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Part of the Leaders series published with Mining Journal

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EPCM2015-2016

Guide

making the difference

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We specialise in set-up, management and administration of EPCM

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Contents

IntroductionDaniel Gleeson introduces the guide and its contributors.

Law: Pinsent MasonsThe legalese of EPCMsIt is fair to say that the EPCM model is the primary model for the delivery of mining and related infrastructure, but more recently, in light of the downturn in mining projects, falling commodity prices and shareholder pressures to minimise costs, this model has come under increasing scrutiny.

Consulting: Turner & TownsendTicking all the right boxesHow mining companies procure for projects is changing, Turner & Townsend says. In reaction to continued weak commodity prices, mining companies are being pressured by their boards and investment committees to approve capital more rigorously and apply it more efficiently.

ConclusionThe final takeThe EPCM marketplace has become a lot more flexible in recent years, with providers willing to engage in greater incentivisation and risk-sharing. Two influential names in the space give their takes on the future of the delivery model.

Contributor biographiesShort biographies about the companies and people who contributed to and wrote the articles within the guide.

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Part of the Leaders series published with Mining Journal • SEPTEMBER 2015

3

??????Introduction

“The formulation of an EPCM contract is no longer a box-ticking exercise”

Thought of as the standard contract for explorers turning reserves into mines, or producers adding another operation to their portfolio, the EPCM (engineering, procurement and construction management) contract is evolving.

Often confused with EPCs, the two are very different. EPCMs are contracts for professional services, whereas EPCs are design and construct contracts for which a single contractor usually assumes all responsibility. Under EPCM contracts, other parties take on this obligation, meaning there can be a handful of contractors working on one individual commissioning project, something many investors forget about.

While this distinction remains, the EPCM delivery model is improving.

Various reasons are behind this. A string of high-profile cost and time blow-outs, many of which occurred during significant commodity price falls, dented the industry’s confidence in the model. While poor planning, complacency and over-ambitious scheduling were partly to blame, project owners have been starting to look for more security and less risk on execution.

This has led to financing drying up and the project pipeline contracting. In a bid to improve the outcome, many savvy project owners able to commission projects have employed hybrid EPCM contracts (possibly with some EPC elements included), brought on more in-house expertise to monitor the builds and enlisted a series of key performance indicators tied to payments to incentivise the contractors.

This hasn’t been a one-way street, though. Contractors have also brought in new systems to ensure project builds run smoothly, while incorporating best practice from other industries to enhance delivery.

This has meant those projects getting bankrolled are typically much better-equipped through to completion than those greenlit during the recent boom.

As a consequence, the importance of developers finding the right partners to advise them is even more important.

The formulation of an EPCM contract is no longer a

A contract evolutionThe way mine builders are constructing operations is changing for the better

Daniel Gleeson, Mining Journal Assistant Editor

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Introduction

box-ticking exercise; it includes individual stipulations and allowances aimed at reducing the possibility of any overruns.

This guide includes input from some of the most influential names in the business on this front.

In its chapter, consultancy Turner & Townsend gives guidance on how to effectively employ EPCM providers, make sure the correct teams are selected and how the industry can learn from other sectors.

Law firm Pinsent Masons, meanwhile, uses its chapter to look at ways to improve cost guidance, alleviate potential disputes, minimise the project owner’s risk and reduce costs.

The next logical place to go is the future, with the final chapter asking some key industry figures how these con-tracts could evolve over time.

While another commodity boom could be on the horizon, the mine-building mistakes of the past will not be forgotten. EPCMs have changed for the better.

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Financings offered to market in US$m

SNL's Indexed Metals Price (IMP)

SNL's Pipeline Activity Index (PAI)

(left-hand scale)

The SNL Pipeline Activity Index (PAI) measures the level and direction of overall activity in the supply pipeline. It incorporates significant drill results, initial resource announcements, significant financings and project development milestones into a single comparable index, as well as component indices for gold and base/ other metals.

The SNL Indexed Metals Price (IMP) measures the relative change of precious and base metals prices, weighted by the percentage of overall exploration spending for each metal as a proxy of the relative importance of each in the industry at a given time. Both the PAI and the IMP are calibrated so that May 2008 = 100.

Source: SNL Metals & Mining

“While another commodity boom could be on the horizon, the mine-building mistakes of the past will not be forgotten soon”

The ebb and flow of

mining finance

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Ticking all the right boxes

In reaction to continued weak commodity prices, mining companies are being pressured by their boards and investment committees to approve capital more rigorously and apply it more efficiently.

As a result, improving project delivery models has moved to the top of the agenda for many mining companies/mine project-owners and, as part of the thought process, existing procurement strategies for capital project delivery – which includes the EPCM model – are currently in the spotlight.

The traditional EPCM contracting model has been thought by the industry to leave mine project-owners exposed to perceived rising costs and potential risks, and has in instances led them to reconsider how risk is shared and managed with consultants/contractors delivering projects via an EPCM contract.

“While the EPCM delivery model can accommodate design changes more easily, and the associated flexibility has the potential to reduce the cost and to delay the impact of these changes (particularly during FEED; front-end engineer-

How mining companies procure for projects is changing, Turner & Townsend saysBruce Clarke, Stephen O’Brien, Mark Wainwright & Rory Wallace

Turner & Townsend has expertise throughout the development, mining and expansion phases

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ing design), for many of our mining company/project-owner clients this model has not been seen to deliver on its potential. In cases where project costs have

ballooned, the sentiment has often been that the only beneficiaries were the EPCM consultants/contractors employed on a cost-reimbursable basis. In some instances, this is despite scope adjustment or expansion being justified reasons for the cost increases,” says Mark Wainwright, Natural Resourc-es Managing Director, Turner & Townsend.

Considering the above, now is as good a time as any to ask: where does the future lie for the EPCM contracting model within evolving project procure-ment strategies?

Turner & Townsend – as an organisation experienced in the set-up, manage-ment and assurance of EPCM contracts – believes that EPCM consultants/contractors still have a major role to play in projects, but that where they sit in the project delivery model is changing.

The emergence of hybrid delivery models and the role of the EPCM contracting model“We see more mine project-owners looking for ‘best of all worlds’ solutions, or what can be termed hybrid delivery model options. In needing to deliver more complex programmes, they are asking how they can increase confidence in the project outcome to the level expected in an EPC arrangement, while maintaining access to the skills and benefits that an EPCM consultant/contractor can bring to the project,” says Rory Wallace, Mining Director, Turner & Townsend Chile.

Hybrid models can provide an alternative to the traditional delivery models and can be designed to clearly define areas over which the owner may wish to take control (this is based on the premise that accountability and risk lie in the hands of the most appropriate party/stakeholder). The attractiveness of a hybrid model, as it relates to EPCM contracts, has to do with the benefits to the mine project-owner in terms of its ability to: change the scope and control of the EPCM contract; change the way these contracts are issued and administered; and offer reduced risk exposure, better change management; and minimised cost and delays.

Bruce Clarke, Mining Director, Turner & Townsend Johannesburg, adds: “We’ve seen a step change in EPCM contracts as mine project-owners have looked to consider alternative models. We’ve seen mining company clients of ours look at varied pricing options for EPCM services and we’ve assisted with the strategy and planning of many contracts that have fixed pricing for aspects of engineering and procurement, and a reimbursable pricing structure for the construction management services. My sense is that EPCM contracts will be tendered within tighter parameters to include fixed pricing components, strict

“EPCM consultants/contractors still have a major role to play in projects, but where they sit in the project delivery model is changing”



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mobilisation procedures, and the ‘right to audit’ clauses embedded, as examples.”“To give a few hybrid examples, we supported a mine project-owner with the

selection of a hybrid-type contract model where the EPCM consultant/contractor – along with its supply chain and in-house capabilities – covered the engineering and procurement functions, while a greater degree of control over commercial and construction management responsibility lay with the mine project-owner. In a separate instance, the EPCM consultant/contractor did not even assume responsi-bility for the procurement; manufacturing vendors assumed this responsibility. We’ve also supported the selection of other hybrid model types that have included EPCM contracts delivering their full traditional suite of services combined with a series of engineering, EPC, procurement or construction contracts for specific areas of work… and, I expect, in the future we will find ourselves at Turner & Townsend (as part of the owner’s team) supervising more of these type of hybrids,” explains Wainwright.

Wainwright continues: “From these examples, I think it is clear to see that delivery models are evolving. I believe that with the market as it is currently, a window of opportunity has opened up for more mine project-owners to spend time understanding the best procurement strategy for the delivery of their projects – including hybrid models and the potential role of the EPCM consultant/contractor within such models.”

In the past, some mine project-owners have given insufficient attention to a handful of areas within the procurement strategy planning stage, which can ultimately affect the service delivery from the EPCM consultant/contractor. “In

Many mining projects come alongside complex infrastructure developments


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reality, mine project-owners can’t blame the contract strategy alone if their project was deemed to have failed. Poor scope definition, unrealistic schedule targets and poor management (among other factors) have at times also contributed to the poor outcome and are not exclusive to EPCM arrangements. These are some of

the areas that they must pay more attention to – if projects are to be delivered to expectations. “As advisers, we would like to suggest that mine project-owners should spend more time applying themselves to the following six areas while defining their procurement strategies, starting with the choice of the right contract,” says Wainwright.

Six areas that need more consideration while developing procurement strategies and the underlying contracts:

1. Spending time to get the contracting strategies right from the startEPCM contracts need to be right the first time round and owners should use the increased time afforded to them in the current market to their advantage. Once contracts have been signed, it is difficult to remedy their shortcomings. Even before contracts are defined, there is already scope for deliverables to be identi-fied, and it is important to design the contracting strategy for an end outcome rather than a current investment or project approval milestone. “Whichever type

Six areas that need more consideration while developing the procurement strategy and underlying contracts:1. The contracting strategyCarefully decide the right combination of contracts (of which EPCM may be one), and ascertain if what you want is possible and practical in the project environment before you go to market.2. Responsibilities, reporting, milestones, key performance indicators (KPIs), penalties and incentivesWhile this may not appear radically different in the new environment, it is worth reinforcing that EPCM contracts should be adapted and constructed to include a clear reporting structure, delivery schedule, penalties and incentives. In this way, the risk can be reduced and timely, value engineered design ensured. Also consider how to clearly set and communicate expectations in terms of the delivery of key project outcomes with the EPCM consultant/contractor and work out how the procurement selection and EPCM contract terms will reflect this. Clearly designed and articulated deliverables linked to re-imbursement is an imperative.

“In reality, mine-project-owners can’t blame the contract strategy alone if their project was deemed to have failed”



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of contract a mine project-owner chooses, they can manage it better by carefully planning ahead. Of course, in practice, conditions change, and so early plans have to be adapted, but if you spend time and money wisely up front to get set up properly, you will save considerably more money later,” says Wainwright.

Currently studies are being re-engineered and re-evaluated, and, with the additional time available, some of it should be spent on clearly defining the EPCM consultant/contractor’s role in further detail before it’s written into the contract. By improving the detail of their scope, the price and schedule will be more predictable and the accuracy of the project baselines will increase.

It is equally important to spend some of this time to analyse and identify project risks early on and to plan to bridge any ‘integration’ gaps upfront. The prevailing market conditions and the market’s appetite to accept particular risk profiles should be assessed and proposals tested before EPCM tenders are issued to the market for pricing. The appropriate limits on liability should also be determined beforehand as this is generally an area of intense negotiation during the tender clarification and finalisation phase – if not communicated to the EPCM consultant/contractor earlier on.

However, getting the contract right is also about recognising inexperience and

Six areas that need more consideration while developing the procurement strategy and underlying contracts:3. TeamworkTo get the right team balance, mine project-owners need to clarify the roles within their team and those of the EPCM consultant/contractor with a view of preventing duplication within the structure and showing a clear delineation of responsibilities to achieve project outcomes.4. Change managementMine project-owners could pay heavily for changes. Putting a mechanism in place to proactively manage change can control and reduce costs. Key to a successful change management process is an accurate and well-defined baseline.5. E xternal comparisonsAlthough there are usually many variables to consider, benchmarking is extremely useful for establishing directional targets.6. Industry parallelsThe mining sector is at the forefront of the EPCM evolution and new adapta-tions tend to be spreading out from this sector, but ideas can still be brought in.

“Getting the contract right is also about recognising inexperience and bringing in the right level of expertise to make sure the contracting strategy is appropriate”


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bringing in the right level of expertise to make sure the contracting strategy is appropriate. In some cases, Turner & Townsend has had no alternative but to recommend termination of contracts that were awarded with little upfront consideration to the contracting strategy. However, as Stephen O’Brien, Director Infrastructure Turner & Townsend Johannesburg, points out, the bigger risk is that this may not always be possible: “We were called onto a project that was so far behind on performance, that there was no way it could be rescued. Starting again was not an option due to time pressure, so we had to adapt it, but it will never perform anywhere above a sub-optimal level.

“In another, more successful example, a mining project with extensive railway and port infrastructure took a robust approach to identifying the detail required in their professional services contract, by using a team of in-house and external experts. They did a very thorough level of scoping and decided on a strategy that paid a fixed amount for the bidders’ tender submission as a way to access the right level of expertise and gain their commitment to the bidding process. The bidding was limited to just three companies – compared to many more in a more conventional tender process – and extended deadlines were permitted. This approach helped the prospective EPCM consultants/contractors commit and devote sufficient time and attention to the detail within the bid response that would ultimately form the basis of the contract.”

2. Clarifying responsibilities, reporting, KPIs and key milestones, incentives and penalties… and strong contract managementIn some instances the relationship between mine project-owner and EPCM consultant/contractor can become antagonistic. In such instances, without good contract management (among other things), there is little chance the contract will proceed as intended. It is therefore a good idea, when using an EPCM contract to include checks and balances to keep all parties aligned. One way to do this is to appoint a specialist third party to manage the EPCM consultant/contractor.

Unlike lump-sum turnkey EPC contracts (where there is a clear understanding as to the role of mine project-owner and contractor), roles and responsibilities within EPCM contracts can vary somewhat. Responsibilities and risk must be clearly assigned under the contract, ensuring each party knows exactly what their responsibilities, deliverables and liabilities are. Milestones, target costs, incentives and penalties need to be considered and arranged to ensure a project is de-signed in a cost-effective manner, but does not prejudice the ultimate success of the operations. In practical terms, Turner & Townsend feels adherence to time and commercial targets are the best ways of assuring effective and efficient design. Of course, a well-defined engineering scope provides a baseline for the inclusion of these initiatives and is crucial to limiting cost overruns on a project.

Mine project-owners also need to specify ownership of data and the reporting mechanism they want used to enable the interrogation of information produced



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by the EPCM consultant/contractor. Dashboard reporting does not always provide the ability to drill down into the detail, which is often important to identify and sort out particular issues. Progress reports are needed and should be well defined and agreed within the EPCM terms. Project data is a valuable asset and should be presented as clearly as possible at the earliest opportunity. Without the correct level of controls and tools in place, mine project-owner teams will not have total visibility over costs, issues and risks. “The balance of power within the supply chain is determined by the possession and application of data. Put the correct checks and balances in place and issues can be picked up early on,” says O’Brien.

Clarke agrees it is important to monitor performance: “At the very least, you need robust commercial assurance with checks and balances – earned value analysis helps us measure performance and

Turner & Townsend has been involved in the early-stage development of the Quellaveco copper mine and associated infrastructure since 2010 and has performed contract strategy, project delivery and asssurance services on the project to drive better business outcomes throughout the project’s lifecyclePhoto: Anglo American

“Project data is a valuable asset and should be presented as clearly as possible at the earliest opportunity. Without the correct level of controls and tools in place, mine project-owner teams will not have total visibility over costs, issues and risks”


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address problems early. Measurement of this sort and, reporting thereof, needs to be worked into EPCM contracts. Don’t just use a contract where all the consultant/contractor has to do is prove time was spent and payment was forthcoming. On reimbursable contracts, man hours need to be managed by setting the right target and having a commercial mechanism (such as guaranteed maximum price) in place to dissuade the contractor from claiming too much. In the case of target cost contracts, claims are not always justified and overruns must be tested against scope change. A robust mobilisation process should also form part of the contract terms and conditions to control movement of project staff. Lastly, I would suggest key areas of performance management be included on design as well as during

procurement and delivery phases of the project – with cost targets, quality guaran-tees, health and safety specifications and associated incentives and disincentives clearly identified.”

The owner must also be able to make sense of the monitoring. This cannot be a superficial process – for example, if 70 drawings from 100 are produced, one cannot say with certainty that 70% of the drawings are complete and it should not

simply be reported as such. It would depend on which of the drawings have been completed, and this requires delving into the detail. The mine project-owner needs to have a robust project controls framework and a detailed responsibility matrix in place to be able to identify actual earned progress in detail. “In one case, KPIs were in the contract, but not applied because the mine project-owner’s team did not have the expertise to monitor it closely enough, until external supervision was sought. A third-party professional services consultant, providing commercial support to this team, helped fill in the expertise where they were short-staffed and not equipped to perform the required tasks,” advises Clarke.

3. Getting teamwork rightIf effective, integrated teamwork between mine project-owner and EPCM consult-ant/contractor is a key requirement, there needs to be thorough consideration of project governance and delegations to the EPCM consultant/contractor so that the team members’ roles are clear from the outset. If changes can be made to the working culture of the mine project-owner or EPCM consultant/contractor so that they work more effectively together, these should be considered. The two need to work as a joint team rather than reverting to defence of roles and divesting responsibility.

In one particularly well-planned project, before employing the EPCM team, each key member was assessed not only for competency, but also on his or her

“At the very least, you need robust commercial assurance with checks and balances – earned value analysis helps us measure performance and address problems early”



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ability to fit in with the management team. This ensured a good mix in terms of personalities from the start and inevitably improved project performance.

In building the project owner’s team, care must also be taken not to step into the EPCM consultant/contractor’s areas of responsibility, and as part of the contracting strategy for the project, boundaries must be defined. “There is a thin line between an appropriate level of management and doing the work of the EPCM consultant/contractor – a mine project-owner must allow the EPCM consultant/contractor the flexibility to do their job. Sometimes mine project-own-ers’ teams get too involved, which can delay the execution of services and ultimately the project. When this happens – particularly when a reimbursable basis contract is used, it adds to cost. Duplica-tion, for these reasons, needs to be avoided,” says Wallace.

Turner & Townsend has worked with Glencore on many occasions, including at the Tweefontein coal mine in South Africa to carry out an optimisation project to extend the life of the mine

“In building the project owner’s team, care must also be taken not to step into the EPCM consultant/contractor’s areas of responsibility, and as part of the contracting strategy for the project, boundaries must be defined”


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Wainwright agrees: “You don’t want to duplicate teams, and if you don’t define the responsibilities well, you might end up ‘man-marking’ the EPCM consultant/contractor team, which should not be necessary.

“If you put the right incentives and reporting in place, the monitoring can be lighter touch, but you must have some supervisory role – especially checking on the commercial indicators.”

4. Establishing robust change managementUnnecessary time wasting and a lack of discipline towards change management can add heavily to costs, no matter the nature of the contract.

Disciplined and proactive change management needs to be incorporated into EPCM contracts to encourage a focus on delivery and discourage chasing change events. Changes are inevitable in a project, so managing the effects of changes to produce the least impact is a fundamental measure.

Mine project-owners should make sure change procedures are clearly identified in the contract. Additional controls such as scope variations, delay/cost notifica-

tions, personnel restrictions, incentives and delayed damage clauses can be worked in with KPIs and used to limit risk. In the case of controlling personnel changes, once a mine project-owner is satisfied with a hand-picked team there should be penalty clauses in the contract if key individuals are taken off the project. To minimise changes within the EPCM contracts, fees and fees-at-risk linked to project milestones could also be incorpo-rated into the contract.

Controls such as these help mitigate the risk of an overrun; however, careful consider-ation is required for the wider cost implica-tion of introducing such mechanisms, as the risk of not meeting stringent KPIs is likely to be priced into the fee at tender stage.

Net contribution clauses are also among the methods used to keep EPCM consultants/contractors focused on targets. “This way, you split the difference in any gain or pain – so the cost of target overruns is shared. A net contribution clause aims to limit the proportion of any loss or damage payable by either the contractor or owner, to its ‘fair share’.

“At present, net contribution clauses are more the exception than the rule in EPCM contracts, although some EPCM contract models – such as the FIDIC (International Federation of Consulting Engineers) Model Services Agreement – do contain basic forms of net contribution clause,” says Wallace.

“When project owners do not compare costs and performance, or only choose to do so against their own projects, there is a reduced understanding of what constitutes ‘good’ performance or real costs on capital programmes”



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5. Benchmarking for normsWhen project owners do not compare costs and performance, or only choose to do so against their own projects, there is a reduced understanding of what constitutes ‘good’ performance or real costs on capital programmes. Independent consultants can bring a level of external benchmarking to the adjudication and assessment processes, which will give the visibility needed to target and drive improved performance.

“Robust, independent benchmarking is recommended to indicate how much the EPCM contract should cost as a percentage of the total project cost. Rather than a focus on pure cost of services in relation to capital spend, consideration also needs to be given to productivity and the level of support structures required on engineering and construction disciplines,” says Wallace.

A comprehensive benchmarking study from the outset helps set the baselines and control parameters. It can improve the effectiveness of controls and the quality of procedures – especially if you can compare the price at which the EPCM contract was awarded with the end price. However, according to Wainwright: “Benchmarking is a powerful tool, but not an exact science. There are many variables in a project and contracts are seldom the same. It will provide a norm, about averages, but bear in mind that projects have unique features. It is not the final solution, but a step along the road.”

6. Learning from other sectorsThe trends in hybrid delivery models as seen in mining are expanding to areas such as infrastructure. This is partly because infrastructure is often included with large resource projects, and many EPCM consult-ants/contractors also work across sectors. However, there are lessons from other sectors from which mining can draw.

For example, if distinct speciality expertise is required – as is often the case in oil & gas offshore work – to avoid the mark-up of a consultant/contractor/ subcontractor relationship, another option is to split the project scope between two or more EPCM consultants/contractors – even though this inevitably increases complexity and requires good integration management, and more likely a bigger management team.

In addition, in property construction, information-based management is established and modular or repeat design is frequently applied. Offshore fabrica-tion and relocation to site is also the norm in the oil & gas business. In the mining industry, uptake in this area has lagged – particularly in less developed economies where remoteness and access are factors. It is likely that engineering/design in the mining sector will be challenged more and more to look at repeatable design,

“The trends in hybrid delivery models as seen in mining are expanding to areas such as infrastructure”


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innovative ways and technology-driven trends from other industries.More alliances, as seen among oil & gas contractors, should also be considered

where, for example, in addition to revised EPCM contracts, there are equipment vendors now taking more responsibility.

Wainwright concludes: “Now is the time to push ahead with tightening up procurement strategies and controls, including the effective use of EPCM con-tracts: the market shifts bargaining power – sometimes mine project-owners need consultants/contractors more, but currently in many instanc-es, it’s the other way round.

“Those that use the time afforded to them during the current market depression to consider alternative models (and the often-neglected areas mentioned) as part of their procurement and contracting strategies can positively influence business relationships with the engineering and contracting market of which EPCM consultants/contractors will remain a key player.”

“Now is the time to push ahead with tightening up procurement strategies and controls, including the effective use of EPCM contracts: the market shifts bargaining power – sometimes mine project-owners need consultants/contractors more, but currently in many instances, it’s the other way round”



Law

17

The legalese of EPCMs

It is fair to say that the EPCM model is the primary model for the delivery of mining and related infrastructure, but more recently, in light of the downturn in mining projects, falling commodity prices and shareholder pressures to minimise costs, this model has come under increasing scrutiny.

The concept of EPCM contracts as the traditional ‘one-size-fits-all’ model has, in particular, been challenged as a number of more recent projects have either replaced it with a mixed EPC/EPCM model, or have adapted it into more of a traditional ‘limited risk’ professional services contract model with cost and project management control largely taken back in house.

The model of choiceNevertheless, the EPCM model still remains the favoured contractual model for delivery of mining infrastructure, for a number of reasons, as highlighted below:

Lack of suitable EPC market players: • The EPC market suffers from a shortage of players with sufficient experience of

the particular jurisdiction of the mine and/or in the types of disciplines required for guaranteeing performance of mining processing facilities where key equip-ment suppliers are unlikely to be treated as the EPC’s sub-contractors (as they are either not familiar with the relevant specialised process, or unwilling to absorb the risk)

Client EPCMContractor

Equipmentsupply

Equipmentsupply

Purchase order for Ts & Cs

Purchase order and Ts & Cs

Equipmentsupply

Constructioncontract

Constructioncontract

Tradecontractors

Sub-contractors

Sub-contractors

Sub-contractors

Sub-contractors

Tradecontractors

black lines represent direct contractsred broken lines represent contractual obligations on the part of the EPCM contractor, dependent upon the precise scope of theEPCM services (whether to prepare procurement packages, co-ordinate design and other information, supervise, manage and/oradminister dependent upon the scope of EPCM services)

Diagram 1: typical EPCM

The EPCM model remains a staple but is starting to evolve, Pinsent Masons saysSarah Thomas

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Law

• The value of many mining projects is often too high for a financial covenant to be offered by a single company or joint venture as EPC contractor.

While there have been developments in the wider construction market (in terms of appetite for joint ventures and alliancing arrangements between contractor/engineering houses and construction contractors), so far at least, this has not been reflected in the mining sector where there appears to remain little appetite on the part of large EPCMs to assume substantive delivery risk by joining forces with international contractors.

In certain mining jurisdictions where social and environmental obligations remain more relaxed and there is limited capital to develop mining projects, Asian contractors have been able to take advantage of local skills gaps to offer EPC turnkey packages. This is very much the model for Chinese contractors, using their own workforce where possible, to bring low-cost engineering, equipment and construction solutions along with finance and investment.

EPCMs offer experienceIn the words of Ian Cluroe, Global Director, Marketing at global EPCM player, Hatch:

“There really are only a handful of companies that have the experience and resource to deliver really big projects from concept to completion. There are smaller players who are focusing on specific commodities, or in specific geographies, and no doubt they are helping to deliver capacity in a business that’s booming. But for big projects, Hatch and a handful of other companies are known as the go-to guys in the global mining sector.”

Simandou stats Owner: Rio Tinto Location: Guinea, Africa Value: US$20 billion Deposit: 2,200Mt high-grade

iron ore Life: 40 years Output: 100Mt/y

Once engaged, the EPCM consultant effectively supplements the mine owner’s team overseeing design, cost control and reporting, as well as providing procure-ment services. The extent to which the owner’s team needs to be supplemented and the precise degree and nature of the EPCM services will differ according to the size and nature of the project but also according to how much technical and project management capacity the mine owner has in-house.

Continuity Where an EPCM consultant has undertaken the prefeasibility, or more importantly the feasibility study (FS), it often makes sense for a mine owner to utilise the same EPCM consultant for project implementation. However, as the market for EPCM consultants arguably becomes more competitive and dynamic in the wake of the current downturn, a number of mine owners are revisiting this thinking.

The problem with appointing a different consultant for implementation is that



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the liability of the initial FS consultant is likely to be very limited, with no responsi-bility for the underlying inputs into the study and a lack of a single point of respon-sibility for the overall design of the project. During the implementation phase the owner will have a mix of consultants providing different aspects of the design with the original EPCM consultant providing design services under a more traditional design appointment. The construction management services are either conducted in-house or by a separate project manager under a project management consul-tancy appointment, and procurement services undertaken by either the mine owner in-house, or by the EPCM consultant. Thus the E, P and CM is broken up.

However, the key challenge to the ’continuity benefit’ is that this benefit is often not reflected in the EPCM’s risk profile under the full EPCM services contract. So if a design defect arises during implementation, the only liability an EPCM consult-ant will generally accept is re-performance of that design, rather than any losses that investors (or the mine owner itself) have suffered.

Insourcing vs. Outsourcing EPCM contracts allow for direct relationships between the mine owner and the supply chain which in turn arguably provides the mine owner with greater flexibility to change requirements and influence design. All authority remains with the owner but the EPCM contractor will act as agent in providing, developing and coordinat-ing the overall design concept with other proprietary design packages. It will also define work scope to deliver this design and will negotiate contracts and administer the work of other consultants, suppliers, equipment and construction contractors.

Equipment performance is critical, as it affects the efficiency of the plant and reve-nue collection against the cost of running the overall operation. Likewise, ensuring efficient off-loading of equipment at port facilities cannot be underestimated.

The choice here, contractually, is between (1) a direct relationship between the mine owner and the equipment supplier and (2) having the risk of equipment non-performance being ‘wrapped’ under an EPC arrangement where key suppli-ers will be treated as ‘preferred suppliers’. However, full risk transfer for output performance of key equipment under an EPC arrangement may be illusionary if the EPC contractor requires that these suppliers are treated as ‘nominated’ (the owner may be forced to retain any performance risk). The solution is still to secure a subcontract or warranty from equipment suppliers direct to the mine owner.

In any event, owners often want control over the way in which a design is developed because they will be in the position of owner/operator over the mine’s life. The view historically has been that mine owners have more control over these matters under an EPCM professional services arrangement, mainly due to the fact of having a direct contract with equipment suppliers. In addition, the larger mine owners often have embedded long-term relationships or frameworks with these trusted international suppliers which allow them to secure more favourable commercial terms. These benefits do not exist via subcontracting arrangements


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under an EPC contracting umbrella. That said, large EPCMs also have good, if not sometimes better, relationships with equipment suppliers themselves, in addition to large, offshore and, therefore, lower cost design and engineering teams.

Greater control over costs Historically, there has been a sense that a traditional full EPCM services arrange-ment offers a more efficient, cost effective and cost transparent way of delivering large, multi-faceted mining projects. This notion has been challenged in the wake of a perceived lack of control over costs which were seen to spiral in the last up-cycle.

There has also been a sense – certainly historically – that the cost of EPC contracting was too high and did not correspond with any significant transfer of risk to the EPC contractor.

One potential alternative is to adopt a mixed EPC/EPCM model under which certain key equipment supply contracts form part of the EPCM model or certain mining facilities become subject to EPC packages rather than part of the EPCM remit (see Diagram 2). The downside of course is that this dilutes the impact of adopting an EPC model in the first place.

No one size fits all There is a lot of variation in the EPCM market and on some projects EPCM coverage is only applied over certain aspects of the mine’s overall delivery.

Some mining projects might use the EPCM model more expansively to cover initial scoping of the project (prefeasibility and feasibility) through to full design and implementation of the project, down to the granularity of selecting which contractors to use for individual phases, with the model overseeing the tendering process between each phase.

Other projects may use mixed models with discrete works packages to hive off the individual works components and separate construction packages, increasingly on a fixed lump sum EPC basis.

Diagram 2: mixed EPCM/EPC models

ClientEPCM

Equipmentsupply

Equipmentsupply

“E” and “P” can be split from CM and CM undertaken by client in house or by another consultant (for cost savings)

Equipmentsupply Construction

contractConstruction

contractConstruction

contract

EPC

EPC

EPC

black lines represent direct contractsred broken lines represent contractual obligations on the part of the EPCM contractor, dependent upon the precise scope of theEPCM services (whether to prepare procurement packages, co-ordinate design and other information, supervise, manage and/oradminister dependent upon the scope of EPCM services)



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Skill shortages also play a part here, as they can contribute to a more fractured approach to combining available skills to serve industry requirements.

Where the EPCM contractor is providing full EPCM services covering the whole of the project the typical contractual model used is that set out in Diagram 1. As projects become larger and more complex strategic partnerships are likely to become more prevalent. The giant Simandou iron ore project in Guinea, Africa is a case in point, requiring not only the development of infrastructure to mine the massive deposit, but also development of a new 650km multi-use rail line and multi-use deep water port to handle this load.

Key drivers and issues: how can more robust risk management and cost control be reflected in EPCM models?

There are a number of commercial drivers currently influencing trends in the use of EPCM models, including:• A contraction of new or existing projects due to dismal shareholder returns,

falling commodity prices and worries over future demand

• Higher capital costs for bulk commodity projects such as iron ore and copper, which are often in undeveloped mining jurisdictions

• A tendency to expand already large mines, instead of developing new projects.

These factors have led to a more ‘back to basics’ approach with owners focusing on cost control, productivity gains and protecting margins.

Coupled with this are changes in the EPCM market place – partly in response to the contrac-tion in projects and these ’back to basics’ drivers, but also as a response to a more general trend in the construction market towards bigger, more complex projects. This has led to mergers and acquisitions in the sector with some new key EPCM players entering the market and, arguably, to a greater dynamism and more innovative approach to how EPCMs are struc-tured.

Procurement issuesThe EPCM consultant acts as the mine owner’s agent and creates on the owner’s behalf direct contractual relationships between the owner and the other suppliers

“The EPCM consultant acts as the mine owner’s agent and creates on the owner’s behalf direct contractual relationships between the owner and the other suppliers and construction contractors”


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and construction contractors. Key to effective performance of these services is the efficient placement of appropriately scoped contracts with robust rights and reme-dies in the event of failures in performance, which allow effective management of interfaces between packages.

The mine owner ought to have a large and experienced in-house team to assist the EPCM consultant with the administration of these contracts, although they often do not. It is vital the owner scrutinises the performance of said contracts both to avoid disputes and ensure it is informed when attempting conflict resolution.

In terms of engineering and design responsibility, aside from proprietary process designs the EPCM will usually assume a primary design role and carry out design. The fact there will be proprietary process designs means there will also be design interfaces between the EPCM’s design responsibility and those other contracts. For the owner, key to mitigating design risk will be:• Robust IPR (intellectual property rights) clauses in all contracts involving design

to ensure the owner has sufficient rights to use, copy and amend that design in order to achieve completion, commissioning, long-term operation, maintenance, replacement, modification and, if possible, expansion of the mining facility

• Co-ordination of the various design inputs into the overall project. The EPCM will typically assume this co-ordination role but owners need to be aware of the typical limits on an EPCM’s assumption of liability for failures in performance.

So what is the solution to minimise risk for the owner?• Ensure the EPCM is sufficiently experienced in the design in question and in

co-ordinating the design inputs • Use only tried and tested designs where the interfaces are known and have been

successfully co-ordinated on other proven projects.

With technological advances in innovation and the push to drive down costs mine owners are increasingly opting for technology and design solutions that may not be tried and tested. In these circumstances an owner must accept that the risks are higher and will not be fully offset by contractual remedies either under the EPCM contract or any other contracts involving design input. The extent to which contractually a mine owner can make the EPCM responsible for ensuring a completed plant will meet required process output requirements is questionable. The EPCM’s actual responsibility for co-ordinating interfaces in design is likely to be limited to an obligation to comply with the professional standard only. Even if the EPCM breaches this standard, it is unlikely it will be held responsible for consequential losses and will generally bear no responsibility for rework.

In terms of procurement, robust template contracts should be used for both construction and equipment supply contracts, and orders should be placed on the basis of these approved standard terms and conditions. The specification for



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scoping of packages should also be well defined and reviewed and have suffi-ciently detailed interfaces between them, clearly identified from the outset and with a defined strategy for managing them.

However, the above is often not achievable in practice. First, mining projects by their very nature are complex, with a need to be tailored to a unique mine site. They often require changes during implementation to deal with many variables. Secondly, schedule and cost constraints often mean packages are let before they are properly defined and the need to identify long lead items means that certain key packages are placed early.

Moreover, the tender process or the lack of a robust supply chain in the jurisdiction concerned may limit the extent to which well-defined template terms and conditions can be used. The procurement strategy should have appropriate controls within it, which the mine owner’s own in-house team scrutinises and monitors.

As well as employing anti-bribery and corruption practices, using appropriate pre-qual-ification criteria at tender stage, ensuring a sufficient number of meaningful bidders for a competitive process and, where possible, standard specifications are used, are all ways in which the underlying contracts and procurement process can be improved.

In addition, it is important to ensure that failure to follow the approvals process results in strict liability on the part of the EPCM and, where possible, a readiness to assume at least one element of the on-cost.

Construction management (CM) The EPCM is responsible for the overall management and supervision of construction activities which includes managing, supervising and often administering the construction contracts. The delegation of authority guidelines and the precise extent to which the EPCM can act as agent of the owner should be clearly spelt out from the outset.

A key element of the EPCM’s role is to co-ordinate and impart design inform ation to participants timeously and in sufficient detail to allow them to perform their contracts on time and without the risk of loss and expense claims from works contractors. This element needs to be properly scrutinised and enforced at all times. Given the EPCM’s limited liability some possible risk mitigants include:

“The EPCM is responsible for the overall management and supervision of construction activities which includes managing, supervising and often administering the construction contracts”


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• Implementing a robust in-house design review procedure Require the mine owner’s in-house team to engage in detailed and robust design review and ensure it has the capacity to respond quickly and effectively, thus minimising the number of claims arising from both the EPCM and works contracts

• Introducing a set of KPI measures to monitor the EPCM’s effectiveness at construction management and health and safety These KPIs could measure effectiveness in reporting, whether regular site meetings are held, the accuracy of cost forecasts and the success in achieving any reduction in claims under works contracts. Health and safety KPIs should always be included and all breaches treated as significant material breaches enabling the owner to terminate for default

• Linking payment of fee components to the achievement of milestones It is unlikely the cost reimbursable element of the EPCM’s remuneration will be subject to milestones but linking payment of part of the fee to the achievement of project milestones could be effective at mitigating risk

• Apportioning responsibility for adopting environmentally responsible work methods While EPCMs will not generally be responsible for site conditions, they should be made to assume responsibility for ensuring subcontractors adopt safe and environmentally-friendly methods of construction. If the EPCM’s manage-ment of construction exacerbates existing conditions, or introduces new contamination to the site, then it should accept liability without the benefit of any indemnities

• Ensuring design defects are dealt with on-site An owner should take steps to ensure that, to the extent possible, in light of limits of actual liability, any design defects are dealt with on site. One should also consider introducing an extended defect and maintenance period, to supervise optimisation and rectification of defects post-mechanical completion

Control over project scheduleClearly, deadlines can be imposed on EPCMs for deliverables which are directly within their responsibility and should be set out in detail in a schedule to the EPCM contract, with liquidated damages for any failure to meet these deliverables. The schedule for overall project completion should also be included in the contract.

Works contractors may suffer delays and claim against the owner if there has been a failure by the EPCM to provide information timeously or with adequate detail, or if coordination with other works contracts has not been carried out properly.

Whilst full recovery for these losses against the EPCM is unlikely, if a KPI is tied to the achievement of the overall programme and a portion of the fee is at risk, then this could still incentivise the EPCM to perform on this programme.



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Remuneration and cost controlsThere are two main categories of cost to consider – the capital cost of project implementation and the costs of employing the EPCM consultant itself.

Costs of the EPCM contract itselfThese will be a fraction of the capital costs of the project mainly made up of man hour costs as EPCM contracts are usually entered into on a cost-reimbursable basis. The key issue is the extent to which this reimbursable model is truly trans-parent and the extent to which costs can be excluded or ‘disallowed’.

(a) Transparency:EPCMs can include a level of transparency in the makeup of man-hour costs or rates, by seeking to reflect the actual cost of salaries, pensions and any other fixed employment overheads, or alternatively they can opt for a competitively bid ‘man-hour’ rate. Certain disbursements can be fixed as a rate, which can be payable as fixed monthly lump sums, or as rates which are multiplied by man-hours.

The choice depends upon the extent to which the EPCM consultant is prepared to be transparent regarding man-hour costs and the extent to which these costs are built up from the bottom of the actual cost to the EPCM (rather than straightfor-ward man-hour rate per category of personnel).

The challenge for owners is avoiding duplication between cost categories (that can be offset by a ‘no double recovery’ provision). In addition, if man-hour costs are being presented as com-pletely transparent they will be subject to salary reviews.

There are ways of controlling the cost implica-tions of exclusive use of expatriates onto projects by agreeing a staffing plan upfront which will set out the ratio of expatriates to locals, or categories of expatriates to locals and will require owner approval in the event that ratio is revised. Some owners have also introduced a fixed ‘rate per drawing’ during the detail design development phase in order to fix manpower costs for elements priced upfront. More broadly, a target cost can be agreed for the EPCM charge and a portion of the fee linked to achieving this.

(b) Disallowing or excluding certain costs:Disallowed costs should always include categories allowing exclusions that are obviously illegitimate such as:

“EPCMs can include a level of transparency in the makeup of man-hour costs or rates, by seeking to reflect the actual cost of salaries, pensions and any other fixed employment overheads”


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• Costs not expended in performance of the services and, if further added ‘in accordance with the contract’ – this can allow project managers within mine owner teams to exclude costs in breach of the contract (rectifying errors in earlier drawings, for example). The key point here is to distinguish between the normal iteration of design and man hours expended on rectifying what are obvious and/or negligent errors. This is an important disallowed cost category because effectively it means the EPCM consultant is not entitled to be paid such rectification costs in the first place. In other words, because it goes to disentitle-ment to payment (instead of discharging a liability for defaulting performance). Hence it does not count towards the EPCM’s liability for re-performance and towards the liability cap

• Disallowing costs expended because the EPCM did not follow a required procedure under the contract.

(c) Controlling disbursements:Disbursements often have a maximum threshold, above which the written approv-al of mine owners is required. Two issues usually arise:

First is overtime. Generally speaking, there will be controls on overtime so this issue is subject to the mine owner’s approval, at least over certain minimum thresholds.

The second issue is a particular risk in light of market contraction where there are fewer projects available and where, arguably, there is the potential for unscrupulous EPCM players to load up its remaining projects with expatriate personnel in order to retain them in readiness for when the market turns around.

By far the most common mechanism, however, is the use of incentivisation, which can apply anything from ‘light touch’ penalties through to more concrete mechanisms (by making the entire, or a portion of the, fee subject to achievement of budget). This mechanism allows for a target price to apply to the EPCM as well as to the overall project cost.

Capital cost – controlling cost outrunsWhere the EPCM is responsible for preparing the FS, it may be possible to hold it partly responsible for the overall capital cost estimate. There is often a KPI which relates to the accuracy of the cost forecasting, with a portion of the fee at risk. Again, KPI measures can be devised to monitor the EPCM’s effectiveness in terms of accuracy and regularity of reporting albeit without liability for the outturn costs themselves.

Another method is to introduce budgetary limits for the works and equipment supply packages, which are part of the document approvals process, and ensuring the scoping of such packages is well defined – to minimise subsequent variations. The works contracts themselves should also include early warning mechanisms for matters which would have an impact on outturn costs.



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Controlling cost through interface managementAny EPCM contract needs well defined and communicated objectives to work effectively.

Clearly the visibility of interface points between different works contracts and effective interface management is key to ensuring that, while in leading terms the mine owner bears the risk of gaps between contracts, the risk of those gaps manifesting themselves into failures in delivery, or cost overruns, is minimised.

In most cases the EPCM is responsible for all aspects of project management, including oversight of contractor performance, progress reviews, planning, scheduling, materials manufacture, etc. However, contractually speak-ing it will only be responsible for conducting this project management role in accordance with a professional standard of skill and care. To mitigate the risk, the mine owner should identify interfaces early on in the project.

Adopting an interface register and creating an obligation to keep this up-to-date with accurate information is also beneficial. The quality of design is also relevant, as is the extent to which it has been translated into clearly scoped specifica-tions in the individual work packages. These would often be supported by a ‘quality’ KPI as well as an overarching obligation for the EPCM to exercise professional skill and care.

Linking payment to the achievement of minimum KPI scores is a well-established and effective ‘carrot’. On the ‘stick’ side, accumulation of minimum scores can trigger warning notices, which may ultimately lead to termination. Of course termination is a remedy of last resort and not particularly helpful to a mine owner in need of delivery of the project.

Limits on risk mitigation strategiesThese risk mitigation measures are themselves limited to the extent of the EPCM’s contractual responsibility for cost overruns, which would only arise in the event of professional negligence on the EPCM’s part.

Another limit under the EPCM contract is that the remedy is to put the owner back in the same position as if the default hadn’t occurred e.g. if an accurate forecast had been given and contracts and guidelines followed correctly. The remedy is often limited to re-performing the services but in any event the owner may find it difficult to demonstrate that actual loss was even suffered.

Nevertheless, there will be areas of strict liability that can be enforced e.g. where the EPCM exceeds the limits of delegated authority.

“In most cases the EPCM is responsible for all aspects of project management, including oversight of contractor performance, progress reviews, planning, scheduling, materials manufacture, etc”


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Other points on mitigation:• Management protocols should ensure risk registers are regularly updated and

design review processes and procurement protocols are checked for compli-ance. Regular site meetings should be conducted

• Sliding costs can be used as a lever to ensure performance, but the mine owner needs to be engaged, well-informed and have the capacity to apply these

• Mine owners need to be vigilant, especially with respect to works contractor claims alleging inadequate design detail, or delay in provision of information. In these claims the EPCM is unlikely to be impartial.

Incentivisation Incentives under EPCMs can be positive or negative and can include:• Bonus payment for works or services being completed on time, or under a

certain cost• Bonus payments based on health and safety• Target price with EPCM contractor sharing in savings if actual costs are less than

target.

Incentivisation models need not be standardised, they can be tailored to a particular project or parties. What can be said is that with increased competition for fewer projects a trend is emerging away from often regarded ‘soft’ models to

actually putting a portion of the ‘fee’ at risk, making payment subject to achievement of cost budget.

Even where an EPCM consultant puts a portion, or the entirety of its fee at risk, it will do so only in relation to that percentage paid as a fee and not in relation to manpower costs.

Alternatively, a proportion of the ‘fee’ can be made payable against milestones – each being paid either conditional upon achievement of cost forecast accura-cy KPI measures, achievement of interim milestones in project delivery, or other key dates.

In a mining context the main KPIs used are to improve performance in health and safety, quality assurance, community relations, the extent to which local labour/supply chain is used or is encouraged, traffic management measures and costs control reporting.

Set this against other risks that are retained by the mine owner under an EPCM model for effective project delivery (i.e. meeting outputs and accurate project delivery). The extent to which these risks are offset will be dependent upon the robustness of the underlying works and equipment supply contracts. The benefit of this is that a local supply chain can be used which can meet social licence requirements.

“Incentivisation models need not be standardised, they can be tailored to a particular project or parties”



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Liability: limits under EPCMsLiability is addressed through a combination of damages for breach of contract and indemnities – the latter typically for physical damage, personal injury and death and in respect of IPR infringements.

Consequential losses are usually explicitly excluded by clauses which often also make it clear the only liability the EPCM will assume (aside from the limited indemnities referred to above) is re-performance of the defective services. This will obviously not assist where defective design has been built out, equipment has been manufactured and/or supplied, or where incorrect information has been provided to a works contractor.

Other than addressing the EPCM’s costs of re-performance itself through the disallowed costs mechanism, this does not address the loss and expense claims from works/equipment supply contractors as a result of EPCM project management failures. The key is to minimise the risk of such failures happening in the first place with greater scrutiny of the EPCM’s performance by the owner’s team.

Standard of carePotential liabilities relate to either simple breach or professional negligence. Where the FIDIC (the International Federation of Consulting Engineers) consultancy form (White Book) fourth edition is used without amendment, the consultant is only liable if the owner can also show the EPCM has “failed to exercise reasonable skill, care and diligence in the performance of his obligations”.

It is also standard for mine owners to offer clarity on the benchmark for that professional standard of skill and care by introducing a defined term ‘good industry practice’, or sometimes ‘best industry practice’. The important point here is to ensure the benchmark relates to all disciplines within the EPCM’s scope and to an ‘international’ standard rather than a potentially lower standard in the jurisdiction concerned.

EPCM failures fall into a number of broad categories. As well as design and performance, project management failures can result in liability from the following:• Inaccurate or negligent preparation of budgets and cost estimates• Accuracy of information in reporting.

If the EPCM has acted outside the ambit of its delegation limits, this should result in an automatic breach – regardless of whether it resulted in any negligent preparation of estimated project schedules and negligent management of procurement services.

The key on all the above is in prevention rather than ‘inadequate’ cure.

“Consequential losses are usually explicitly excluded and with re-performance of the defective services often the only remedy”


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Limits/exclusionsAs liability caps tend to be tied to the level of fee, it is very rare for EPCMs to tie their caps to the overall contract value, given the EPCM contract itself is cost-reim-bursable.

It is also common to exclude indirect consequential losses, often including net contribution clauses to discount liability further. To the extent owners are able to negotiate some responsibility for re-work or any other express remedies, these would need to be framed as carve outs to the general exclusion of consequential loss.

Is insurance an answer?Another way an owner could potentially minimise risk is to consider the role of professional indemnity insurance.

To the extent a claim is covered by insurance proceeds, and where the costs of obtaining insurance have been included for in the price, this should be carved out of any caps on EPCM liability.

The same should apply to the extent a claim is covered by public liability insurance, usually included in the mine owner’s own third party insurance, and potentially also by the EPCM again as a cost-reimbursable item.

It is very difficult to negotiate these carve outs, particu-larly with larger and more well-known EPCMs who self-in-sure for defective services, or have group policies without allocation to the specific project.

Certainly, death, personal injury, property damage should also be carved out, as should any specific remedies reserved to the owner.

A final point on insurance is that EPCMs always carry employer’s liability and worker’s compensation insurance. As noted above, labour claims can be brought against the

owner directly in certain jurisdictions as a result of working too closely with EPCM personnel.

Payouts under the indemnities to cover this liability should not reduce the overall liability cap as it is recognised the EPCM’s employees are exclusively its responsibility.

Gaps in responsibility and dispute avoidanceHandling contractual gaps between the various contracts on the project requires the EPCM to apply strong interface management practices to control risk.

As EPCMs do not bear strict liability for the outputs of these works/supply contracts, one must consider how the EPCM’s role can be monitored and evaluated through effective KPIs in order to measure the management

“Where insurance proceeds are available, consider carving out the liability cap”



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coordination between other major contractors and suppliers. The EPCM’s ‘construction/project management’ role includes managing

disputes and conflict resolution on behalf of the mine owner with various works contractors and equipment suppliers.

If a mining infrastructure project goes wrong, the owner is potentially faced with a multitude of disputes and potential parties responsible. The EPCM may itself bear some responsibility, but in any event it is also a useful source of information for successfully pursuing claims against works contractors and suppliers. This underlines the importance of document ownership and IPR provisions as well as an obligation to assist with claims within the scope of services.

In terms of cost reimbursement, it is important the ‘allowable costs’ categories carve out charges for dealing with any disputes between the mine owner and the EPCM itself.

The importance of the mine owner maintaining control in the dispute resolution process cannot be underestimated. Reporting governance and delega-tion of authority obligations requiring frequent reporting with quality content will help achieve this outcome.

Sub-contracting issuesFor larger and more complex projects and to meet client specific needs, EPCM contractors often bring other specialist contractors in to carry out specific services.

EPCM contracts are often lax in terms of sub-contracting controls but owners should be vigilant regarding the sub-contracting of key services in specialist areas. Issues for owners include:• Use of documentation/IPR generated by sub-con-

tractors. While the overarching EPCM will take responsibility for the acts, omissions and defaults of the relevant consultant, the question is whether the IPR has flowed down correctly from the sub-contractor. A direct warranty ensures the owner enjoys direct access to the documentation and IPR in any design generated

• The costs charged by sub-contractors are equally relevant. The owner will want to check the level of transparency employed and that there are limits on ‘fee on fee’

• Direct warranties can be difficult to obtain in certain markets but at the very least owners should expect a right of assignment of any key sub-contracts in the event of termination.

“EPCM contracts are often lax in terms of sub-contracting controls but owners should be vigilant regarding the sub-contracting of key services in specialist areas”


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Use of standard forms as a basis for EPCM models in mining projectsGiven EPCMs are professional services contracts, one would think a standard form professional services contract would be a good starting point. The obvious choice would be the FIDIC White Book standard or the NEC’s Professional Services contract.

However, such forms will generally be inadequate, tending to have been framed with only one services discipline in mind and cannot anticipate the complexities of providing a full EPCM services remit.

Such forms also take no account of the complexities in delivering the services themselves, for example, the need to supplement the form to provide for:

(a) Provisions for key project personnel (KPP)Given the remote locations of many sites, it is important the project management team includes personnel with the requisite experience, lan-guage and cultural skills, not ignoring the management team’s responsibility for addressing health and safety issues and cultural and community relations.

The mine owner needs to be assured that the key project personnel

who ‘won’ the contract are retained for the duration of the project.As well as the usual anti-poaching boilerplates, contractual incentives to ensure

KPP and the winning project team are retained can range from an obligation to use ‘reasonable endeavours’ to retain KPP to levying actual liquidated damages in the event of any departure.

(b) Communication and protocolsConsultancy standard forms generally do not provide the detail necessary for EPCM requirements when delegating responsibility for design and, for the giving of approvals where the owner’s operational team will require input. They also fail to deal with the various management protocols required to be followed.

This underlines two things for the mine owner: (i) the importance of clear communication and governance protocols; and

“For large complex multi-faceted projects, the EPCM model is likely to remain in one form or another, albeit adopting a more flexible, adaptable form. This is because the high cost to companies of EPC fixed price turnkey solutions remains and often such projects are too large or complex”



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(ii) the need for constant and effective communication between the EPCM and the owner’s team.

In particular, such forms often do not envisage the consultant’s significant physical presence on site – which needs to be reflected both in insurance terms and employer liability provisions.

ConclusionsThere is no doubt mining companies operate in a complex arena, where they face increasing challenges and compliance requirements. At the same time, they have an imperative to adapt to constantly changing market conditions and adopt new innovations as they seek to produce more for less. These conditions remain regardless of whether the market is in downturn or is recovering.

For large complex multi-faceted projects, the EPCM model is likely to remain in one form or another, albeit adopting a more flexible, adaptable form. This is because the high cost to companies of EPC fixed price turnkey solutions remains and often such projects are too large or complex and the multi-faceted nature too burdensome for the owner’s team alone to manage effectively.


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The EPCM marketplace has become a lot more flexible in recent years, with providers willing to engage in greater incentivisation and risk-sharing. On top of this, the traditional model has been broken up in order to get the most cost-effec-tive and appropriate outcome for these projects. Phasing, peer reviews and an openness to engage multiple parties are likely to continue to be employed by project owners in the future, but how far could this contract revolution go?

Two influential names in the space give their takes on the future of the EPCM delivery model.

Tom McCulley, group head of projects for Anglo American, has more than 15 years’ experience in the industry. He is tasked with handling a plethora of projects on the books at the diversified miner.

Hayden Sommer is former general counsel of international EPCM provider Tenova Bateman. He now consults to the renewable energy, mining and engi-neering/projects sectors.

1) The wider construction industry is seeing a predominance of larger, more complicated projects and a need for contractors to assume a greater share of execution risk, which increasingly involves them bringing finance to projects, as well as using more bespoke, flexible and innovative contracting

The final take

“The wider construction industry is seeing a predominance of larger, more complicated projects and a need for contractors to assume a greater share of execution risk”

Outotec previously carried out the design, engineering, delivery and construction of the core plant at one of Samarco’s pelletising plants in Brazil

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models. These developments are particularly prevalent in other industries that use high capital expenditure infrastructure such as the oil & gas and utility sectors and it remains to be seen whether they will in turn influence procurement in the mining sector. Do you think the mining sector is ready to embrace ‘alliancing’ as a possible answer to risk sharing and a greater collaboration between owners and the supply chain?

Sommer: “I think that the mining industry has fewer new mega-projects than the infrastructure and oil & gas sectors in general and the commodities downturn over the last few years has really exacerbated the fact that there are a limited number of new project developments that have actually entered into the execution phase.

“Having said this, my experience is that miners have generally been willing to embrace different contracting models (particularly where a tangible benefit exists for them). Over the years, I have seen all manner of contract types and risk and reward-sharing as well as EPCM houses providing value-adding services such as finance facilitation.

“The classic EPCM model in Africa still remains the contract model of choice for the major and mid-tier mining houses and project engineering houses because the risk profile of EPC or fixed price remains difficult to price on the continent where uncertainty is a daily issue. Other models, whether EPC or hybrid, has more traction in other jurisdictions such as China, India and the CIS.

“As far as alliancing goes the EPCM contractors would generally be prepared to put some margin on the table to secure a long-term alliance with a major mining house and some do already. Alliancing is nothing new and invariably they work for a while and then after one or two bad projects they break up. Alliances have to be win-win and, to get it right, both sides need to put in a lot of effort into under-standing each other’s perspective.”

McCulley: “Typically in a down market, the contractors will do non-traditional things including bring financing, self-finance via a build-own-operate, enter new geographic areas or go into specialty areas where they have no prior experience, taking on unusual commercial structures (e.g. lump sum when they are traditional-ly cost-reimbursable), joint venturing (with unproven partners and unproven structures), etc. These have historically not been very successful, especially during the last major market downturn and need to be pursued cautiously by owners. In my view, alliancing doesn’t make sense, the owner and the contractor have different drivers, time horizons, cultures, risk philosophies, and business consider-ations. The owner and the contractor need to respect each other’s roles, but decision-making should not be merged/combined into a partnership or alliance. The owner in reality has all the risk in mining and should be the one to make the decisions, with input from the contractor and I do not see ‘alliancing’ making sense as a risk-sharing approach for Anglo American.”


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2) There has been a tendency in recent years for developers to ‘double up’ on certain parts of the EPCM contract model, with members of the owners’ team sometimes duplicating work contractors are already carrying out for internal reporting purposes. How far would standardised reporting methods for EPCM contracts go to alleviating the situation?

Sommer: “My view is that the type and extent of reporting between the EPCM houses is pretty standard right now. The fact that the owner has a duplicate team often boils down to the owner themselves and/or the sort of trust they have in the

EPCM contractor. Some owners are very hands-off and it is a challenge for the EPCM contractor to get owner sign-off on drawings or purchase requisitions. Others make it nearly impossible for the EPCM contractor to give a site instruction without the owner’s intervention. In general, the mature owners and contractors who have worked together before find the right balance.”

McCulley: “You are right there has been a ‘double up’ approach by the owners, but this has nothing to do with reporting but a matter of lack of trust. During the boom times, EPCMs, like others, were stretched to provide quality teams on projects and the owners felt they would address the EPCM weakness by over-managing the EPCMs and this approach was clearly not very successful.

As owners, we need to find the right balance for managing the EPCMs and not get focused on addressing every EPCM weakness by adding to the owner’s staff, but rather manage the EPCM to address their weaknesses. In addition, we need to

have clear roles, responsibilities and accountabilities established with the EPCMs early on so we all clearly know our roles on the project. Simply put, owners need to focus on what we are good at and have EPCMs do the same. This will help ensure better outcomes on projects.

3) Considering the recent volatility in commodity markets, the time it now takes to build and commission an operation and the capital expenditure involved, how do you think EPCM contracts will adapt to accommodate commodity-price fluctuations to ensure profitability over the long term?

“There has been a tendency in recent years for developers to ‘double up’ on certain parts of the EPCM contract model, with members of the owners’ team sometimes duplicating work contractors are already carrying out for internal reporting purposes”



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Sommer: “Mining houses and banks understand commodity-price fluctuations and it is their business to deal with this risk.

“From a contract perspective, the EPCM man-hours is generally around 15% of capital expenditure (capex). To get any real cost savings, it is not the EPCM contract itself that can really make an impact but the capex spend across the board.

“It is hard to see how some sort of risk or reward sharing based on commodity-price fluctuations can be managed right across the whole supply chain into a huge number of vendors and contract-ors whose ordinary business is not to understand or manage commodity prices, but who are obliged to tender on a competitive basis on cost and schedule.

McCulley: “EPCMs during the last downturn focused on keeping their key people busy via studies and other small project work and we see this happening again. So far, we haven’t seen a significant reduction in overheads and rates, but, if the market stays slow for some time, we would expect to see a reduction in these costs. In addi-

“During the boom times, EPCMs, like others, were stretched to provide quality teams on projects and the owners felt they would address the EPCM weakness by over-managing the EPCMs and this approach was clearly not very successful”

The Roy Hill iron ore project in Western Australia has involved both Japanese funding and construction


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tion, EPCMs may ‘buy’ projects, or take imprudent risks which may lead to some going out of business because of the increase in risk exposure.”

4) The role of original equipment manufacturers (OEMs) and plant providers has been growing over time, with services extending beyond installation and after-market care. How far will their remit stretch into the EPCM space, and will this complement or compete with the work of traditional contractors?

Sommer: “There has been lots of noise around this over the years and the OEMs have been punting this as a growth opportunity for as long as I can remem-ber.

“In more traditional EPC or lump-sum jurisdictions, the OEMs have got the formula right. Companies like FLSmidth and Outotec are real players in the CIS, for instance, where they can execute lump-sum EPC on their own, or as the main supplier to a local EPC contractor. Generally, the process design is more rigid and less complex where standard process solutions are designed around the OEM’s suite of equipment.

“The bigger mining houses that typically prefer EPCMs… tend not to adopt this model unless it is a very small brownfield upgrade. In this case, the same OEM trying to take a bigger piece of the pie in the EPC jurisdictions has to engage with the EPCM contractor as a ‘client’ of sorts and they are fairly careful not to overtly come across as a direct competi-tor.

“I think the noise will continue and the OEMs will have varying degrees of success but the EPCM model will, on larger projects in complex jurisdictions, be around for a long time to come.”

McCulley: “OEMs, like other contractors, will continue to look for other sources of revenue and this is definitely one avenue that could make sense. I think OEMs will try to compete with traditional contractors, mainly on smaller projects, until they can prove, via a track record, that they have the systems, processes, procedures and teams to properly execute the work. Everyone is looking for better ways to do projects which reduce risk and increase certainty, and at this time, I don’t see this OEM approach addressing these issues, but they may be able to achieve this in the future.”

“EPCMs during the last downturn focused on keeping their key people busy via studies and other small project work and we see this happening again. So far, we haven’t seen a significant reduction in overheads and rates”



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Contributor biographies

Sarah ThomasPartnerSarah has over 20 years’ experience advising on major infra-structure projects and leads Pinsent Masons’ international mining sector group. Sarah has advised on diamond, gold, iron ore, platinum, copper and metal ore processing facilities in Africa and Russia, and on copper, nickel and hard rock mining projects in Brazil, Chile and Peru. Sarah is familiar with EPC, E&P and EPCM forms used in the sector and has helped owners devise contract templates (including EPCMs) for use throughout their business and across the whole of the procurement cycle. Sarah has also delivered EPCM contract training to owner legal and commercial teams in South Africa and South America.

Sarah sits on the UKTI Mining Subsector and Water in Mining subsector group (of British Water) and regularly speaks and chairs conferences including; the Infrastructure Panel at the C5 conference on ‘Mining in West Africa’, the Mining on Top (Africa) Summit and more recently presenting on EPCMs as a delivery model in mining at the World Initiative of Mining Lawyers Conference and a recent WIM seminar.

With contributions from:

Kate TerrySenior Associate, Finance & ProjectsAs former in-house counsel with a mining major, Kate has wide-ranging experience of major mining and infrastructure projects. Based in Hong Kong, she advises on investment, construction and operational arrangements on mining projects across Asia and has recently advised a number of Chinese outbound investors.

Pinsent MasonsPinsent Masons’ world-class global projects practice can service planning and implementing early studies and procurement of large-scale mining projects and its wealth of experience in the water, energy, rail and port infrastructure sectors ensures full legal support covering extraction through to processing and transportation from mine mouth to port. Website: www.pinsentmasons.com

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Contributor biographies

Turner & TownsendTurner & Townsend is an independent professional services company specialising in programme management, project management, cost management and consulting across the property, infrastructure and natural resources sectors.

With 90 offices in 38 countries, the company draws on its extensive global and industry experience to manage risk while maximising value and performance during the construction and operation of its clients’ assets.Website: www.turnerandtownsend.com

Rory WallaceDirectorRory has 10 years of global experience within the company. He is a professionally qualified quantity surveyor with a particular focus on procurement, cost planning, benchmarking, value engineering and cost control.

Mark WainwrightGlobal Natural Resources Managing DirectorMark has extensive skills in the redesign of business processes, change management disciplines and strategic planning. His consulting career in mining and logistics has focused on, in particular, feasibility studies, cost reduction, productivity and business process improvements, business model formulation and ERP implementation management.

Bruce ClarkeDirectorBruce takes overall responsibility for the Contracts Services sub unit of the Natural Resources business in Africa. His experience covers the development of both new and existing mining projects.

Stephen O’BrienDirectorStephen works within the Infrastructure business unit. His experi-ence lies in the commercial aspects of projects across Southern Africa and developing systems and strategies for their roll-out.

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A leading provider of legal services to the Mining Sector

www.Out-Law.comwww.pinsentmasons.com© Pinsent Masons LLP 2015

Pinsent Masons is an international, full service law firm headquartered in London, with 20 offices across the UK, Europe, the Middle East and Asia Pacific, including Australia.

Ranked Band 1 within Chambers & Partners the Mining and Minerals team at Pinsent Masons is experienced in advising across the full spectrum of the mining life cycle globally, including:• Mining exploration, concessions, asset acquisitions and permitting• Mining development• Innovative, cost effective procurement models plus construction• Operations – advising on general estate management, planning and permitting, offtake arrangements

and disputes• Closure and abandonment – advising clients on closure and reinstatement of mining facilities• Acquisition and Funding – advising on IPOs and fundraisings at various stages of the mining lifecycle.

We have extensive knowledge of mining legislation in key mining jurisdictions and our team includes dual-qualified lawyers fluent in various languages.

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