the chinese epc
TRANSCRIPT
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The Chinese EPC Contractor in Power Generation: Strengths, Weaknesses, Risks and Rewards
Chudi C. Egbuna
Professional Mechanical Engineer at Parsons Brinckerhoff Africa (Pty) Ltd, Hobart Square, 23 Hobart Road,
Bryanston, 2191, PO Box 41927, Craighall, 2024, Johannesburg, South Africa, Tel: +27-11-514-7200,
About the Author
Chudi Egbuna is a registered professional Mechanical Engineer with the Engineering Council
of South Africa (ECSA). Chudi has experience in coal and gas fired power plants. His experi-
ence spans from Owner’s, Lender’s and Technical advisory engineering services to providing
comprehensive thermodynamic optimisation and analyses of cycles, sparing philosophies and
complete heat mass balance diagrams as well as economic inputs for financial feasibilities.
He is currently employed by Parson Brinckerhoff Africa and works in the Power Generation
Division of the company.
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The Chinese EPC Contractor in Power Generation: Strengths, Weaknesses, Risks and Rewards
1 Introduction Chinese EPC contractors are seemingly becoming the Engineering Procurement and Construction Contractors
(EPCCs) of choice in the power generation industry especially in Africa and the developing world. Working
with Chinese EPCCs offers rewards as well as risks. Being able to manage effectively the associated risks of
working with Chinese EPCCs could result in significant gains to project Owners. The following paragraphs de-
fine the global trends in the engineering services industry with respect to Chinese EPCCs and associated con-
tract models in practice. The paper aims to provide an objective view of the Chinese EPCC, highlighting their
capabilities that motivate decisions to work with them. It further provides evidence of their performance world-
wide and then progresses to identify the specific risks while offering ideas for mitigation of the identified risks.
This paper provides information in an attempt to improve the understanding of the Chinese EPCC, and perhaps
tries to better equip Owners and Owners’ engineers alike who might be considering taking them on as partners
or working with them on projects worldwide.
2 Popularity of the Chinese EPCC Chinese engineering firms are consistently emerging in the global engineering services market. A description of
their relative position within the global engineering services market (with particular emphasis on the EPC con-
tract model) is important for a discussion on the Chinese EPCC.
Engineering contracts define the terms under which engineering services are provided. Some engineering con-
tract models include Engineering and Construction (EC), Engineering and Procurement (EP), Procurement and
Construction (PC), Engineering Procurement and Supervision (EPS), Engineering Procurement and Construc-
tion Management (EPCM) and the Engineering Procurement and Construction (EPC) model. The EPC and
EPCM contract models are the main contract models in common practice today in large construction projects.
A brief overview of the EPC and EPCM contract models is given below. This overview provides the required
reference within which Chinese EPCCs will be discussed.
2.1 Chinese EPC Contractors and the EPC Contract Model The primary difference between EPC and EPCM is in the “C” for Construction in EPC and “CM” for Construc-
tion Management in EPCM. The EPC contractor is paid a lump sum price to deliver a complete facility, with all
subcontracts under their name. Conversely, the EPCM contractor is an extension of the Owner, executing all
contracts and procurement under the name of the Owner and being compensated on either a lump sum or reim-
bursable basis to perform engineering and management services (Agnitsch, Cooke & Solberg, 2001). Alterna-
tively, an EPC contract is a design and construct contract where a single contractor takes responsibility for all
elements of design, construction and procurement. In contrast, an EPCM contract is a professional services con-
tract with a radically different risk allocation and different legal consequences (Loots & Henchie, 2007). The
above definitions however subjective implicitly highlight the allocation of risk existing within the contract mod-
els.
From the contractors view point, EPC contracts are inherently high risk, although also potentially high profit.
Due to the associated risk and liability, few engineering firms are willing to execute large projects under the
EPC contract model. Henchie (2008) states that recently, in response to market conditions and an improvement
in the negotiating position of EPC contractors, there has been a significant increase in use of the EPCM contract
module for international infrastructure and major construction works. The above statement suggests a shift from
the EPC to the less risky EPCM contract model. Chinese EPCCs show a willingness to assume the risk profile
required of the EPC contract, with significantly lower margins and contingencies built into their offers in con-
trast to their counterparts in Europe and the West. Arguably, this (approach) may be driven by a desire to break
into the market or their ability to be more cost effective on processes and delivery than their competition.
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Furthermore many engineering firms have started focusing on the more traditional Owners Engineering (OE)
role where the risk and liability profile is considerably less burdensome with consequently less room for profit
making. Original Equipment Manufacturers (OEMs) are arguably also migrating to the EPS contract model ra-
ther than EPC contract model, where they are only responsible for supervision of the construction of their sup-
plied equipment and do not have to deal with the added burden of managing subcontracts outside of the OEM
facility being supplied. These trends have as a result created an engineering market with only a few engineering
firms willing and capable of executing large projects under the EPC contract model. This in turn has led to and
promoted the growth of the Chinese EPC contractors who are not afraid to take on the added risk. The following
basic schematics depict typical EPC and EPCM contract models as discussed above and indicate the relative risk
of each role.
Owner
EPC
OE
Subcontractor Subcontractor Subcontractor
High Risk
Low Risk
Contractual relationship
Functional relationship
Figure 1: The EPC contract model and indicative risk
OwnerEPCM
Subcontractor Subcontractor Subcontractor
High Risk
Low Risk
Contractual relationship
Functional relationship
Figure 2: The EPCM contract model and indicative risk
Chinese EPCCs have positioned themselves in the engineering market so as to become attractive to Owners who
typically want less risk while maintaining project quality and relatively lower overall project cost. Lenders also
generally favor one point of contact (the EPC contractor) instead of multiple contact points (EPCM, Designers,
Suppliers, Construction contractors, etc) where scope is less well defined and delays by one contractor tend to
affect others. In summary, the predictability of a lump sum pricing structure provided by an EPC contract model
lowers risk and appeals to financiers. Figure 2 shows the EPCM contract model in contrast to the EPC model.
While most EPC contractors can perform OE and EPCM roles, the subject of this paper is the EPC model where
Chinese EPC contractors seem to be flourishing.
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2.2 Strengths and Attractiveness of Chinese EPC Contractors Some characteristic strengths for which the typical Chinese EPCC has gained recognition are:
Aggressive pricing and willingness to provide attractive commercial terms such as construction bridging
loans;
Ability to commit to aggressive project schedules;
Willingness to adopt international codes and standards; and
Their ability to mobilize Chinese construction labor to site.
The above mentioned strengths have promoted the popularity of the Chinese EPCC for large power develop-
ment projects in Africa and in the developing world, particularly where project budgets or other financial con-
straints exist, and where aggressive project schedules are required.
2.3 Chinese EPC Contractor Presence Globally China has been the fastest growing economy in the world over almost three decades (Nicholas, 2007). Along
with its economic growth comes a need for energy and better technology to aid its growth for which it is becom-
ing renowned. In 2010, China’s installed capacity climbed to over 900,000 megawatts. China’s expertise in
power generation and power generation equipment is as such improving with resulting successful exports to the
Americas, Canada, Bangladesh, India, Indonesia, Iran, Iraq, Vietnam, and more than twenty countries and re-
gions.
In Africa, China Eximbank concessional and non-concessional loans for infrastructural development, excluding
projects in the petroleum and mining sectors, were US$12.5bn, as reported by the World Bank. Angola, Nigeria,
Mozambique, Sudan and Zimbabwe account for over 80 per cent of these loans, and the power sector makes up
about 40 per cent of total commitments (Isaac & James, 2007). This fact further highlights point one of section
2.2 above.
Shanghai Electric Corporation (SEC), Harbin Power Equipment Company Limited (HE) and Dongfang Electric
Company are the 3 biggest state owned enterprises in China (Parson Brinckerhoff Regional Offices, 2010). The-
se enterprises have their core business in manufacturing power generation equipment and are competing suc-
cessfully in the global power generation sector. Their footprint within Africa and developing world demon-
strates this success.
3 Chinese EPCC Risk Mitigation Having identified their strengths, Chinese EPCCs also have weaknesses. These weaknesses present themselves
as risks to project owners. With these risks mitigated, significant rewards can be achieved by working with Chi-
nese EPCCs.
As highlighted above, a certain amount of additional risk is inherently taken on by an Owner when employing
the services of Chinese EPCCs outside China. These risks generally are related to the modus operandi of the
Chinese EPCCs. The challenges experienced by Chinese EPCCs outside China are typically cascaded onto the
Owner, manifesting in the form of risks during project implementation. For the purpose of this paper, these risks
have been broadly classified as:
Communication
Technology
Quality control, Health and Safety
Codes and Standards
Table 1: Chinese EPCC Challenges and Associated Owner Type Risks
Table 1 below presents the challenges faced by Chinese EPCCs. The table also provides a categorization of the
mentioned challenges as a function of the associated risks class which an Owner may be exposed to.
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Table 1: Chinese EPCC Challenges and Associated Owner Type Risks
S/No. Chinese EPC Challenges Associated Risk Class
1. Poor English communication skills Communication
2.
The need to cross reference indigenous standards against
international standards (e.g. GB - Chinese against inter-
national standards)
Codes and Standards
3. Inadequate quality control and assurance processes and
procedures
Quality Management - Quality Assur-
ance/Quality Control (QA/QC)
4.
Poor quality of knowledge transfer such as Operation and
Maintenance (O&M) Manuals and Training during pro-
ject handover
Quality Management (QA/QC)
5. Inadequate or non-compliant health and safety measures,
and Poor Safety, Health, Environment performance Health, Safety and Environment
6. Inability to properly manage interfaces with local con-
struction contractors and applicable local authorities Communication
7. Bids offering technologies without proven track records Technology
8. Difficulty in securing entry and work permits for Chinese
construction labor. Communication
The following sections describe the risks in general terms and proffer measures towards mitigating the risks
likely to be encountered by Owners when working with Chinese EPCCs.
3.1 Communication
3.1.1 English Language Barrier The inability of Chinese EPCCs to effectively communicate in English usually puts them at a disadvantage
when competing internationally – English being the universal business language. The poor English communica-
tion skill prevalent in most Chinese EPC contractor organizations is a significant problem which requires proper
attention at all phases of a project. Right from contract negotiation and award to financial closure and during
project execution, effective communication is important if delays are to be avoided. All these pose significant
concerns for the Owner and the Owners’ Engineer. Chinese communicate less directly and less explicitly, often
relying on gestures, facial expressions, eye messages, and other non-verbal signals (Engholm, 1994). It is ad-
visable when dealing with Chinese EPCCs that communication is given the utmost priority and that proper in-
vestment in communication channels and processes is made. In most cases, using a translator proficient in tech-
nical issues during discussions will help.
For most Chinese EPCCs, the design office is located in the home country (China) while the project office will
be located in the project host country. In such cases, it is most beneficial to have project coordinators on both
the EPCC and Owner teams proficient in English and the indigenous language of the EPC (Mandarin or Canton-
ese as the case may be) and well-versed in the technical aspects of the project as well as conversant with project
teams on either side (Owner/OE and EPC project teams) to facilitate communication between the teams and
offices during all phases of the project. This is especially important during the construction phase where the
field team will be less knowledgeable of English. The specific number of persons with such designation will of
course be dependent on the size and complexity of the project. Whatever the case, the presence of such persons
streamlines the flow of communication between the Owner/Owners’ engineer, the field and project teams and
the design office in China during the course of the project.
3.1.2 Understanding the Culture: The hierarchical culture of Far Eastern (FE) countries is reflected in the work environments of FE organizations
and firms. The chain of command, seniority and responsibility are important factors when communicating with
Chinese EPCCs.
Experience with Chinese EPCCs has shown that a large number of project staff is usually involved in technical
discussions and meetings, with only a hand full of them having the actual power or discretion to make decisions.
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In some instances, the oldest (age wise) are the true power brokers regardless of title, rank or position. Certain
mannerisms, gestures and in some cases even arguments are some cultural peculiarities that may be encoun-
tered.
While it is possible to learn and adapt to the cultural situation during the course of the project, Identifying the
prevailing cultural posture of the EPC contractor through a proper due diligence activity and planning puts the
Owner in a better position to quickly address issues arising from culture.
3.1.3 Project Management Chinese EPCCs operating outside their element (in countries foreign to them) encounter significant challenges
in project management. These challenges manifest as problems for the Owner in the form of project delays and
schedule slip.
As identified in
Table 1, Chinese EPCCs face challenges when trying to manage interfaces with local construction contractors
and the applicable local authorities. This often leads to their inability to provide adequate and efficient project
management, cost and schedule control as well as risk management.
On the African continent, the norm most often is that the project host country insists on the use of local labor as
much as possible. The degree to which this will be possible will depend mainly on the amount of skilled and
unskilled labor required by the project that can be sourced locally as well as the ability of the Chinese EPC to
secure the required permits for foreign construction labor. Ultimately a mixed labor force comprising local
workers and workers brought in from China will be deployed during project execution. Managing this mixed
labor force is a challenge and requires proper communication throughout the labor force. The inability of the
Chinese EPC to effectively communicate through and between ranks in the labor force puts them at a disad-
vantage and results in problems which propagate to the Owner.
In order to mitigate the risk associated with the inability of Chinese EPCCs to effectively manage the project, it
is imperative that the Owner with the help of the Owners’ engineer be involved with the signing off of all key
appointments to the project management team on the EPC side. Key appointees in addition to pertinent skills
related to their roles must be capable of the necessary skills relating to communication, organization and liaising
with local authorities. In terms of communication, it is important that the key appointees understand the cultures
(work and otherwise) of both the project host country and China. Having a project management team with these
important characteristics on the EPC team as well as on the Owner’s team should go a long way in streamlining
the challenges that come with a multicultural work force.
3.2 Technology The reliability of implemented technologies plays an important role in the success of any project. From an Own-
ers’ perspective, the project specification included with the Invitation to Tender (ITT) should clearly identify the
required reliability on all technologies or equipment to be offered by EPCCs.
Where Chinese EPCCs are capable of offering the required reliability (or proven technology or equipment) as
well as meeting the balance of specification requirements at attractive overall project costs, it becomes easier for
the Owner to decide amongst bids. However, where unproven technologies or equipment are offered the follow-
ing could be requested by the Owner or offered by the EPC to mitigate the risk associated with unproven tech-
nology or equipment:
additional performance testing
extended guarantees
liquidated damages in the event of equipment failure
additional spare parts
On-call technical expertise
In many cases, the Chinese EPCC may include the above without the formal request from the Owner in the Invi-
tation to Tender (ITT) Documents, in order to make their offer more attractive/competitive. The Chinese EPCCs
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may also offer bridging loans. The risks in the project are as such spread between the Owner and the Chinese
EPC, generally making the EPC offer more attractive to the Owner.
Typically, it is the responsibility of the Owners’ engineers to ensure that the Owner is well aware of the risks of
unproven technologies. Regardless of the technical and financial completeness and competitiveness of the bids,
the Owner through the Owners’ engineers should be required to perform the necessary risk and financial analy-
sis to ascertain the true worth of the EPC bids.
3.3 Codes and Standards Experience with Chinese EPCCs showed that their designs are most often based on their indigenous codes and
standards, such as the GB (Chinese) standards. In some cases Chinese EPCCs utilize Chinese OEMs with li-
censes to technologies originating in Europe and the West. Where the technology is reproduced and vetted by
European or Western OEMs, the original technology standards are inherited. In other cases, modifications are
made to imported technologies with a resulting combination of international and indigenous standards applica-
ble to the equipment.
When Chinese OEM equipment are supplied to countries outside China, It becomes necessary to compare their
imported codes and standards against internationally accepted codes and standards such as ASME, BS, ANSI,
etc. in order to validate their applicability to the particular situation. Similarly where the project host country has
defined codes and standards on any project subject, and these standards supersede the relevant international
codes and standards, it will be necessary to validate the applicability of the Chinese OEM codes and standards
against the local codes and standards.
Typically, a list of codes and standards is provided by the EPC during contract negotiations which would be the
guiding codes and standards to which their design offer complies. The Owner on the other hand via the Owners’
engineer in turn provides the required codes and standards to which the Chinese EPCC offer must comply. The
Owners’ list would normally be compliant with the project host country and/or international codes and stand-
ards.
It may become necessary for the Owners’ engineer to safeguard the Owner by ensuring compliance of the en-
gaged Chinese EPCCs’ codes and standards with the project specific codes and standards through a process of
validation. It should be noted that this validation process does not absolve the Chinese EPCC from any liability
arising from the finally agreed upon and implemented codes and standards but rather serves to streamline the
design review process.
In most projects where international finance is required, international standards such as World Bank (WB) and
International Finance Corporation (IFC) standards have to be complied with in order for financing to be secured.
Most often WB and IFC standards do not constitute a problem and can be easily met by Chinese EPCCs.
Project codes and standards compliance is not a trivial subject and must be given due consideration by an Owner
when employing the services of Chinese EPCCs. As a pre-requisite, a due diligence will have to be performed
on the Chinese EPC to ensure that they can comply with any changes and/or additions to their offered codes and
standards.
3.4 Quality Management (QA/QC) China is known to have quality issues with respect to manufacturing. Unfortunately, changes to the quality man-
agement systems of Chinese firms is difficult because it often requires not just a change of techniques, but also a
change of corporate cultures, systems and practices (Pun, 2001). Quality management as such remains an area
which is a major concern when dealing with Chinese EPCCs.
The quality management reputation of Chinese EPCCs is generally improving with time. This statement is borne
out by the fact that Chinese power stations and related technology continue to attain maturity, and may be
judged to be progressively more proven, with the passage of time. These continuous improvements notwith-
standing, Chinese EPCC continue to experience shortcomings with performance of effective quality assurance
and control. Experience has shown in some cases that while the required performance test may have been car-
ried out correctly, improper or inadequate monitoring and results evaluation most often invalidate the perfor-
mance tests. As the Owner of a project, this is a major issue if quality is to be ascertained.
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Proper documentation of processes and activities is essential in all engineering projects. In power generation
projects, the successful validation of plant performance as well as operation of the plant is very dependent on the
availability of complete and accurate documentation and knowledge transfer in the form of O&M manuals and
training and general information management.
The quality of O&M Manuals and training are most often affected by poor communication. Translation incon-
sistencies from OEM language to English; less emphasis on quality of documentation by the EPCC as it is the
last few documents being provided; differing training methods and language amongst nationalities (EPCC in-
structors and O&M staff), etc. are a few other reasons for poor quality O&M manuals and training. For such
challenges to be remedied, QA/QC procedures should include requirements for all translations (O&M manuals)
to be up to the required certified technical standard. Similarly, training processes should be audited to ensure
complete and correct knowledge transfer.
In terms of plant operation from a document control point of view, it is expected that all documentation (manu-
als) from the EPCC should be handed over to the Owner/Operator during the early stages of the defects and lia-
bilities period. Improper and incomplete documentation often leads to ill trained operators or an inability of the
operators to effectively resolve problems when they occur. In order to have complete documentation during op-
eration, proper information management systems (document control) should be implemented from preliminary
design through to the detailed design phases, to the end of commissioning prior to the defects and liabilities pe-
riod.
Some Chinese EPCCs have very poor quality control and assurance systems for document control, which ad-
versely affects the quality of documents (drawings, memos, emails, etc) that are transmitted during the course of
projects. In many instances the documents will be badly worded and will require significantly more time to un-
derstand. For the Owner, this means more review cycles and hours required by the OE to approve design docu-
ments. Even when translators are used, most processes are drawn out due to ineffective communication between
the parties involved. Generally, more effort is required to ensure that all documentation is in a presentable, use-
able and complete format.
Ideally a QA/QC plan covering all the issues mentioned above should be submitted by the Chinese EPC as part
of the bid and reviewed by the OE to ensure completeness in the early phases of the project. It is to the Owners’
advantage if this plan is closely monitored and implemented throughout project implementation. Ensuring that
the QA/QC plan is monitored and implemented can be achieved by insisting that the EPCC use an international-
ly recognized 3rd Party for the complete range of QA/QC management.
3.5 Health, Safety and Environmental Issues The constantly growing and varied workforce in China makes it difficult to have effective health and safety reg-
ulations and labor practices. The International Labor Organization (ILO) estimates that China’s 2001 workplace
fatality rate was 11.1 per 100,000 workers, compared with a rate of 4.4 per 100,000 in the United States (Garrett
& Dara, 2003). China has strengthened their national OSH system (ILO, 2011), however, experience shows that
the performance of Chinese EPCCs in terms of occupational health and safety is poor. Unfortunately, this poor
performance in health and safety is often carried over by the EPCCs to projects outside of China.
In order for the Owner of any project to safe guard against issues arising from poor health and safety conditions,
it is imperative that when engaging Chinese EPCCs, the tender specification demands the submission of a
Health Safety and Environment (HSE) plan. The HSE plan of course is required to be compliant with the Opera-
tion Health and Safety Acts and legislations of the project host country. In addition to this, constant monitoring
and evaluation of the Chinese EPCCs’ HSE practices should be performed to ensure that they comply with their
outlined plan.
Working and site conditions is an aspect during construction which should be monitored closely. As discussed
above the Owner/Owners’ engineer should continuously enforce the HSE plan when working with Chinese
EPCCs and as with every construction project, constant training and educating of the work force must be per-
formed and maintained to minimize related HSE risks.
Another health and safety issue which may arise when engaging Chinese EPCCs is the living conditions of the
foreign labor. As mentioned in section 3.1.3 Chinese EPCCs often bring along with them their own construction
labor force. In order to ensure that the working and living conditions are conducive to best HSE practices, it is
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common practice to provide a living camp on site where the foreign labor force can reside while working. This
has a twofold advantage of keeping the foreign labor separate from local labor (i.e. in order to prevent conflict
arising from cultural differences) as well as providing a place of their own (foreign labor) in which they can
exist with common lifestyles representative of their home country, especially for the extended project durations
characteristic of power plants.
4 Conclusion While this paper addresses typical risks and mitigations associated with Chinese EPCCs, other risks exist which
are not peculiar to the Chinese EPCCs alone and which should be addressed if projects are to succeed. Hence,
risk assessment and mitigation are activities which should be performed continuously through the life of a pro-
ject, from the project feasibility and conceptualization phases, through to operation and maintenance and de-
commissioning.
In conclusion, Chinese EPCCs are yet to be as popular but are quickly gain experience on their counterparts in
the West and Europe. There is reward that can be obtained from working with them but these come along with
risks. These risks if managed properly can be translated to successful and rewarding projects.
It should be emphasized that the status quo existing in the engineering services delivery environment is evolv-
ing; especially in the power generation industry. It can be expected that as soon as Chinese EPCCs can compete
on the same level playing field and with the same level of expertise and experience of their counterparts in the
West and Europe, things are likely to change and they (Chinese EPCCs) will be less willing to offer competitive
prices as they do currently or acquiesce to the demands of Owners.
It is hoped that the information herein has provided some insight to the Chinese EPCC to aid in making deci-
sions when working with them.
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