A convergence of events — including the war in Ukraine, supply chain issues and increased demand for new construction projects — has spurred material price increases and market volatility. In fact, the price of machinery and equipment for transformers and power regulators increased 64% between January 2020 and December 2022.
When material and labor costs skyrocket, identifying ways to reduce costs, stay on schedule and improve efficiencies is critical. To address schedule constraints and market volatility, utilities are finding success with a progressive engineer-procure-construct (EPC) approach. This efficient and effective method brings the utility and EPC firm together at the beginning, agreeing to a contract that provides flexibility and transparency in scope and price. This approach prioritizes collaboration between the utility and firm as these parties share risks and potential cost savings.
Implementing a Progressive EPC approach
Utilities can hire an EPC firm while the project scope is being finalized, and project execution can be segmented into three phases:
- Phase 1: The utility and the EPC firm identify the end goal of the project and develop a path to execute the project. The utility and the firm work together on a conceptual layout and plan for the project while also starting to divide responsibilities among appropriate parties. The firm will create conceptual drawings and plans so the team can develop a scope and price estimate for the project.
- Phase 2: The utility and the EPC firm agree to limited notice to proceed (LNTP) contract, which will allow the firm to continue advancing the project. This will allow engineers and geologists to begin geological investigation to learn about soil and foundation properties before new structures are designed. The LNTP also will allow the firm to identify, bid and award material contracts for items requiring long lead times, to help keep the project on schedule. As design progresses, pricing for suppliers and contractors is updated to reflect a more refined design and scope. The final step of this phase is price and schedule alignment, during which the EPC firm provides an updated project price to the utility, taking into account scope adjustments and feedback from the market.
- Phase 3: The firm and utility review the updated price, schedule and scope. Costs, contingencies, profits, risks and opportunities are transparent and identified in this meeting. At this point, the firm and utility can look at the contract and renegotiate if necessary. The firm and utility can choose to proceed under an open-book approach or switch to a new contract structure, such as lump sum, that would transfer more risk to the EPC firm. After an agreement is reached on the final contract structure, the firm transitions to execute the project under those terms and conditions. The EPC firm executes the remaining vendor and subcontractor contracts at this stage. After contracts are awarded, the firm moves forward with construction on the project following the installation and quality requirements that were agreed to during the development of the project execution plan. Once the asset or facility is constructed, commissioning takes place to energize the asset, and a final turnover package is given to the utility.
Benefits of a Progressive EPC Approach
Most utilities know that a firm with EPC capabilities can execute the entire project, but when prices and labor are volatile the progressive EPC approach gives utilities an opportunity to maintain control of major decisions and remain engaged in scoping.
This approach provides financial and execution transparency to the utility during the early stages of the project. The utility can access cost information and has the ability to review documents being generated. The EPC firm provides monthly cashflow information for the project, change order log information, risk register and contingency log information, and project accruals. Additionally, the utility and the firm share risks, ideally leading to shared savings.
One of the biggest benefits utilities can expect is a condensed time frame from concept to commissioning, resulting in earlier project completion. The EPC firm starts work immediately at project conception — addressing engineering needs and identifying critical procurement and construction components. This approach allows the firm to implement and complete various activities in tandem, including identifying value engineering opportunities through immediate construction feedback.
When Progressive EPC May Not Be Most Beneficial
If a utility approaches an EPC firm with a well-defined scope, land that is already acquired, permits in hand, costs defined and a clear vision for project execution, a traditional EPC lump sum approach would probably be preferable, because it transfers risk from the owner to the firm.
Otherwise, a progressive EPC approach will help the firm and utility secure resources and labor efficiently. In a volatile economic and labor environment, a progressive EPC approach is a practical and smart choice, helping secure resources and craft labor for complex projects.
Owners in the electric power industry are contending with labor shortages and market volatility. Reviewing the merits of different contracting methods can help owners address novel market forces at play today.