What are the Owner’s Costs in an EPC Capital Project?
This is a question that comes up quite often in capital cost estimating. So, I thought I would share my point of view and experience on this subject.
Generally speaking, I would say that the Owner’s costs are all the costs required to bring a project to commercially operable status, less the cost of the EPC contract. This is a very high-level observation of what constitutes the owner’s costs. In the following paragraphs, we will break down the costs in more detail.
EPC – What is in the name?
As part of the capital cost of a project, the Engineering and Construction (EPC) include all costs to deliver a turnkey facility that is ready to go.
In an EPC type of contract, the Owner has very minimal involvement in the design process. The EPC contract usually stipulates the design requirements in the form of performance requirements, which will constitute the basis for the design development performed by the EPC contractor.
The EPC contractor is responsible for the design, procurement, construction, and commissioning & start-up. The risk is transferred from the owner to the EPC contractor in an EPC project delivery format. This project delivery method tends to attract higher project costs than the EPCM (Engineering, Procurement and Construction Management) method.
Project capital cost breakdown
The best way to explain what constitutes the Owner’s costs is to break down the project capital costs from the top down. The most common way to break down the capital cost of a project with the EPC element in it is:
- Direct Costs
- Indirect Costs
The Direct Costs are all the costs included in the EPC contract:
- Detailed design
- Site investigations
- Procurement
- Contractor’s direct and indirect construction costs
- Commissioning & Start-up
- Contractor’s overhead and fees
All costs shown above are in base-year currency.
The Indirect Costs are:
- Project contingency
- Owner’s costs
Owner’s Costs
All costs, in addition to the EPC costs and project contingency, can be labelled as the Owner’s costs. Depending on the type of project and the Owner’s requirements, the following list is a comprehensive account of possible Owner’s costs.
- Pre-production costs
- Inventory capital
- Land costs
- Financing costs
- Preliminary feasibility studies
- Front-end engineering design study
- Community support
- Site development outside of project boundaries
- Camp and housing facilities
- Temporary site services and facilities
- Insurance
- Freight for Owner’s supplied equipment (if any)
- Currency exchange
- Legal fees
- Permitting and permits
- Owner’s engineer
- Owner’s Project Management
- Owner’s contingency (Owner’s reserve)
- Taxes
- Escalation during the capital expenditure period
- Interest on debt during the capital expenditure period
Interesting to note is that some Owners might require a specific Owner’s costs breakdown based on their internal code of accounts and accounting for capital expenditures requirements. In such cases, it is common for the Owner to supply the cost consulting firm with their cost breakdown requirements and code of accounts. Owners who have repeat projects for similar assets have an interest in recording and tracking asset costs.
I hope you found this article useful. Please leave your comments below. I am interested to know about your experience with the Owner’s costs in capital cost estimating. If you have questions, please write them below, and I will try to give you my best answer.
7 Responses
Very good article Doina
It´s good to see you lecturing estimating costs courses, which have good contents
Hope you will be successful in your activity
Dear Doina,
Thanks for your article. I have read this article in the line of my business experience and therefor some items I would provide some feedback on which have encountered during my experience as a cost estimator.
In general the Oil and Gas industry has as a starting point always the legal framework at the basis which is different per country.
From there on the cost can be split up into the following segments (be aware this isn’t cast and stone as this might be depending on interpretations of the company accountants and governmental bodies).
Expex: Cost of Exploration (including seismic exploration and exploration drilling, assessment of reservoir)
Capital cost: can be split into smaller cost categories):
Feasex: Feasability engineering study cost(early stage)
Drillex: Cost of drilling appraisal/ production wells
Capex: Cost of hardware capital investment + Project related cost
CSU: Commissioning and Start up cost
Owners cost: Pre-Operating cost (not captured under Capex)
Operating cost: After Declaration of production and performance testing has been accepted by external authorities.
Shared services: e.g. Logistics as well as any cost that might be shared and is not dedicated on one project (air, marine, land, study e.g. LIRA), cost of warehousing, cost of Emergency response (to be spit over Capital and Operating cost.
General and Admin: Mainly overheads which will be allocated over the above categories.
Decommissioning: Cost of decommissioning all facilities after Cessation of Production CoP is granted (Operator project management; Facility running/ owners’ costs; Well plugging and abandonment; Facilities/pipelines ‘making safe’; Topsides preparation; Topsides removal;Substructure removal; Topsides and substructure onshore recycling; Sub sea infrastructure (pipelines, umbilicals) Site remediation; Monitoring)
I hope this helps.
Regards John
Hi John,
Thank you for reading and taking the time to leave a comment. You have excellent points.
For the natural resources industry, the project lifecycle can be broken down into the following stages: Exploration, Appraisal, Development, Production, and Abandonment.
So, we have the following cost estimates:
1. Exploration and appraisal
2. DRILLEX – drilling
3. CAPEX – facilities
4. OPEX – production
5. ABEX – abandonment
My article focuses on the CAPEX part of the cost, with emphasis on the Owner’s costs.
Thanks again!
Doina
Nice explanation, Thanks! In this mode, the objective is to create a schedule with costs that are used only as an estimate. The schedule will never be updated. Activities may have many resources assigned to them to develop an accurate cost estimate and include many items that would never be updated in the process of updating a schedule. Primavera P6 tool is really usefull to manage this process
Normally, what is the Owner Cost considered as percentage of EPC Cost in Project Cost Estimation?
Hello Doina,
I am a technologist and not a financial accounting person I would like to understand the costing model of [BESS] Battery energy storage system -Grid Connected MW scale, Appreciate if you could share a model EPCM costing if you have carried out in the past for my academic understanding, I appreciate your article above.
Look forward to receiving your reply
Thanks
Regards
John
Few years ago I was in contract section of EPC Contract 3rd LNG Project at Das Island, UAE.
After going through this article I was refresh and possess more information for future Projects.
Many thanks.