What are 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 a commercially operable status, less the cost of the EPC contract. This is a very high-level observation of what constitutes 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, Procurement and Construction (EPC) includes 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, and these 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. In an EPC project delivery format, the risk is transferred from the owner to the EPC contractor. This method of project delivery tends to attract higher project costs as opposed to the EPCM (Engineering, Procurement and Construction Management) method. 

Project capital cost breakdown

The best way to explain what constitutes 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: 

  1. Direct Costs
  2. Indirect Costs

The direct costs are all the costs included in the EPC contract:

All costs shown above are in base-year currency.

The Indirect costs are:

Owner’s Costs

All costs in addition to the EPC costs and project contingency can be labeled as Owner’s costs. Depending on the type of project and Owner’s requirements, the following list is a comprehensive account of possible Owner’s costs. 

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 very common that the Owner will supply the cost consulting firm with their cost breakdown requirements and code of accounts. Owner’s 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 Owner’s costs in capital cost estimating. If you have questions, please write it below and I will try to give you my best answer. 

14 Responses

  1. 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

    1. There are several key cost that you did not consider in estimating commissioning cost.

      Like EPC, commissioning when the process is understood, the likelihood of costs overruns are minimized. Any time spent regarding commissioning activities when not recognized adds cost impact to construction schedule, commissioning mobilization /demobilization, commissioning organization, contract scope and Division Of Responsibilities (DOR). Any of these key activities not included in your estimate affects your overall costs on the backend as Change Orders:

      1. developing commissioning schedule
      2. planning for commissioning
      3. document development (extensive)
      4. execution plans
      5. turnover/handover
      6. Vendor Coordination
      7. Licensor Technology Acceptance
      8. Project Closeout

      I have been developing detail estimates for commissioning for 48 years and held positions senior management roles both in office and projects.

  2. 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

    1. 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

  3. 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

  4. Normally, what is the Owner Cost considered as percentage of EPC Cost in Project Cost Estimation?

  5. 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

  6. 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.

  7. Hi Doina,

    very helpful article.

    Can I check if I have understood your article correctly?

    – Owner’s costs include EPC contract costs (i.e. owners costs =EPC contract + management costs)?

    – For a typical oil pipeline infrastructure construction project, what would be a typical % of the Capex for owner’s cost?

    Thanks.
    regards
    Wendy

  8. Hello Doina,

    Very interesting topic and most crucial when we talk about the Construction/ Infrastructure Project Cost. You have very well elaborated the heads which falls under Direct & Indirect Cost. It would be great if the templates for deriving such cost can be shared for better understanding and how to come-up with deriving cost for each head. Most important is the philosophy for developing/ arriving such direct and indirect cost for different type of project. As there are many assumptions underlies for working out such costs.

    It will be great if information to how to workout such cost can be detailed. I know its not that simple as it is a complex working but still if things can be shared for learning and developing the cost for such projects.

    Chintan Gajjar

  9. One thing to consider to include in the estimate is the owner’s cost from completion of FEL3 to EPC Phase. This period is knows as “bridging” or Investment Funding Decision. This sometimes takes 4-6 months where the owner works on EPC phase PEP’s and EPC contract finalization (back and forth redline T&C’s).

  10. Thank you for confirming what constitute owners cost for a construction project.
    I have a question. The EPC cost for constructing the project which is part of the Plant Cost as you mentioned in your slides,,,, before COD (Commercial operation date) we recognize these plant cost in the books as Construction in Progress (an asset item). However, after COD, do we convert this Plant cost into fixed assets?

    If yes, how many % of the Plant Cost is depreciated? Is there a specific requirement for example , certain asset have salvage value

  11. Hellow Diana
    What would be % cost considered for Design as compared to overall cost estomate of the project.
    Rajendra Khanvilkar

  12. I think, the Total Investment of any project comprise of 4 main items:
    1. Capex (i.e. EPC cost)
    2. Working Capital
    3. Pre-operating Expenses
    4. Financing Cost

    The Owner Cost is part of the Pre-Operating Expenses.

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