When considering this, we have looked at Energy from Waste (EfW) projects as an example where we have seen both successes and failures.

Procurement of contractors can follow a number of pathways, from individual purchase orders to full PFI EPC Wrap Contracts. The approach taken depends on the overall perception of risk and the apportionment of that risk.

Large scale Energy from Waste (EfW) plants and the EPC Wrap approach

Traditional [large-scale] Energy from Waste plants have adopted a full EPC Wrap approach.

This involves a single construction contract with generally the main process contractor, and then a series of subcontracts between the main contractor and the package contractors.

The principal is that the main interface risk is with one single entity and therefore the perception of liability is with one single contractor. This has not always proven to be a successful approach but is seen as standard.

However, this route of procurement has a number of disadvantages:

1. This increases Capital Construction costs on average between 20% and 30%. Often this will make smaller projects unviable.

2. The risk is not carried by the contractor best able to understand and manage the risk. Process Engineering companies are very different to Civil and Building Contractors and therefore the two often struggle to understand and manage the interface / objectives of the other.

3. Fewer contractors are providing full EPC Wrap options. Many of the traditional contractors are moving away from this approach because they just cannot manage these contracts and others are not comfortable in this type of relationship.

That said, the interface risk and wrap approach has some benefits, particularly when, say, the building is an integral part of the process.

For example, large-scale EfW plants will have deep storage bunkers and a main wall into which the process has to be installed. The complexity and therefore the risk is best pushed towards the single entity to manage.

However, where the projects are not complex, the procurement strategy can simplify this process and move away from the single EPC approach. The packages are easy to manage, and the interface is clearly defined within the contract specifications.

The procurement objective should be to move away from the single contractor EPC Wrap and to source the work in the varying packages such as Building and Civil works in one package and process equipment in another.

The principal behind this is to ensure that the risk is directly apportioned to the contractor best able to manage that risk.

Therefore, as an example:

1. Building and civil engineering works – Utilising a standard form of contract that is known to the contractor, and a specification and process of pricing that is familiar to that organisation.

2. Process Supply and installation – Again, a standard form of contract such as an IChemE Red Book that is familiar to the contractor.

Lump sum contracts and inflationary costs in construction materials

In all instances the objective is to establish a lump sum price for the design, installation and commissioning of the supplied items. The contracts would also incorporate appropriate warranties and guarantees.

This is particularly relevant in today’s market where we see large inflationary costs in construction materials.

The communication with the contractor best able to manage and understand those costs is vital when reaching a meaningful lump sum contract. These risks are not managed well in an EPC Wrap.