For EPC projects, which is better: design institutes or construction companies?

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Regarding design institutes, construction companies, and supervision units, who will take the lead in carrying out the EPC project. It is generally agreed that the supervision unit should not take the lead. Regarding the remaining two options, both the competent authorities and the design institutes believe that it is advantageous for the design institute to take the lead, while the construction company thinks it has an advantage. In fact, the debate over whether design institutes or construction enterprises should take the lead has existed since the 1980s. Even back then, the Design Department and the Construction Department of the Ministry of Construction (both of which no longer exist today) each oversaw a number of pilot projects. Yet to this day, there is still no unified conclusion on this issue. Looking at past market conditions, design institutes hold the largest share in the EPC market, while not many construction companies perform well in this area. In 2019, the value of new EPC contracts signed by survey and design firms was 4.6 trillion yuan, an increase of 11% compared to the previous year ； As for the EPC business carried out by construction companies, according to Pan Chengde’s estimates, back in 2016, the contract value and operating revenue in the domestic market were around 600 billion and 400 billion respectively, while in the international market they were around 125 billion US dollars and 80 billion US dollars (equivalent to 800 billion and 500 billion yuan respectively). It can be seen that the design-led EPC market is far larger in scale than the construction-led market; does this prove that design-led EPC is the market’s choice? But now, the construction industry is seeing the emergence of construction firms that excel in the development of EPC services. Some outstanding construction companies seem to have reached heights in the field of EPC that design institutes have not attained. So does this mean that it is an inevitable trend for construction companies to take the lead in carrying out EPC projects? So, which side has the upper hand, the design institute or the construction company? To answer this question more effectively, let’s first analyze the advantages and disadvantages of each type of company when undertaking EPC projects. I. Design institutes undertaking EPC projects 1. Advantages (1) The first advantage of design institutes taking on EPC roles is their technical expertise, which allows them to be positioned at the upstream part of the value chain. As is well known, design is the starting point of all engineering projects; from design drawings to construction, it is a process of creating something from nothing. In the construction industry, which involves complex processes, the core technical aspects lie in the hands of design firms. Therefore, when working on projects, design institutes have an inherent technical advantage and benefit from the strengths provided by their upstream partners. (2) The second advantage of design institutes lies in the preference of clients; compared to construction companies that are still in a labor-intensive industry, design institutes, as representatives of the knowledge-intensive sector, are more likely to win clients’ trust. Owners usually believe that, compared to construction companies, design firms have employees with higher educational qualifications and are more specialized in this field. This professional image will facilitate communication for the design institute. Therefore, adopting the EPC model by design firms facilitates coordination and communication with clients, and makes it easier to use gentle approaches when resolving conflicts, thereby helping to improve the progress and efficiency of engineering projects. (3) Finally, it helps to shorten the procurement cycle. Since the entire project is design-driven, the design institute can directly coordinate all aspects of the project during the design phase—for instance, by preparing for procurement activities in advance. This helps to shorten the procurement cycle and, consequently, reduce the overall cost of the engineering project. 2. Disadvantages (1) The first disadvantage of design institutes undertaking engineering general contracting is their relatively weak service awareness. Due to the fact that design institutes in the past had less close ties to the field market compared to construction companies, their sense of service was generally weaker, and their commitment to serving clients was not as strong as that of construction companies. This situation is also related to the educational background of the staff in the design institutes; most of them are highly educated professionals who generally place more emphasis on technology than on service. Although they have an inherent advantage in terms of their professional image, they fall short when it comes to their attitude and ability to serve clients. (2) The second drawback of design institutes is uneven capabilities. There are five fundamental capabilities for EPC: design management capability, procurement capability, resource integration capability, planning and control capability, and professional management capability. The design institutes are weak in building capabilities in the three areas of resource integration, planning and control, and professional management. In addition, as a light-asset enterprise, design institutes also have weaker financing capabilities and risk resistance. Once problems arise with a project, the design institute has little capacity to provide compensation. This is also a disadvantage that design institutes cannot avoid. (3) Additionally, the piece-rate wage system discourages the effort to optimize drawings. In terms of the work system and its characteristics, design institutes typically adopt a piece-rate wage system; this weakens the connection between the rationality and cost-effectiveness of drawings and the designers themselves. For most designers who have completed the drawing task, it is not cost-effective to optimize and refine the existing drawings, which makes it difficult to make modifications and improvements to them when the client has further requests. (4) A lack of specialized talent in project management. At the current stage, designers are far removed from the market and insensitive to pricing. Designers cannot become competent engineers; most of them do not go to the construction site, which is a fundamental difference from architects abroad. In other countries, architects are required to be present throughout the process, from drawing up plans to actual construction, participating in every design change, diagram optimization, and on-site inspection. As engineers on the construction side, it is necessary to consider cost savings while completing the construction, as well as to facilitate construction and maintenance; however, domestic designers rarely take this into account. And given the current situation, it’s difficult to address the shortage of personnel; if all the designers go to the site, then there will be no one left to work on the design drawings. In the future, it might be possible to outsource the drawing work in order to address the shortage of staff. In summary, if the design institute wants to take the lead in the EPC model, it still has a long way to go in terms of enhancing service awareness, building an effective organizational structure, upgrading technical management, and improving the talent pool. In the future, how design institutes can change their mindset, effectively integrate capabilities and resources, and improve their design management skills in order to meet the requirements for EPC projects will be the key factor determining whether they can truly lead such projects. II. Construction companies engaging in EPC projects 1. Advantages (1) Firstly, construction firms have an advantage in on-site management. Thanks to the strong project management capabilities of construction companies, when it comes to addressing practical issues during construction, they are often more flexible in making adjustments compared to design firms ； Furthermore, when taking on projects, construction companies tend to make use of their strong organizational capabilities; they are bolder in approach than design firms and willing to take on challenging tasks. Moreover, the project managers of construction companies generally have stronger capabilities and a greater sense of service than those in design institutes. (2) Second, it facilitates control over the total price, and the construction cost becomes more reasonable. Construction companies, due to their prolonged presence on site, are well aware of the areas that need optimization, resulting in more reasonable costs. Having the construction contractor take the lead is beneficial for controlling the total cost, as it allows costs to be reduced while maintaining rationality, thereby increasing profit margins. (3) Finally, construction companies also possess certain advantages in terms of risk mitigation. In the domestic market, even if project delays occur due to issues with the drawings, the responsibility usually falls on the construction company. Owners usually attribute all problems on a project to the construction company. Having operated in such a high-risk and low-profit environment for a long time, construction companies possess extensive experience in dealing with various project risks. 2. Disadvantages: (1) The disadvantage of construction companies undertaking EPC projects is first reflected in the attitude of the owners. Due to the special nature of the construction market, construction companies enjoy a low level of credibility in the eyes of owners (especially **units**). This also results in the owner still interfering heavily in the project even when an EPC contract is in place, causing the EPC project to become a mere formality and losing its original purpose. (2) Second, the disadvantages in the downstream part of the value chain. Unlike design firms, construction companies are located at the downstream end of the value chain; construction is the process of transforming blueprints into physical buildings. In this process, it is very difficult for construction companies to overturn the drawings. This corroborates the view held by some people—that construction companies know what to do, but not why they should do it. (3) Additionally, there is a shortage of design management talent; most notably, there is a lack of construction management personnel who understand design. An excellent project manager for EPC contracts had better have experience in design and an understanding of design standards; however, there is a significant shortage of such professionals in China’s construction industry, which makes it difficult for project managers to communicate effectively with designers when working with blueprints. (4) In addition, China’s large construction enterprises still lack sufficient investment in technology. There is no focus on technological research and development or the application of research findings, and no own patents or unique technologies have been developed. There is still a significant gap compared to the advanced process and engineering technologies internationally. It seems that construction companies also face numerous difficulties as they strive to align with the design requirements. Therefore, there is still a long way to go for China’s construction companies in terms of transforming into an EPC business model, as it is necessary to build a cohesive effort in various areas such as comprehensive project management capabilities, design skills, and strategic procurement systems. III. So, who has an advantage in undertaking EPC projects? Is it a design institute or a construction company? After analyzing the advantages and disadvantages of both, let’s return to the initial question: in the context of the EPC model, which party has the upper hand, the design institute or the construction company? We can see that both design institutes and construction companies face numerous obstacles in the process of transitioning to EPC. In fact, for different types of engineering projects, design institutes and construction companies each have their own strengths. For engineering projects with complex processes and difficult tasks in industries such as metallurgy, petroleum, and water resources, it is more advantageous for the design firm to take the lead ； For conventional construction projects in fields such as residential building and municipal works, which do not require high levels of specialization, the advantage of being led by the construction contractor is even more evident. Most successful international engineering contractors have proven through continuous practice that their true core competitiveness often does not lie in any relatively monopolistic core technology in a particular field, but rather in the capabilities developed over years of experience in international engineering contracting, such as those in business integration, mergers and acquisitions, and cross-border operations. Therefore, whether it is a design institute or a construction company, their respective weaknesses are likely to be temporary; through the accumulation of project experience and continuous improvement and reflection, these companies will surely make progress in overcoming their weaknesses and breaking down barriers. This means that when dealing with EPC projects, design institutes should be present on site and actively participate in project management, while construction companies need to work closer with the designers and improve their design management capabilities. Those who can leverage their strengths while addressing their weaknesses to achieve resource integration will be able to win the future. In the future EPC market, whether it is design-led or construction-led at present, it will ultimately move towards the integration of design and construction. Therefore, this binary discussion that pits the design institute against the construction contractor might itself be a false proposition. At the current stage, both design institutes and construction companies need to leverage their strengths and address their weaknesses, ultimately leading to the same outcome. Only by integrating design and construction organically can the greatest advantages of EPC be fully realized.