EPC Vs EPCM
EPC Vs EPCM
EPC Vs EPCM
o assist investors and analysts to better understand our Company and our financial statements, this guide will appear on our website. The guide will include an explanation of some financially significant terminology used in the engineering and project management business, as well as provide some guidance for comparing companies in this sector. It is our intention to communicate our results as openly and transparently as possible, with interpretive commentary to make them understandable.
notably related to project financing. We therefore take to book new orders only once all conditions precedent have been met and the contract has become effective. Order Book is the value, on a given date, of the unexecuted portion of all active orders previously received. It reflects the amount of guaranteed revenue for future periods, and is also commonly referred to as forward order book or backlog. The Order Book is computed as follows: Order Book at the previous reporting date + New Orders received during the period - Revenue recognised during the period Exchange differences = (closing) Order Book on the reporting date
Accounting Principles
We report in accordance with International Financial Reporting Standards (IFRS). Within the possible choices allowed by IFRS, our accounting policies enhance transparency by limiting the ability of management to influence results. Our full accounting policies are described in the financial statements section of the annual report, but here are some noteworthy examples: All marketing costs1 are expensed. It is permissible according to IFRS and common in the engineering and project management business to capitalise marketing costs related to a project at the end of a reporting period, if management believes that there is a high likelihood that the project will be secured. Such a policy has potential for abuse and therefore Bateman Engineering writes off marketing costs for all projects not secured by the end of the reporting period. Revenues and Profits for lump-sum turnkey (also known as LSTK, EPC or Fixed Price) contracts are recognised on a straight line basis (measured by percentage of completion), while providing for any contingencies that may arise during the completion phase. Forecast losses are recognised immediately. The percentage completion of a project is determined by dividing the total actual cost incurred to date, by the total forecasted costs to completion (which include all project specific provisions).
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can charge a premium for relieving the client from project risk. There is a growing demand for LSTK contracting, because: I The shortage of skilled personnel in the metallurgical and mining industry worldwide is forcing clients to assign more responsibility for projects to their contractors. I Finance-providers to projects in the mining sector often require the main contractor to provide a fixed (LSTK) price so as to minimise lending risk. The following table illustrates the costs borne by a client on a USD100 million project when carried out through LSTK and EPCM contracts. It is a highly simplified representation and each contract has a different cost structure, but it demonstrates how an LSTK contractor can generate higher profits than an EPCM contractor for a given project, even though the EPCM contractor may have a higher profit margin (in percentages): Amounts in USD million EPCM LSTK Total project value (capital expenditure) 100 100 Costs borne by client divided as follows: Contractor services 15 19 Client in-house project management and insurance 5 Equipment, construction, infrastructure and third party services (includes profit to LSTK contractor) 80 80 100 100 Revenue recognised by contractor 15 100 Sample contractors profit margin 15 % 10 % Profit for contractor 2.25 10.00 Project engineering companies with high gross profit and profit after tax margins often pursue an EPCM strategy, while other companies (like Bateman Engineering) pursue an LSTK strategy with lower margins but higher potential profits. As a result of heightened demand in the industry, which has resulted in overstretched suppliers and contractors, shortage of skills and wage inflation, a hybrid form of contracting is gaining popularity. The aim of a hybrid contract, which can contain elements of both EPCM and LSTK, is to either more effectively manage risk associated with the unknown or to provide appropriate incentives, in the form of bonuses, should the contract be completed within a specified period.
In order to maximise its performance, Bateman Engineering needs not only to excel in the engineering disciplines but also in its financial planning. Bateman Engineering therefore structures each contract on a tax efficient basis, in conformity with the economic and industrial realities of the project, given the circumstances of the project and in full compliance with all tax rules, including in particular international transfer pricing rules. The tax planning involved on a project by project basis and the maintenance of a Dutch / Luxembourg / Swiss structure have a cost currently well in excess of USD1 million a year, and will grow with the growth of the Company (although not linearly). This cost is captured in Cost of Sales (reducing Gross Profit) and in the Selling, General and Administrative costs, both of which reduce EBIT. A focus on EBIT therefore penalises us because it includes the costs of tax optimisation without the benefits. The benefits of this investment in tax optimisation are in the form of a low sustainable tax rate, which we currently estimate to be approximately 20 %. Bateman Engineering is not a capital intensive company (except for the Metal Recovery business), and thus does not have substantial depreciation or amortisation. Accordingly, EBITDA is not very relevant to us.
Income Tax
Income tax optimisation is achieved through careful planning, transfer pricing, the utilisation of Group losses, and inherent opportunities and favourable advanced tax rulings in certain jurisdictions.
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