Each engineering, procurement and construction (EPC) project is unique with respect to infrastructure requirements, industry requirements, regulatory and environmental requirements or geographic location. Albeit unique critical success factors require careful consideration before signing any EPC contract.

What is Engineering, Procurement and Construction (EPC)?

EPC projects consist of the design, procurement, construction and commissioning of physical assets. They are transferred to the end-user or owner as a complete functioning unit. They are typically large complex infrastructure investments, and projects valued greater than a billion U.S. dollars are classified as mega-projects.

Due to the scope, timeline, materials and resource requirements, execution of a successful mega-project is significantly more difficult than traditional turnkey or design-build projects. The timeline for the project is often measured in years and in a 2017 report from McKinsey & Company, “The art of project leadership: Delivering the world’s largest projects,” it was found that mega-projects are often delivered a year behind schedule while running 30% over budget. These shortcomings are often identified early on in the design phase and in order to prevent project failure, critical success factors need to be addressed before a contract is signed.

Project Failure — The Dabhol Power Station

There are many examples of failed EPC contracts where cost estimates, time schedules or performance criteria were not met, and one popular use case is the Enron financed Dabhol Power Station. Before completion, the budget tripled. The construction company failed to produce a valuable asset and the project was completed just before the Enron scandal, which suggestively in part led to its bankruptcy.

The Dabhol Power Station was a failed attempt to stabilize the local transmission grid. It has been shut down several times, once due to a lack of naphtha supply and again due to the non-availability of operational insurance. The supply cost also exceeds what the market can bear and the surrounding area in India is still plagued by rolling blackouts while the Dabhol Power Station sells its high-priced electricity to the state-owned power distribution company, the MSEDCL and India railways.

Critical Success Factors

Critical success factors (CSF) for large EPC projects are those that are most influential to the budget, time schedule and quality of the finished asset. One of the most influential CSFs, project finance risk analysis and contract structuring, could have helped prevent the failure of the Dabhol Power Station.

Through the use of project finance risk analysis and contract structuring, the EPC contract allows the contractor as well as the asset owner to mitigate the financial risks they are undertaking. It allows risks to be shared through subcontracting and ultimately prevents the parties from incurring extraordinary expenses while all attempts are made to deliver assets on time and within budget.

Another critical success factor is described by McKinsey & Company as the art of project leadership. They found that as the size of the project increases, the measure of success is less about the science of project management; all reputable firms already operate under standardized processes and the success of a mega-project is more or less a reflection of organizational and leadership qualities including their capabilities, mindset, attitudes and overall organizational behaviors.

EPC contracts should be awarded to organizations that lead as a business and are not simply executing project deliverables. The ideal candidate is one that will be a business partner and has a good track record because successful EPC contracts of this size are more of a strategic partnership in which the owner and contractor have each other’s best interest in mind.

Conclusion

Project finance risk analysis, associated contract structuring and project leadership are just two critical success factors defining the outcomes of large EPC contracts. Abnormally large EPC projects inflate the complexity of normal project variables including material requisition lists, piping and instrumentation diagrams (P&IDs) and isometric drawings. Carrying out material and component substitutions can have a waterfall effect. Other tools that can help complete projects on time and within budget can be found here, including online materials requisition tools and intelligent P&IDs.