner will consult with engineers to review concepts, estimate costs, make changes, assess feasibility, and provide approval to move forward. In FEL-3, the concept then proceeds to front-end engineering design (FEED) or basic engineering, where it is fleshed out to produce a more accurate cost estimate and construction timeline that aims for accuracy within ±10-15%. These early planning stages are themselves a best practice for large construction projects, as they produce the foundation on which the project is built. That said, working with a qualified project manager is important here, as are the following best practices for success in the front-end planning phase

  • Establish a clear objective. Carefully define project objectives so that all stakeholders can easily understand key project goals and the owner’s priorities.
  •  Identify changes early. Especially for large capital projects, a good consultant or EPC partner will use FEL or similar procedures to allow owners to explore their options early on and make critical decisions at a point in the project where design changes can be made easily and affordably. Owners should carefully consider each element of the design and any implications that it might have on performance, space, cost, timeline or other factors.

Engineering

The detailed engineering and design phase focuses on producing comprehensive engineering plans for construction of the system or facility. During this phase, the EPC contractor will continue to develop the concept from earlier planning phases into a full-fledged deliverable package complete with functional descriptions, building plans, structural/civil layouts, as well as diagrams of piping, controls, instrumentation, electrical, and mechanical components. Because of the complexity involved, the detailed engineering process is typically a collaborative effort across various individuals, departments, and subject matter experts. As the design is finalized, details regarding the specific types of equipment, quantities, and layouts will become clearer. The EPC contractor will use this information to pin down a more exact project budget and timeline for completion. Most of the best practices at this phase are focused on strategies to produce high-quality plans, and minimize the risk for costly and disruptive changes during later phases. That said, here are some key tips for success during the detailed engineering and design phase

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  • Work with contractors who have good engineering resources. Owners should look for contractors who have experienced, engineers and/or partnerships with vendors who can provide relevant engineering services and subject matter expertise.
  • Look for interdisciplinary collaboration. Detailed designs should be developed and reviewed by engineers and process specialists, of course, as well as staff from other disciplines. The procurement team can provide input to facilitate strategic sourcing, for example, and the construction team can evaluate the plan for constructability. Cross-team collaboration will result in an optimal design, and ensure that any potential issues are caught and addressed early to avoid scheduling delays and cost implications later on.
  • Maintain good communication. To ensure smooth performance at this phase and beyond, project stakeholders should establish clear communications and change management policies and procedures so everyone is on the same page.
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Procurement

The procurement phase of the project is where the EPC contractor gathers all of the physical materials and services needed to build the facility or system to spec. This is a complex process that entails sourcing and purchasing a variety of equipment, materials, and services from vendors and suppliers. Procurement is often done through competitive tender or bidding processes, where the EPC contractor publishes specifications and invites suppliers to submit their offers and pricing. Here are some tips for success during the procurement phase of an EPC project

  • Source strategically. Some system components and materials have long lead times, and need to be prioritized early in the procurement schedule so that they are ready when needed. The contractor will also need to practice good communication with suppliers to ensure quality of purchased goods and on-time delivery.
  • Create detailed timelines. The main goal of procurement is ensuring that construction teams have what they need, when they need it. Creating detailed timelines to plan out purchases and deliveries will ensure that stakeholders know what to expect, and can identify potential scheduling issues before they result in delays.
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Construction

The construction phase of an EPC project is where the contractor builds the facility or system based on the specifications established in earlier phases. This may entail pre-fabrication of system components off-site in a fabrication shop and transporting them to the construction site, building the proposed system on-site at the project location, and/or integrating various components together at the site. The EPC contractor may have its own fabrication facilities, or it may contract fabrication work out to a vendor—either approach is acceptable so long as good communication is maintained throughout the project.

  • Manage changes. Change management protocols should be established in earlier phases of the project, and should provide criteria for assessing the appropriateness of a change, as well as guidance for executing and documenting change requests to clearly communicate impacts to cost and timeline, and ensure stakeholders are kept informed
  • Seek input from the design team. During the construction phase, the design team should continue to participate in the project to clarify elements of the project plans and assist with handling change requests. 
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FINANCE

N&C Ventures partners can provide for the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of its sponsors. Usually, a project financing structure involves a number of equity investors, known as ‘sponsors’, and a ‘syndicate’ of banks or other lending institutions that provide loans to the operation that may include collateral and government to government projects assrance. They are most commonly nonrecourse loans, which are secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors, a decision in part supported by financial modeling; see Project finance model. The financing is typically secured by all of the project assets, including the revenue-producing contracts. Project lenders are given a lien on all of these assets and are able to assume control of a project if the project company has difficulties complying with the loan terms.

Generally, a special purpose entity is created for each project, thereby shielding other assets owned by a project sponsor from the detrimental effects of a project failure. As a special purpose entity, the project company has no assets other than the project. Capital contribution commitments by the owners of the project company are sometimes necessary to ensure that the project is financially sound or to assure the lenders of the sponsors’ commitment. Project finance is often more complicated than alternative financing methods. Traditionally, project financing has been most commonly used in the extractive (mining), road, bridges, transportation, telecommunications, and power industries

Risk identification and allocation is a key component of project finance. A project may be subject to a number of technical, environmental, economic and political risks, particularly in developing countries and emerging markets. Financial institutions and project sponsors may conclude that the risks inherent in project development and operation are unacceptable (unfinanceable). “Several long-term contracts such as construction, supply, off-take and concession agreements, along with a variety of joint-ownership structures are used to align incentives and deter opportunistic behaviour by any party involved in the project.” The patterns of implementation are sometimes referred to as “project delivery methods.” The financing of these projects must be distributed among multiple parties, so as to distribute the risk associated with the project while simultaneously ensuring profits for each party involved. In designing such risk-allocation mechanisms, it is more difficult to address the risks of developing countries’ infrastructure markets as their markets involve higher risks. 

A riskier or more expensive project may require limited recourse financing secured by a surety from sponsors. A complex project finance structure may incorporate corporate finance, securitization, real options, insurance provisions or other types of collateral enhancement to mitigate unallocated risk.

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