Main Contracts used in Industrial Projects

FEED (Front End Engineering Design)

Front End Engineering Design (FEED), also referred to as Front-end loading (FEL), feasibility analysis or conceptual planning, is the process for conceptual development of projects in processing industries such as upstream, petrochemical, refining and pharmaceutical. This involves developing sufficient strategic information with which owners can address risk and make decisions to commit resources to maximize the potential for success.

FEED/FEL projects includes robust planning and design early in a project’s lifecycle, at a time when the ability to influence changes in design is relatively high and the cost to make those changes is relatively low. It typically applies to industries with highly capital intensive, long lifecycle projects (i.e., hundreds of millions or billions of dollars over several years before any revenue is produced). Though it often adds a small amount of time and cost to the early portion of a project, these costs are minor compared to the alternative of the costs and effort required to make changes at a later stage in the project.

FEED/FEL is usually followed by detailed design or detailed engineering.

OBE (Open book estimation)

In an open-book contract, the buyer and seller of work/services agree on (1) which costs are remunerable and (2) the margin that the supplier can add to these costs. The project is then invoiced to the customer based on the actual costs incurred plus the agreed margin. It is essentially the same as what is known as a cost-plus contract.

This contract form is popular to ensure that a competitive price is obtained, for instance in cases where tender competitions are impractical. It is also useful if the work is difficult to specify precisely up front, or if the buyer is not willing to pay for the risk-premium that sellers typically add when giving fixed prices.

EPC (Engineering, Procurement & Construction)

This is the prominent form of contracting agreement in industrial projects. 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. Under an EPC contract, the contractor designs the installation, procures the necessary materials and builds the project, either directly or by subcontracting some of the work.

In some cases, the contractor carries the project risk for schedule as well as budget in return for a fixed price, called Lump Sum Turn Key depending on the agreed scope of work. The ‘keys’ to a commissioned plant are handed to the owner for an agreed amount, just as a builder hands the keys of a flat to the purchaser. One should recognize that some EPC contracts terminate at Mechanical Completion but before Commissioning while LSTK contracts always include Commissioning.

An owner decides for an EPC contract for reasons that include:
· Reduced stress for owner
· Single point of contact for owner simplifies communications.
· Ready availability of post-commissioning services
· Ensures quality and reduces practical issues faced in other ways
· Owner protected against changing prices for materials, labor, etc.
· Cost is known at the start of the project

EPCC (Engineering, Procurement, Construction & Commissioning)

The same as EPC with the addition of the commissioning phase which will see the contractor undertake testing of all the facilities at the project prior to commercial start-up.

EPCM (Engineering, Procurement, Construction & Management)

This type of contract is different to an EPC Contract in that the Contractor is not directly involved in the construction but is responsible for administering the Construction Contracts.