Cost Control
The EPCM contractor is usually paid a project fee divided monthly across the term of
the project for the performance of its role. In addition, it is often paid on an actual cost
basis at rates and prices agreed in the contract for the performance of its services. So
as to keep a check on such costs and provide the EPCM contractor with an incentive to
keep costs down, often a target price will be set with the EPCM contractor sharing in
any saving if actual costs are less than the target price. There is often a schedule to the
EPCM contract which sets out the budgeted man hours for the EPCM contractor’s team
– this may be divided between the Project Management team (including the project
director, project managers, planners, cost engineers, HSE Engineer etc), procurement
(mainly buyers), construction (construction managers, site supervisors, site planners,
secretaries) and engineering (engineers split between the main disciplines, civils, piping
and instrumentation, controls, electrical and mechanical).
However, since the EPCM contractor does not construct the project, Owners and funders
will be concerned to ensure there is some control on outturn costs for the whole project.
What responsibility does the EPCM contractor have for the project outturn costs and
how does the Owner effectively control costs without the protection and relative certainty
afforded by a xed price lump sum that the EPC contract can offer? In answering this
question, it is important to note that, at the time the EPCM contractor is rst appointed,
the Owner may have little idea what the project will cost since the design will be in its
infancy and the construction packages will not have been let. It is therefore vital that the
EPCM contractor is incentivized to bring the project in within an agreed budget with the
Owner. This is also something which the funders will be acutely aware of.
As part of its services the EPCM contractor will be responsible from a very early stage
for developing budgets for the construction works and procuring, managing and
administering the construction contracts in accordance with those budgets. Of course it
is only in extremely rare instances that an EPCM contractor would ever consider offering
any form of guarantee that the project outturn costs will come within a set budget.
15
More commonly, EPCM contractors are often content to set a target price for the outturn
costs of the works package contracts and share in any saving and, sometimes, contribute
to any losses but even this, particularly in today’s market, is rare. However, this does not
mean that the EPCM contractor typically avoids any liability for a project which comes
in signicantly over the budgeted cost. There are usually detailed provisions regarding
the EPCM contractor’s obligations to safeguard and advise the Owner on project costs.
Usually the schedule of services attached to the EPCM contract will go into great detail
as to the level of services to be provided by the EPCM contractor in this regard and
the types and frequency of cost reporting and estimating required. A typical overriding
obligation
16
would be as follows:
“The EPCM Contractor shall be responsible for monitoring and reporting
on anticipated outturn costs for the Project. Costs shall be estimated,
budgeted, reported, forecast and controlled throughout the project period
by the Contractor. The Contractor must implement cost controls in every
phase of this Project showing the development of the expected outturn
costs. In particular, after the completion of the detailed engineering for
15 Indeed in the author’s joint experience they know of only one project where this has occurred.
16 Usually developed in more detail in the scope of services.