EPC is here to stay, lucrative options lure contractors

Monday, November 15, 2010

The engineering and construction market in India has undergone some significant
changes. It has affected both the government agency and private investment projects.
There has been a significant increase in engineering, procurement and construction
(EPC) arrangements including fixed-price turnkey, reports Projects Info.

The EPC way of executing a project is gaining importance worldwide. In an EPC

contract, the EPC contractor (EPCC) agrees to deliver the keys of a commissioned
project to the owner for an agreed amount.

Engineering, procurement and construction (EPC) market in India is nascent. EPC

offers a one-stop solution for the project promoters. Among the project partners, E PC
(Engineering, Procurement and Construction) contractors play a crucial role in the
actual implementation of projects. Depending upon the size of a project, an EPC
contractor might execute the same solely or break the project into different categories
and delegate it to a number of sub-contractors. In case of public sector, project
contractors are selected always through tendering process while it is generally a
closed door affair in case of private sector. However, when it comes to implementing
large projects where state-of-the-art technology is involved, local or international
tendering is preferred by private sector.

EPC contractor executes the same solely or break the project into different categories
and delegate it to a number of sub-contractors. In case of public sector, project
contractors are selected always through tendering process while it is generally a
closed-door affair in case of private sector. However, when it comes to implementing
large projects where state-of-the-art technology is involved, even private sector goes in
for local or international tendering.

Some reasons for choosing EPC:

1. The owner puts in limited efforts for the project

2. EPC gives the owner one point contact that facilitates to monitor and coordinate
easily.
3. Owner remains unaffected by market fluctuations
4. Investment figure are appraised at the inception of the project

With EPC contract the owner will define the following:

1. Scope and the specifications of the plant

2. Quality
3. Project duration, and cost

Cost Factor
EPCC’s performance can be affected by cost variation. An EPC contract has no price
escalation clause. The cost variation to the EPCC can occur on two factors:

foreign exchange fluctuation and variation in the prices of materials and labour and
services

There are 10 top companies in the organised sector which account for 35 per cent of
the industry. Currently orders for most companies are from the Central or State
governments. Local competition is growingly intensely and foreign companies are
equally making a foray into this sector.The ability of other smaller players to thrive will
depend on their capability to enter into joint ventures and acquire independent
qualification.

Tremendous potential

EPC has come to be accepted both in the public and private sector. EPC contracting in
India is reportedly well developed with clients and contractors choosing to operate on
international contract formats including the ones developed by FIDIC (the International
Federation of Consulting Engineers).

EPC is recognised as a preferred mode of contracting where lenders seek greater

risks to be borne by the contractors.EPC contracting has very good potential
considering the size and complexity of projects being set up in India in the power,
steel, oil and gas, and transportation industries.

Industry experts say the concept of EPC has been gaining ground for the past five to
eight years in India with many organisations opting for this route so that a single-point
responsibility can be fixed. It has tremendous potential and will become increasingly
popular in coming years. At present, there is scope in the infrastructure area, already
sanctioned refineries and in some parts of the chemicals sector apart from power.
There is a large gap witnessed between demand and supply in the power sector in our
country that will stimulate continuous growth.Great potential also exists in the nuclear
power area that has recently opened up.

International players have no major advantage over Indian contractors. Nowadays,

Indian clients are ready to enter into multi-currency contracts, thereby reducing
exchange variation burden. The taxation structure is more or less similar in terms of
excise duty, import duty, service taxes, etc, for foreign and Indian contractors. On the
other hand, foreign contractors have to consider the possibilities of PE tax in India. The
only advantage they have is less ‘financing cost’ during implementation in their
countries and easy access to foreign vendors. As far as engineering is concerned,
Indian companies are equally competent and much more cost-effective. What we need
is fine tuning of project and construction management techniques.
Skill Sets

EPC contracts require multiple skill-sets and involve high risk owing to the size and
complexity of the projects. Depending upon the size and intricacy of a project, an EPC
contractor may execute it solely or break it up into a number of subcontracts. Many
EPC contractors also form onsortiums to bid for such projects.

A common practice in EPC contracts, particularly in India, is dividing or splitting project

work into two or more separate contracts. The basic structure involves splitting the
contract into an ‘offshore contract’ and an ‘onshore contract’. The tasks of the offshore
contractor would usually be restricted to supply of design and engineering services,
plant, equipment and materials sourced from outside the host country. The onshore
contractor’s responsibility would normally involve installation of equipment procured
under the offshore contract, onshore design, construction, commissioning and other
onsite activities as well as supply of equipment sourced from within the host country.

Technical consultants point out that one contract would be for supply of equipment and
material and the other for services covering the scope of engineering, bulk material
required for construction, erection, commissioning, supervision and performance
guarantee test run (PGTR). Adopting such an approach during the tendering stage
itself results in tax synergy and minimises litigation risk with tax authorities.

Hurdles

The EPC method assures immense possibilities and assured benefits for all involved,
but it also entails risks and difficulties, particularly for contractors. An EPC contractor
deals with a large number of suppliers and vendors while executing a contract; yet he
has to take the responsibility for the quality and timely execution of the project or bear
the penalty for delays in execution that may even have been owing to a lapse at the
vendor’s end.

EPC contracts awarded by clients are always one-sided without any consideration
towards the genuine problems faced by the EPC contractor. The contractor has to deal
with a large number of vendors during execution. Irrespective of whether he has direct
control or not, he is penalised in terms of delay and quality on the basis of overall
contract price.

Clients have become more demanding but at the same time they are unwilling to pay
in excess. They come with budgets that are not in sync with prevailing market
conditions and try to transfer higher risks and liabilities to contractors. A major
challenge is to match unrealistic budgets and avoid cost overruns during the execution
of mega projects.

Contractors often complain about taxation. With several types of taxes such as
customs duty on imports, excise duty on manufacture of goods, service tax on the
provision of services, and central sales tax (CST)/VAT on the sale of goods, some of
which again differ between states, the tax problems of EPC contractors seem to be
multiplying.

At present, there is no umbrella legislation in force to levy a single tax on the

composite consideration paid for the multitude of activities that constitute an EPC
contract. However, certain tax laws do provide options to EPC contractors to determine
the specific taxable amounts, in order to ensure that only the appropriate amounts are
taxed and there is no overlapping or double taxation.

EPC business is still considered an attractive option by contractors who are now trying
to find alternative ways to mitigate and control risks.

The future of the EPC industry is expected to be bright and challenging but each EPC
company will have to develop its own strategy for best profitability and success.
Leadership in the use of information technology will play a key role in winning future
EPC work and knowledge management systems may become mandatory EPC
offerings in the near future.

“The connectivity within the country itself has got huge scope to work for”

Sadique Molla, General Manager – Buildings, Supreme Infrastructure discusses

about the scene of EPC in our country and the different benefits that the model offers.

Please elaborate on the different benefits to the owner for choosing the EPC model for
executing a project
When an EPC model is chosen over any other one for the execution of the project, the
contractor becomes the single point of contact for the entire project. With the use of
this model it helps in the smooth execution of the project. In this model, the costing is
under control in all the aspects of the project. Also due to minimal staffing, cost overrun
is in control. The legal and administration cost is minimal.

Do you think EPC ensures quality and reduces issues faced in other methods? Please
Elaborate.
Under this kind of work, the contractor is solely responsible for the execution of the
entire project. With this, the project quality control becomes his job the quality
standards are as per the specifications made by the owner and then it becomes the
contactor’s responsibility.

What are the different factors that can affect an EPC contractor’s performance and
may cause overruns?
The different factors that can affect an EPC contractor’s performance and may cause
overruns are post award deviation from the original specifications and legal cases if
any imposed.
What is the current market scenario for EPC in India? Please elaborate differently w.r.t
private sector and public sector projects. Please comment on the demand drivers. Do
you think foreign players are entering the Indian EPC market in a big way? Which are
the factors that make them chase the Indian market?

India as a country has a largest opportunity in respect of infrastructure segment there

is about 70 per cent of the country where the roads and other infrastructure is not
readily available. The connectivity within the country itself has got huge scope to work
for. The scope for the demand of public and Private sector is also increasing as the
demand in the market size is also too big and also the project complexity has also
increase. The capacity to magnitude for the execution of the project of big size is
limited within the country. Men, Material, Machine and Money are the important
aspects in the execution out of which only Men is readily available with us but for other
parts FDI is more required and FDI with the PPP models will be the best for getting the
execution done.

“EPC model is a low risk model”

SK Tripathi, COO and President, JMC Projects shares his views on why EPC is a
preferred mode.

Please elaborate on the different benefits to the owner for choosing the EPC model for
executing a project.
EPC model is a low risk model. If the project objectives are properly defined during its
phasing time there will no time loss to the owner. In fact the projects will have shorter
time cycle than other models. They are low risk models in terms of quantity, price
escalation and land acquisition of availability problems.

Do you think EPC ensures quality and reduces issues faced in other methods? Please
elaborate.
Quality of construction and issues are same in any model/method. All the models
ensure good quality since they are guided with some norms and specifications. The
only advantage in EPC is that these issues are distributed in the whole cycle but they
cozening not reduced.

What are the different factors that can affect an EPC contractor’s performance and
may cause overruns?
The factor that affect EPC contractor’s performance are land or work area, regulatory
clearances from Government departments, project finance to some extent, price
fluctuations of commodities in the market.

What is the current market scenario for EPC in India? Please elaborate differently w.r.t
private sector and public sector projects. Please comment on the demand drivers.
Private EPC segment is evolving very fast in the country. With the deregulation of
economy major infra segments are on the route of privatization . Owing to above
majority of EPC market is shifting towards the private.

Do you think foreign players are entering the Indian EPC market in a big way? Which
are the factors that make them chase the Indian market?
No. There no such EPC contractors, we only have foreign Joint Venture partners and
we use them for their technology. Our EPC process is not transparent.

Info Profile

C & C Constructions: Soaring to new heights 

Incorporated in 1996 C & C Constructions has emerged as one of the fastest growing
infrastructure project development companies of India. The company’s project
expertise lies primarily in transportation engineering projects including roads and
bridges. In 2007, C & C Constructions diversified its operations across the two value
added business divisions of building and water sanitation & sewerage to stay in line
with the rise in demand for intricate value added projects. C&C Constructions has so
far completed 29 projects across India and Afghanistan, with aggregate contract value
of over Rs. 1,200 crore. The client list includes National Highways Authority of India,
Airports Authority of India, UNOPS, Republic of Afghanistan and Rites. It recently
signed a joint venture agreement with Spanish major, Isolux Corsan to jointly bid for
projects internationally.
For further info: www.candcinfrastructure.com E-mail: candc@candcinfrastructure.com

Glozon Technologies: Decoding the construction world 

IGlozon Technologies is an ISO 9001:2000 company, led by a team of two IlTians with
a common goal of networking and database management through innovative ideas
and models. The company develops Esticon which is used for construction and EPC
world to deal with BOQ, definitive and control estimation, status tracking, bid analysis
and evaluation, and reconciliation. It can be integrated with ERPs and designed to
provide reports to check time cost resource. The software is built on J2EE, compatible
with all databases; web-based, access controlled and automated data backup facilities.
The company has a strong technical team that is conversant with functional areas,
solution development and system integration.
For further info www.glozon.com  Email: marketing@glozon.com

Afcons marches ahead

Commenced its operation as a civil construction firm way back in 1959, Afcons
Infrastructure, a pioneer and leader in infrastructure is one of India’s major construction
companies involved in executing large and complex civil engineering projects, both in
India and abroad. The company has been involved in construction of marine works,
bridges, roads, general civil engineering works including industrial structures, nuclear
power projects, tunneling, pipelines and special foundation works such as piling,
diaphragm wall, pre-stressed anchors, drilling and grouting and other ground
improvement works. The company is presently executing major marine works in
Oman, Mauritius, UAE, Madagascar and also civil structural works in Yemen and is
actively pursuing new and developing markets such as Middle East & Africa.
Email id: bd@afcons.com, Website: www.afcons.com

HCC: A dominant player

As a pre-eminent Indian infrastructure company, established over eight decades ago,
HCC has, over the years, strongly anchored itself to India’s development effort. HCC
will continue to grow its successful construction operations profitably whilst expanding
its EPC capabilities and acquiring / executing an increasing number of EPC projects.
These projects will come from the key sectors currently addressed by HCC including
hydro, water, nuclear and thermal, transport and integrated infrastructure projects
whilst opportunities will be taken to develop in the associated energy and infrastructure
sectors of process plants, industrial complexes and defence related projects. These
EPC skills and capabilities will also be utilised to support HCC’s own investment
projects (BOT, etc). HCC is dedicated to sustainable development.
Email Id: corpcomm@hccindia.com, Website: www.hccindia.com

Era Infra: Strengthening through the years

Era Infra Engineering, the flagship company of the Era Group of Companies, stands
out as one of the few fully integrated infrastructure development companies with a
diverse presence across various sectors in the industry. EPC is one of the key
strategic business units of Era Infra Engineering. This is the oldest division of the
company and is engaged in executing infrastructure development contracts across the
full spectrum for the last two decades. To capitalise on the prospects unfolding in the
infrastructure development space, the company has set up strategic business divisions
representing well structured, robust and scalable business lines. These include power,
road & highways, railway sector to name a few.
Email: joy.saxena@eragroup.in, Website: www.eragroup.co.in

Supreme Infrastructure: Making a strong presence

Supreme Infrastructure India is a 27 year old construction company with a turnover of
Rs 390 crore in 2009. It is listed on the BSE and NSE. The company was incorporated
by Bhawanishankar Sharma who has has been also awarded the Udyog Ratna award
from the Institute of Economic Studies (IES). Supreme has a presence in six different
states and an order book worth Rs 2400 crore, including BOT of highways, bridges,
buildings, railways, and power distribution. Apart from using the latest methods and
techniques, it has also introduced automation and uses QA/QC methods, and project
management and control tools.
Email: admin@supremeinfra.com, Website: www.supremeinfra.com

Key players in EPC Industry:

• Supreme Infrastructure
• JMC Projects
• Lanco Infratech
• Bechtel
• Nagarjuna Construction Company
• Era Infra Engineering
• Marg Construction
• Aker Solutions
• Engineers India
• Gammon India
• Hindustan Construction Company
• ITD Cementation
• Larsen & Toubro
• Leighton India
• Petron Engineering Construction
• Samsung Engineering
• Shriram EPC
• Tata Projects
• Toyo Engineering
• Tecnimont ICB
• Uhde India