June 21, 2013
By: Meliza
Category: 1st SEM
Lump-sum turnkey (LSTK) EPC contracting is now popular world-wide as a project delivery system for large process and power facilities. Examples are steel mills, LNG facilities, petroleum and petrochemical facilities and power plants. It is also being adopted for large infrastructure developments such as airports, water
treatment facilities and telecommunication systems. While the term LSTK implies a fixed price for the whole contract, you must understand that several variations of the EPC mode of contracting are in vogue. The contract price issue can however vary from „fixed price‟ to a „hybrid price‟.
LSTK EPC contracts offer the following benefits:
– It fulfils the primary expectation of a single point of responsibility (SPR) for all facets of project. You (owner) can transfer more risk to the EPC contractor, understanding that this risk allocation carries a higher price tag. Examples of some risks that can transferred to contractor in a EPC contract are:
o Contractor should account for existing site conditions (including sub-surface conditions).
o Even risk for some force-majeure conditions can be transferred to contractor.
– If the scope of the contract is well defined, the potential for significant changes is very low. Without the risk of significant changes, the schedule for performing the work is unlikely to change. In this case, a fixed-price contract is usually the best approach.
The drawbacks of the LSTK EPC contract are:
– It provides less incentive for a contractor to minimise schedule duration than in the case for reimbursable contracts.
– Fixed-price suppliers and contractors often minimise quality management activities in order to reduce costs.
– Renegotiations of the price might delay the schedule as the fixed-price contractors are reluctant to proceed with any work associated with a change request before resolving the cost of the change.
