【Haichuan Chemical EPC】What is the difference between an EPC turnkey project and a simple survey and design project or a construction turnkey project?

As for construction contracts, their typical contract model is based on a bill of quantities/estimated total price/fixed unit price. The contractor is only responsible for the construction work within the scope of the contract and is not accountable for the overall project schedule or performance metrics. Moreover, it can claim compensation from the employer due to the faults of other project stakeholders (such as design delays, design errors, supply delays, supply defects, etc.) or changes. The EPC turnkey contract model typically adopts a fixed-price approach, with the contract setting clear objectives for the general contractor (such as safety, quality, and schedule objectives) as well as strict evaluation criteria (such as unit performance metrics and minimum acceptable performance levels). Penalties for failing to meet these objectives or criteria are very substantial ； Abroad, the \"minimum acceptable performance criteria\" are reflected in contract terms as \"rejection\" clauses, and this is extremely dangerous. It’s one thing if the penalties are high, as that means the mistake can be compensated for with money; but a rejection clause implies refusing to accept the entire project. Without exaggeration, in severe cases, the rejection of a large-scale contracting project by the client can lead to the bankruptcy of the contracting company! Under the EPC turnkey contract model, it is difficult for the contractor using a fixed-price contract to make claims against the owner due to changes; claims can only be made when there is a \"scope change\" with respect to the turnkey contract (the employer altering the scope of work assigned to the contractor) or when significant technical conditions change ； No claims can be made against the employer for rework, delays caused by design changes within the scope of the general contract, or delays in delivery by the supplier, as well as any quality defects.

This means that the EPC general contractor faces dual pressures: on one hand, the project owner transfers most of the significant risks that were previously borne by the owner under traditional construction methods to the general contractor through a lump-sum contract, placing full responsibility on the contractor (a responsibility that an experienced general contractor should assume)； On the other hand, since the subcontractors of the general contractor (design subcontractors/equipment suppliers/construction and commissioning subcontractors) bear limited liability, the general contractor cannot fully transfer contractual risks to the parties responsible under those subcontract agreements. For example, if the results of the performance tests fail to meet the specified performance criteria due to design reasons or those of the supplier, the general contractor will face heavy fines imposed by the owner in order to compensate for the losses incurred by the employer as a result of these failure to meet performance standards (in some foreign countries, when calculating such fines, the employer takes into account not only direct losses but also indirect losses during the operation period, as well as expected profits) ； The general contractor can only file limited claims against the internal parties responsible (the design subcontractor or equipment manufacturer) under the subcontract, which is why foreign EPC contracts typically include a risk fee. It is purely wishful thinking for some general contracting companies to attempt to shift all risks through subcontracts; even if such contracts stipulate explicitly that disputes should be submitted to arbitration, they are bound to lose.

(III) Different sources of benefits and profits: In design contracts, the sources of benefits and profits for design firms lie in the efficiency of the designers and their management skills. Under a fixed-price model, the fewer standard working hours required to complete the design, the lower the costs and the higher the benefits and profits； For construction companies, the key profit drivers under construction contracts lie in reducing costs associated with specialized subcontracting and material procurement, as well as in lowering overall costs through scientific and rational construction organization plans and improving efficiency. Some construction firms with high contract management skills use claims as a main means to generate profits. As mentioned earlier, EPC general contractors face various risks, but often \"risks and opportunities coexist.\" A general contractor using a lump-sum contract model can start with design optimization; as long as the technical standards and requirements specified in the general contract are not violated, reasonable \"design optimization\" by the contractor should not result in any adjustment to the total contract price. Thus, benefits can be achieved through design optimization, which is why many books advocate a \"design-driven\" approach to general contracting projects. Secondly, the general contractor can focus on achieving efficiency through effective management. Since the EPC contracting model integrates design, procurement, and construction and commissioning, proper management can ensure that, while maintaining safety and quality standards, the project progress can be accelerated and construction costs reduced, thereby yielding overall benefits. This is what the author means by “taking project management as the core.”

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(IV) The approaches to managing project objectives and conflicts differ; the objectives of design firms and construction companies are quite simple – they are only responsible for meeting the objectives specified in the relevant design contracts and construction contracts. These objectives do not necessarily align with those set by the project owner regarding the construction of the project； In short, he will not be on the same side as the client, because he is only responsible for individual objectives rather than the overall goal; external problems often serve as an excuse for his failure to meet his own objectives, and some construction firms even see this as an opportunity to file claims and rejoice in secret. The project objectives of the EPC general contractor and those of the project owner are essentially highly aligned, such as project safety objectives, quality objectives, schedule objectives, and cost objectives; moreover, the project owner (the client) exerts significant pressure on the general contractor through the contract terms. Therefore, the author believes that under the EPC general contracting construction model, the main entity responsible for the project construction should be the general contractor; the owner acts as the supervisory body, while the supervisor is a construction management and supervision unit hired by the owner. When serving as the project manager for an EPC turnkey project, the author did something: during the regular construction site meetings, the owner and the supervisor would sit on one side of the meeting table, while the general contractor and its subcontractors sat on the other side, which reflected the distinction between those in charge of management and those who are managed ； However, although my management team and subcontractor staff sat across from the owner/contractor, as the project manager of the general contractor, I deliberately sat on the same side as the owner/contractor, sitting alongside the project director on either side of the owner’s representatives ； It seems that the author went a bit too far with this approach; the owner and supervisor were quite stunned. However, by sitting in that way, the author intended to signal to the owner and supervisor that under the EPC turnkey contract model, the general contractor is the entity responsible for project management, and it is the general contractor’s project manager who serves as the overall commander for the implementation of the project! Of course, once the working relationships were sorted out and the reputation of the general contractor was established, the author sat quietly across from the owner/contractor during the meetings.

When conflicts arise regarding schedule, quality, and cost in a project, under the traditional construction model, the project owner, designers, suppliers, and contractors prioritize their own interests and responsibilities, making coordination among them very difficult. Under the EPC turnkey construction model, the general contractor is responsible for coordinating any conflicts that arise within the scope of the contract; the principle for resolving such conflicts is to ensure that it contributes to the achievement of the project’s overall objectives” ； Safety and quality are red lines that must not be crossed regardless of the construction approach used. However, when there is a conflict between schedule and cost, decisions should be made based on the principle of giving priority to the overall goals, by taking measures that are most conducive to achieving those goals rather than getting stuck on minor gains and losses. For example, when a equipment manufacturer with a signed contract indeed faces financial difficulties, it affects the procurement of purchased components. To ensure the supply schedule, the manufacturer proposed a contract change to the general contractor to increase the proportion of payment for raw materials ； Since the general contractor’s investigation is carried out in real time, it cannot be assumed that simply because it fails to fulfill its obligations, it can be penalized under the contract and its requests denied outright. Instead, a comprehensive assessment should be made to determine whether the delays caused by financial difficulties might affect the critical path. If the critical path is not affected, negotiations can be held to adjust the delivery schedule; if it is affected, the contractor’s requests should be met promptly to assist in resolving its financial issues.

(5) Varying complexity of project stakeholders: Design projects deal with relatively simple stakeholders, typically including owner’s management personnel who are intellectuals, project supervisors, technical staff from construction and commissioning units, **engineers from construction drawing review agencies, etc； The construction contractor deals with a relatively complex set of stakeholders. In addition to stakeholders such as the owner, supervisor, and **quality supervision departments, which are mostly composed of intellectuals, the contractor also has to deal directly with the foremen of specialized subcontracting teams as well as migrant workers ； The EPC general contractor is faced not only with the stakeholders of the design and construction firms but also with those of numerous equipment suppliers. Some people say that the general contractor should just let the subcontractors take care of their own tasks – why worry so much? It simply won’t work, because the general contractor and the subcontractors have different goals and responsibilities; as a result, the risks associated with the general contractor cannot be effectively transferred. This means that any \"mistakes\" made by the subcontractors should be treated as the general contractor’s own errors, and it is the general contractor who must take action to resolve them. Therefore, the general contractor faces a wider range of project stakeholders and more parties involved.