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Assessing Risk on The Engineering Procurement Construction (EPC)

Project from The Perspective of The Owner: A Case Study
To cite this article: A Nurdiana and R Susanti 2020 IOP Conf. Ser.: Earth Environ. Sci. 506 012040

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JIC-CEGE 2019 IOP Publishing
IOP Conf. Series: Earth and Environmental Science 506 (2020) 012040 doi:10.1088/1755-1315/506/1/012040

Assessing Risk on The Engineering Procurement Construction

(EPC) Project from The Perspective of The Owner: A Case
Study

A Nurdiana1* and R Susanti1

1
Vocational School, Diponegoro University
*
Corresponding author’s e-mail: asri@[Link]

Abstract. Risk is part of infrastructure projects, and EPC projects are no exception. Risk is a
consequence of uncertainty conditions. In construction projects, the risk cannot be predicted
because there are a lot of uncertainties in predicting problems [1]. The risks in different types
of contract projects would also be different, because of the different characteristics of each
contract. In this study, the risk of construction projects was reviewed based on the project life
cycle of the E.P.C (Engineering Procurement Contract) contract. The aim of this study is to
analyze the risk from the perception of the owner of the project with the Engineering,
Procurement, and Construction contract type. Primary data collected were in the form of
identification and assessment of the impact and risk probability obtained by interviews and
questionnaires. Data analysis was done with the Risk Breakdown Structure method to
determine the risk ranking. The risk analysis of the Engineering Procurement Construction
project from the owner's perception showed that the majority risk was risk in the low category
(46%), then moderate risk (27%), and high risk (27%).

1. Introduction
The risks in a construction project are different with different types of contract. This is due to the
different types of projects life cycle in each contract type.
One of the ways to achieve sustainable development in a country is by creating a strong
construction industry towards global competition [2]. One of the work contract systems used in
infrastructure projects is Engineering, Procurement, and Construction (EPC) [3].
The EPC contract model is widely used by the private sector to carry out construction work on
large-scale infrastructure projects [4]. The EPC method can improve a contractor’s efficiency in terms
of design, procurement, and construction simultaneously in achieving initial builder involvement, cost
savings, and the effectiveness of a project duration [5].
Engineering, Procurement, and Construction (EPC) is a construction model that integrates work
between engineering, procurement, and construction in one contract. In an EPC project, the general
contractor appointed by the owner has duties ranging from planning, procurement of materials, to
construction [6]. An Engineering, Procurement, and Construction (EPC) / Turnkey contract covers
design, procurement and construction that refer to the contracting company in accordance with the
contract, then the quality, safety, schedule and cost are the full responsibility of the Contractor for the
entire project [7].
Madureira and Carvalho [8] stated five factors that presented a strong correlation with EPC project:
cooperation, trust, exchange of information, synergy, degree of integration. One problem in the

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JIC-CEGE 2019 IOP Publishing
IOP Conf. Series: Earth and Environmental Science 506 (2020) 012040 doi:10.1088/1755-1315/506/1/012040

construction industry is the flow effect resulting from low efficiency and productivity. EPC is one of
the solutions to face dilemmas in construction processes which cause poor performance [9].
Applications in engineering, procurement, and construction (EPC) projects cannot be avoided, due
to the demands of developments in construction projects. In the EPC model, the contractor is
responsible for procurement and construction risks arising from immature technical and social aspects
during the "initiation" phase of the project [10].
Risk is a consequence of uncertain conditions that often cannot be predicted precisely. It is
therefore necessary to assess risk and perform risk management from the start of a construction
project, to reduce the impact and probability of risks that might occur [11].
Risk management is a systematic control procedure for estimating risks that might be encountered
in a project. This is a phased procedure consisting of risk identification, risk classification, risk
analysis, and risk response [12]. The risk management process helps the owner and the project team to
make informed decisions about alternative approaches to the risks involved, to increase the likelihood
of project success in terms of cost, time and quality.
Most of the risk studies on the EPC project were viewed from the contractor’s perspective. While
the owner, the other stakeholder in the EPC project, also has risks. Many of the studies reviewing risks
in EPC projects from a contractor's perspective focused on two things, schedule-related variations and
time-cost analysis [10; 13]. The aim of this study is to analyze the risk from the perception of the
owner of the project with the Engineering Procurement Construction contract type.

2. State of The Art

2.1. State of The Art of Engineering, Procurement, and Construction

Some researchers have provided definitions of EPC, and it can be concluded that EPC is a project
management concept that designs, procures materials and equipment, and constructs [3]. The basic
contractual structure of an EPC contract is illustrated in Figure 1, taking an example of a project-
financed power project, while in reality, detailed structures can differ from one project to another [4].

Figure 1. Basic Structure in an EPC Contract

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JIC-CEGE 2019 IOP Publishing
IOP Conf. Series: Earth and Environmental Science 506 (2020) 012040 doi:10.1088/1755-1315/506/1/012040

The EPC Performance Related Indicators were poor design, poor project planning, bad estimation,
incomplete design, stakeholder involvement that does not accommodate disputes, loss of reputation,
old delivery of goods, poor site supervision, poor project control, changes in project implementation,
delay in delivery of building materials on site, inappropriate quality of building materials, redo of
inadequate tasks, inadequate or inefficient equipment or machinery sub-contractors, unskilled labor,
labor changes, accidents or incidents, excessive bureaucratic inclusion [14]. In analyzing the
productivity of this EPC contract, it is necessary to know in advance what risks might occur in the
application of the contract.

2.2. State of The Art of Risk in Engineering Procurement Construction

EPC project risks have been associated with construction, design, payment, client, and sub-contractor
(procurement) risks [15]. Yoo et al. [16] studied the importance of 52 risk elements through expert
surveys and weighing of risks for EPC nuclear power projects, and it was concluded that procurement
and delivery schedules were the most critical risk factors for a project’s success.
EPC contracts tend to handle problems with greater sophistication than other types of construction
contracts. The prerequisites needed for the successful functioning of the EPC approach include that the
contractor understands, manages and influences the allocation of risk and ready to assume the level of
risks [4].
One risk from the owner's perception is the contractor's claim [11]. Causes of contractor claims in
EPC projects are external risks, client's organizational behavior, and project definitions in contracts
[17]. Causes of contractor claims are analyzed among others as external risks (sociopolitical risk,
economic risk and natural hazards), client organization behavior (premature payments, order changes,
and inefficient processing), and project definitions in contracts (unclear scope of work and technical
specifications).
There are several potential risks in EPC projects such as potential delays in schedules, quality
problems, hostile relations, and information interruptions [18,19]. This is because an EPC project
typically has a long, large-scale, and multi-participatory process [6].

3. Materials and Methods

The primary data collection was done by interview and questionnaire survey. Primary data collected
were identification risks and the risks of impacts and probabilities. Secondary data were obtained from
other studies, for example, reference books, magazine articles, journals related to research topics, and
project data. Other secondary data were EPC project technical documents and other project
documents. The authors reviewed the EPC scheme in a case project of a steam power plant (PLTU) in
Indonesia. Respondents were the decission makers on related projects. Data analysis was done using
the Risk Breakdown Structure method to determine the risk ranking.

4. Results and Discussion

4.1. Identification of Risk

The identification of risks in the Engineering Procurement Construction projects was divided
according to the project life cycle: the Phase of Engineering, the Phase of Procurement, and the Phase
of Construction (Figure 2). There were 12 identified risks and they were then divided into the three
aforementioned phases.

Phase of Engineering Phase of Procurement

Phase of Construction

Figure 2. The Life Cycle of an Engineering, Procurement, and Construction project

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JIC-CEGE 2019 IOP Publishing
IOP Conf. Series: Earth and Environmental Science 506 (2020) 012040 doi:10.1088/1755-1315/506/1/012040

4.2. Risk Analysis

Risk analysis was carried out using the Risk Breakdown Structure method. The data needed were
probability weight and the impact of each risk. These data were obtained using a questionnaire and
interviews with respondents. After the probability and risk impacts were obtained, the level of risk was
calculated by multiplying probability and impact values. The risk analysis is presented in Table 1.

Table 1. Risk Analysis in an Engineering, Procurement, and Construction Project from the Owner’s Perception
Phase of Engineering
Risk Risk Risk
Code Identification of Risk Probability Impact
Level Category Rank
The results of the initial study (engineering
F1 3 4 12 High 2
and environment) were less accurate
The quality of the contractor was not as
F2 1 3 3 Low 9
expected
F3 Delay in design produced 2 2 4 Low 8
Personnel and equipment of mobilized
F4 contractors were not in accordance with the 1 3 3 Low 10
offer
Land status and the environment issues
F5 2 5 10 High 3
around the project
Phase of Procurement
Risk Risk Risk
Code Identification of Risk Probability Impact
Level Category Rank
The timing of the procurement was not
G1 2 5 10 High 4
appropriate
G2 Selected vendors were less competent 3 3 9 Moderate 5
Phase of Construction
Risk Risk Risk
Code Identification of Risk Probability Impact
Level Category Rank
H2 Inaccurate quantity estimation 2 3 6 Moderate 6
Contractor's performance was not in
H3 1 2 2 Low 11
accordance with planning
H4 Project start time was late 2 3 6 Moderate 7
H5 Project cost escalation 1 1 1 Low 12
H6 Contract Change Order by contractor 3 4 12 High 1

Furthermore, the risk level were then categorized into three groups i.e. the low risk, moderate risk, or
high risk. The results of this risk analysis can be seen in figure 3. Most risks were in the low category.

33% 42%

25%

Low Moderate High

Figure 3. Risk Level on the EPC Project from the Owner's Perspective

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JIC-CEGE 2019 IOP Publishing
IOP Conf. Series: Earth and Environmental Science 506 (2020) 012040 doi:10.1088/1755-1315/506/1/012040

4.3. Risk Responses

Risk responses were obtained by interviewing respondents to find action plans that need to be
prepared to reduce the probability and impact of risk. Risks were also grouped into risk received,
mitigation, or avoided. The results of risk response grouping are presented in Figure 4. Most risk
responses were received risks.

33% 42%

25%

Receive Mitigation Avoided

Figure 4. Risk Responses on the EPC Project from the Owner's Perspective

5. Conclusions
From this study it can be seen that from the perspective of the owner, the highest risk in the EPC
project were Contract Change Order by contractor and results of the initial study (engineering and
environment) that were less accurate than expected. 12 risks were identified, and most were in the low
risk level. Further research can assess risk from the perspective of other stakeholders involved in an
EPC project.

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IOP Conf. Series: Earth and Environmental Science 506 (2020) 012040 doi:10.1088/1755-1315/506/1/012040

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