CEM Blog: Technical Series #1: 4 Ways to Build Your CHP Project
Combined heat and power (CHP) projects can be daunting endeavors with many complex technologies, permits, and stakeholders which can make them challenging for even the most seasoned project management professionals. We have found that choosing the right contracting structure between the owner, engineer, vendors, and contractors can make the difference between a successful or failed project.
In our experience, every CHP (or cogeneration) project is comprised of at least four key parties: the owner, a design entity (typically an engineer), a vendor who supplies equipment, and a trade contractor (or contractors) who installs and commissions the equipment in accordance with the design and the owner's requirements. There are multiple ways to setup the contractual relationship between these parties and each one has benefits and drawbacks. We have seen four different strategies that work well and I've tried to outline a basic explanation of each approach along with some assessment of each option.
In a Traditional execution, the Owner hires a consulting engineer directly to prepare construction specifications and construction drawings. The Owner then buys all the major and minor equipment. During the construction phase of the project, the Owner then hires a General Contractor or acts as their own General Contractor and manages the project, including the consultant, trades, and vendors. The Owner takes a direct role in managing the on-site construction and start-up/commissioning of the CHP plant. If the Owner acts as their own General Contractor, they will have to administer 15-20 contracts with vendors and trades. The Owner and their team need to be very engaged in a Traditional approach.
2. Engineering, Procurement, and Construction Management (EPCM)
In this approach, the Owner retains a full-service firm to act as an extension of them and take control of all aspects of a project. In this way, the Owner transfers responsibility for engineering, procurement, and construction management services to an external firm. Similar to the Traditional execution, there are 15-20 contracts, but in this case the EPCM provider manages these contracts, saving a lot of time for the Owner.
Under the Traditional Execution, the consulting fees of the engineer typically represent 8% - 10% of Contract Value, whereas under the EPCM Execution, EPCM fees might 12% to 16% of Contract Value.
3. Partial Turnkey
Under a partial turnkey approach, a consulting engineer is hired by the Owner to write specifications for the CHP equipment, and the general installation. The Owner and the Engineer together perform key functions for the CHP equipment (Tender; Evaluate; Award; Inspect; Expedite). Once the major equipment is purchased, it is then “free-issued” to the successful General (electrical/mechanical) Contractor or Design-Build contractor who builds the system for a firm price. The General Contractor retains a consultant for permitting/approval purposes and stamped detailed engineering drawings. Under this option, the Owner only administers 3-4 contracts: 2-3 for major equipment procurement and 1 contract for the design-build installation.
The benefit of a partial turnkey approach is that it allows the Owner and their engineer a direct hand in the selection of the equipment and it potentially avoids the contractor applying a mark-up to a large portion of the project scope. One of the drawbacks, is that it is often difficult to get a full performance guarantee from the design-build contractor because they 'inherited' the equipment.
4. Full Turnkey, or EPC (Engineer, Procure, Construct)
When a project is executed under a Full Turnkey or EPC approach, the Owner hires a consulting engineer to write a detailed performance specification for design-build or EPC firms to bid on. Under this approach, the Owner only has one (1) contract to administer (although an Owner's Engineer is typically retained to provide ongoing review of the EPC contractor's design). The EPC or design-builder takes responsibility for cost and schedule overruns and stands behind the performance of the system.
The main benefit of an EPC or Full Turnkey approach is that the Owner has 'one throat to choke'. In other words, all project responsibility (budget, schedule, performance) is borne by one party - there can be no finger pointing between engineers, contractors, and vendors. The drawback, typically, of an EPC execution is the Owner is forced to accept a cost premium for transferring the execution risk to the EPC contractor.
In our experience, there is no perfect approach to executing a CHP project. Each project must be evaluated individually and Owners need to assess a multitude of factors (budget, schedule, complexity) along with their own risk tolerance to select the best execution approach for their project. Owner's who have a good project team and have a familiarity/experience with CHP may elect to retain control and risk money by implementing a Traditional or EPCM approach, whereas Owner's who are new to CHP or are risk averse, may elect to pursue a turnkey approach. Know your project, know your company, and pick the best path for a successful project!
Matt Lensink, Chief Operating Officer