“EPC CONTRACTS AND ECONOMIC RECOVERY

AND GROWTH - THE NEXUS”

NIQS BENUE CHAPTER OYINLEYE ADEBOWALE

MANAGING PARTNER
WORKSHOP PROJECTS ASSOCIATES
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  TABLE OF CONTENTS

1.0 INTRODUCTION

2.0 THE STANDARD PHASES OF A PROJECT

3.0 THE PROCUREMENT METHODOLOGIES/ STRATEGIES OF EPC

CONTRACTS

4.0 KEY FEATURES OF EPC CONTRACTS

5.0 EPC AND THE ERGP – The Nexus

6.0 CASE STUDIES

7.0 CONCLUSION

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SYNOPSIS

EPC Contracts have emerged as the construction contract of choice

for major international development projects and project
financing; this makes it particularly beneficial to the ERGP which is
predicated on the inflow of external finance, there are several
reasons for their widespread popularity and acceptance, at least
insofar as the project finance industry is concerned.

In addition to project risk management, EPC Contracts are

distinguished from the corresponding provisions of more traditional
construction contracts .

At the end of the paper, participants should be able to:

What is an EPC Contract

The key features of an EPC Contract
The Linkage between the EPC and ERGP Programmes

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 DEFINITIONS

Procurement is the process of finding, agreeing terms and acquiring

goods, services or works from an external source, often via a
tendering or competitive bidding process....Wikipedia

The Institute of Supply Management (ISM) defines procurement as an

organizational function that includes specifications development, value
analysis, supplier market research, negotiation, buying activities,
contract administration, inventory control, traffic, receiving and stores.

For the purpose of this paper, these two definitions can be condensed to

“organizational process of specifications

development, value analysis for acquiring works from
an external source, often via a tendering or
competitive bidding process, negotiation, and
contract administration”

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THE STANDARD PHASES
OF A PROJECT

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UNDERSTANDING THE PROJECT PHASES

THE PROCESS PHASES

The Conceptual Phase

The Feasibility Phase
The Planning & Project Management
Phase
oPlan The Planning
oPreliminary Project Plan
oProject Plan
The Engineer/Procure/Construct (EPC)
Phase
The Commissioning Phase
Operation phase
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The Past- Sequential Execution

Present- Concurrent Execution 8

THE PROCUREMENT
METHODOLOGIES/
STRATEGIES OF EPC
CONTRACTS

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The contractual structure

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The selection of appropriate procurement strategies
and contracts requires knowledge of:
•the key objectives of, and constraints on
construction project
•the risks (both typical and specific) that might
impact upon or be encountered at each stage in the
delivery of the project, and how best to deal with
those risks
•the level of complexity of the project
•the key processes and activities that must be
performed in delivering the project
•the available procurement strategies and contracts
•Relevant client policy requirements.

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 Engineering Procurement Construction

Engineer, Procure, Construct; it is a prominent form of contracting

agreement in the construction industry. The engineering and
construction contractor will carry out the detailed engineering design of
the project, procure all the equipment and materials necessary, and
then construct to deliver a functioning facility or asset to their clients.
Companies that deliver EPC Projects are commonly referred to as EPC
Contractors.

This form of contract is covered by the FIDIC Silver Book containing the
title words "EPC/Turnkey". Other abbreviations used for this type of
contract are "LSTK" for "Lump Sum Turn Key", "EPIC" for "Engineering,
Procurement, Installation & Commissioning", and sometimes also "EPCC"
which is short for "Engineering, Procurement, Construction and
Commissioning". Use of EPC is common e.g. by FIDIC and most Persian
Gulf countries like Qatar and some other countries e.g. by Qatar
Petroleum whilst the use of LSTK is common in Kingdom of Saudi Arabia.
Therefore, an EPC, LSTK or EPCC are all basically same types of
contracts.

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Engineering Procurement Installation Commissioning : [
EPIC]

EPIC stands for Engineering Procurement Installation

Commissioning is typically a Lump Sum Turn Key (LSTK)
type Contract integrating the responsibility going from the
conception to the final acceptance of one or more
elements of a production system. It can be awarded for
all, or part, of a field development. This is thus more suited
to a industrial production engineering project.— Eg
Chemical Plant

Key points:
Part of whole project.
stakeholders are deciding to no longer pursue EPIC
contracts for the oil and gas industry- Haliburton
cost reimbursable arrangements
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Engineering Procurement Construction Installation [
EPCI]

It is a common form of contracting arrangement within Offshore

construction. Under an EPCI contract, the contractor will design
the structure(s), procure the necessary materials, undertake
construction and transportation, and set it up at the offshore
site. The contractor does this either through own labour or by
subcontracting part of the work. The contractor carries the project
risk for schedule as well as budget in return for a fixed price,
called Lump sum or LSTK depending on the agreed scope of work.

Key points:
rarely carries the project risk unconditionally
Risk of delays and cost overruns due to lacking
information.
Weather windows is an example of a typical risk
that may be borne by the customer rather than the
contractor
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Engineering, Procurement, Construction
Management: EPCM
This is a common form of contracting arrangement for very
large projects within the infrastructure, mining, resources
and energy industries. In an EPCM arrangement, the client
selects a head contractor who manages the whole project on
behalf of the client. The EPCM contractor coordinates all
design, procurement and construction work and ensures that
the whole project is completed as required and in time.

Key points:
 The EPCM contractor may or may not undertake
actual site work.
 EPCM model is structured on the basis of a cost-
reimbursable fee structure or a unit rate fee
structure
 can be regarded as a professional services
contract
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PMC - Project Management Consultant
PMC stands for Project Management Consultant or
Project Management Contract. Under a project
management contract an engineering contractor will
overlook the EPC Contractors work to ensure
compliance with client scope of works. The
distinguishing factor with the EPCM is that the PMC is
not involved at the FEED stage.

Key Points:
overlook the EPC Contractors work
not involved at the FEED stage.

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 KEY FEATURES OF EPC
CONTRACTS

a) Structure of EPC Contracts

b) Advantages and Disadvantages of EPC
Contracts

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KEY FEATURES - STRUCTURE OF CONTRACT 1) Full Design Responsibility
2) Fixed Contract Price

3) Fixed Completion Date

4) Contractor Claims

5) Owner Remedies

6) Owner’s Requirements
7) Performance specification

8) Handover, Testing and Approval

9) Performance Guarantees

10)Limits of Liability

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KEY FEATURES: Advantages and Disadvantages of EPC Contracts

Advantages :
assignment of design and construction risk to the
EPC contractor

strongly preferred by project finance lenders

company only contracts with and engages only

one contractor

EPC contractors are in a position to exercise a

great deal of control to efficiently lower
construction costs.

Disadvantages:

they do lose involvement with the design

process, adding potential risk
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EPC & THE ERGP- THE NEXUS

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oThere are 24 programmes
o60 projects through which the ERGP will be executed and
monitored.
oIn order to achieve the objectives of the ERGP, the key
execution priorities are

Stabilizing the macroeconomic environment

Achieving agriculture and food security

Ensuring energy sufficiency (power and

petroleum products)

 Improving transportation infrastructure

Driving industrialization focusing on Small and

Medium Scale Enterprises
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PROGRAMME – TRANSPORT INFRASTRUCTURE
Programme Transport infrastructure
No. Strategy Key activities Lead EPC opportunity
29 Invest massively 􀂃 Establish a robust capital project development framework Ministry of
in transport to encourage and increase PPPs to deliver critical projects, Transport A very great opportunity exists
infrastructure, such as roads, rail, seaports and airports. Infrastructur for EPC in the provision of
leveraging 􀂃 Review the Infrastructure Concession Regulatory e Roads, Rails, Seaports and
private-sector Commission Act to resolve conflicting legislation with the Concession Airports.
investments Bureau of Public Enterprises and Bureau of Public Regulatory
Procurement Act and strengthen the Commission’s regulatory Commission
mandate to facilitate private investment Bureau of
􀂃 Harness the existing pool of sustainable development funds Public
to assess the viability and bankability of critical infrastructure Procurement
projects Bureau of
􀂃 Leverage a sustainable and alternative mix of funding for Public
critical infrastructure projects, including project financing Enterprises
initiatives, infrastructure bonds, Diaspora bonds, and value Ministry of
capture financing Federal
􀂃 Fast-track the completion of airport cargo and passenger Capital
handling terminals to increase capacity from 208,424 to Territory
276,848 tons and 15 million to 45 million passengers, Ministry of
respectively, by 2020 Justice
􀂃 Complete the road sector reforms to establish a Road
Authority and a Road Fund to enhance best world practice in
the administration of road network development and
management in the country
􀂃 Ensure the approval of the Tolling Policy so that some of
the major dual carriageways can be concessioned for
maintenance and tolling while government utilises the saved
funds from this maintenance for other critical roads in the
`federal road network to the nation’s refineries, ports, NNPC
depots and agricultural hubs, etc.

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 EPC and the Power Programme

Bulk of the investment will be required to increase generation

capacity from current levels of about 7 GW to 350 GW by 2043
spend USD 23 billion in power, of which USD14-16 billion will be
required to increase generation capacity from current levels of about
7 GW to 20 GW by 2018, USD 3-5 billion to increase distribution
capacity.
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PROGRAMME – POWER
Programme Power
No. Strategy Key activities Lead EPC opportunity
27 Increase power 􀂃 Restore lost gas supply through the Gas Flare Ministry of Power,
generation by Commercialization Programme Works and Housing
optimizing Ministry of Petroleum
nonoperational 􀂃 Complete major gas infrastructure lines to plants Resources
capacity, and main trunk lines to facilitate gas supply for power Ministry of Science and The opportunities in this sector
encouraging generation Technology are expected to be huge but
small-scale Ministry of Federal unfortunately, the plan does not
projects, and 􀂃 Introduce strategy for capital market and banking Capital Territory adequately capture the entry of
pursuing long programmes that ensure all upstream industry EPC contracts in solving the
term capacity operators get paid for each contract perennial problem of the sector
􀂃 Reach financial close on the 15 solar plants that and this is primarily because of
have recently signed power purchase agreements the pricing of energy in Nigeria.
(PPPs) The only options available are
through the IPPs and NIPP
􀂃 Accelerate standardization of the process for If the NIPP projects were
executing independent power projects (IPPs), including originally conceptualized as EPC
defining pricing, to encourage private-sector projects, their delivery level
participation would have been higher.
􀂃 􀂃 Achieve privatisation of NIPP generation assets
􀂃
􀂃 Implement the National Renewable Energy and
Efficiency Policy (NREEP)

28 Improve the 􀂃 Review the disbursement and management of the Ministry of Power,
commercial N213 billion Nigeria Electricity Market Stabilization Works and Housing
The modality of Electricity
viability of Facility Nigerian Electricity
Market Stabilization Facility will
GenCos and Regulatory Commission
need to be provided to see if
DisCos Ministry of Finance
there exists opportunities in this
Ministry of Federal
area.
Capital Territory

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 EPC and the Oil & Gas Programme

USD 16 billion to increase oil production capacity by 250 000 bpd and
USD 9 billion to increase refining capacity by 300 000 bpd.

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PROGRAMME – OIL & GAS
Programme Oil & Gas
No. Strategy Key activities Lead EPC opportunity
21 Revamp Strategically reduce government equity in NNPC Ministry of Petroleum
refineries to refineries and other downstream subsidiaries Resources
increase local (such as pipelines and depots) Ministry of Justice
production 􀂃 Conclude downstream liberalization
capacity 􀂃 Implement new business models for refineries
􀂃 Revamp refineries to increase capacity
utilization
􀂃 Encourage private-sector participation through
co-location and JV arrangements
􀂃 Work with the National Assembly to ensure
passage of the PIB
22 Revolutionize 􀂃 Accelerate the building of critical pipeline Ministry of Petroleum
gas by launching infrastructure (e.g., Obiafu-Obrikom-Oben pipeline Resources EPC worked for Dangote
development (OB3), Trans Nigeria Gas Ministry of Refinery, why not for
projects and Pipeline, Escravos Lagos pipeline system (ELPS)II) Niger Delta Affairs Government Refineries?
increasing 􀂃 Finalize gas production sharing contract terms The NLNG issue with
production 􀂃 Implement the seven key gas development NIMASA
projects to ramp up domestic supply
􀂃 Roll out the LPG Penetration Programme
23 Improve 􀂃 use of ICT and automation; and performance Ministry of Petroleum The success or failure of
governance of management Resources a project is mainly
the oil sector 􀂃 Improve stakeholder management and Ministry of Niger Delta determined by the
international coordination through Affairs political inclinations of
implementation of a communication strategy; Ministry of Youth and the government. A policy
stakeholder relationship management; Sports will help create
international energy relations; and bilateral Ministry of Interior assurances for EPC
coordination Ministry of Justice companies to invest in
the projects of the
sector.

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PROGRAMME – SOLID MINERALS ( MINING)
Programme Solid Minerals
No. Strategy Key activities Lead EPC opportunity

14 Create an 􀂃 Expand electro-magnetic and gravity exploration to Ministry of

enabling complete resource mapping Mines and Steel
environment to 􀂃 Increase access to information by improving the Development
enhance private archiving of geo-data, harmonizing their format, and Ministry of Science
investment, promoting their dissemination and
targeting energy 􀂃 Strengthen the infrastructure network by updating and Technology
minerals, integrating mining transportation and power requirements Ministry of Finance Infrastructure can be procured
iron/steel and in national implementation plans Ministry of through the EPC, this will save time
gold/ gemstones 􀂃 Build local technical and managerial skills and capacity Industry, and money, funding can be gotten
to ensure a steady supply of talent Trade and from the private sector due to
􀂃 Clarify the tax and regulatory systems to improve the Investment acceptance of EPC models.
perception of Nigeria’s investment climate for mining Ministry of The introduction of sector specific
activities, and work with National and State legislatures to Labour and EPC firms will provide value for
address gaps and conflicts in governing legislation Employment money.
􀂃 Improve State engagement, particularly in financial Obajana Cement,
participation, revenue-sharing, recognition of Federal Ajaokuta steel?
oversight and social responsibilities to communities
􀂃 Speed up establishment of the Solid Minerals
Development Fund with a seed fund of N200 billion
􀂃 Ensure that industrial and energy minerals strategies
prioritize domestic utilization of assets

15 Decrease value 􀂃 Formalize artisanal and small-scale mining activities by Ministry of Mines
leaks/loss by automating mining cadastral office operations and Steel
formalizing 􀂃 Develop mine file inspection and policing operations to Development
informal mine improve reporting of mine quantities, and target tax Ministry of Science
activities evaders to curtail smuggling (especially in gold and and Technology
precious stones)

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PROGRAMME – CONSTRUCTION
Programme Construction
No. Strategy Key activities Lead EPC opportunity
20 Stimulate 􀂃 Improve access to finance for the Ministry of
construction by construction industry, e.g., by fast-tracking Power,
building affordable implementation of the proposed Family Works and
housing Homes Fund, to build 2 million housing units Housing
by 2020 Federal
􀂃 Work with State governments to invest in Mortgage
vocational and technical training centres to Bank of This can be in the
develop skills for local craftsmen Nigeria Design and Build
􀂃 Construct 2,700 housing units in the short- Ministry of Model , but treated as
term to create 105,000 direct jobs a year and Finance an EPC contract due
gradually increase to 10,000 housing units per Ministry of to the infrastructure
annum by 2020; construct 20,000 pilot social Labour and requirement like
housing units Employment district developments
􀂃 Reposition the Federal Mortgage Bank of Ministry of in the FCT.
Nigeria by Federal Expand the Executive
recapitalizing it from N2.5 billion to N500 Capital order 07 to capture
billion to meet the housing needs across Territory EPC contracting
Nigeria model.
􀂃 Construct 12 new Federal secretariat
complexes in the States where none exist and
complete rehabilitation of the existing 23
secretariats

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PROGRAMME – HEALTH
Programme Health
No. Strategy Key activities Lead EPC opportunity

34 Partner with 􀂃 Partner with the Ministry A great

the private sector to develop of Health opportunity
private at least one mega health for EPC
sector to centre in each State to especially for
construct provide high-quality a Turnkey
model preventive and curative model and
mega-health healthcare integrating
centres partnership
with medical
equipment
manufacturers
.

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PROGRAMME – EDUCATION

Programme Education
EPC opportunity
No. Strategy Key activities Lead

34 Prioritize 􀂃 Construct special schools Ministry of Depending on

education for for girls in 13 pilot States Education the
girls and 􀂃 Construct 501 classroom Ministry of complexity of
infrastructure blocks across the States Women the
development 􀂃 Construct 125 day and Affairs construction,
boarding Almajiri and EPC can still
nomadic education-based be deployed.
schools

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CASE STUDIES

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CASE STUDIES

Nigeria LNG Limited ( NLNG)

A good example is the Nigeria LNG Limited ( NLNG), which is jointly

owned in the following proportions: Nigerian National Petroleum
Corporation (NNPC) owns 49%, Shell Gas B.V. owns 25.6%, Total LNG
Nigeria Ltd owns 15% and Eni International owns 10.4%The plant was
built by TSKJ consortium ( EPC Contractor), which was led by former
Halliburton's subsidiary KBR . Other participants of the consortium were
Snamprogetti, Technip and JGC Corporation ( JV partners). The first train
came into operation in 1999.The feed gas ( oil and gas supplier) was
provided by Shell, Elf Aquitaine and Agip. The off takers were through
sales contracts with Enel for 3.5 billion bcm/yr, Enagas for 1.6 bcm/yr,
Botas for 1.2 bcm/yr, and Gaz de France for 500 million cu m/yr.

UK rail supply sector HS2 Project

Long Island Rail Road Project

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CASE STUDIES

Long Island Rail Road Project

New York City is in the process of creating a new train station

under Grand Central Terminal, with a connection to the Long
Island Rail Road – a plan called “East Side Access.” The
existing Grand Central is on two levels with a total of 67
tracks.
The idea is to offer easier commutes between Long Island and
the east side of Manhattan. It is one of the largest
transportation projects currently underway in the USA,
according to the Metropolitan Transport Authority (MTA). The
project will cost more than $11 billion, which is $1 billion
more than a previous 2014 estimate. Construction began more
than 10 years ago, but it is unlikely to be fully completed until
the end of 2022.

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CONCLUSION

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Conclusion.
Projects focused on collaborative schemes, in which it is expected that
relationships between project participants will be encouraged, can
potentially maximize project outcomes.

This forward-thinking approach can also significantly reduce a project's

timeline. In the same amount of time, a large-scale EPC solicitation can
secure a contractor, complete preliminary design and develop a
guaranteed maximum price (GMP).

It is proven that EPC contracts have succeeded in the private sector, the
GCC countries have embraced this form of contract procurement and they
have testimonials of the success by the level of project completion in
their economy. If the ERGP will succeed in the area of infrastructure
procurement, then there is need to re-evaluate the traditional system
and embrace a more pragmatic approach to project delivery which can
guarantee the performance, timeliness and cost thresholds. The emphasis
placed on planning in EPC projects is a necessary input for the delivery of
the project.

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Last words….
Quantity Surveyors have vast knowledge in the intricacies of contract
drafting and measurement of works , through their training they have
helped to deliver Quality infrastructure which has enhanced effective use
of resources. They are doing it in other countries, they can also do it in
Nigeria.

“The secret of change is to focus all of your energy ,

not on fighting the old but on building the new”
…Socrates

“ The measure of intelligence is the ability to change”

..Albert Einstein

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Oyinleye Adebowale- [ FNIQS, PMP]
Managing Partner
Projects Associates

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