A talk on the use of the FIDIC Conditions of Contract for EPC/Turnkey projects in power projects.

1. Construction Issues:
EPC Contracting and
FIDIC Silver Book
Francis Ho An Update on Real Estate Laws in
Senior Associate, King & Spalding LLP the UAE and Saudi Arabia
Email: fho@kslaw.com Radisson Blu Media City Hotel,
Tel: +971 2 652 3426 Dubai, UAE
Mob: +971 50 557 0446 31 January – 1 February 2010
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2. EPC Contracts
§ Engineering, procurement and construction contracts are most
common form of contract used in major international infrastructure
projects
§ An EPC Contractor s obligations typically include:
§ Turnkey responsibility to deliver:
§ a complete facility
§ for a guaranteed price
§ by a guaranteed date
§ which must perform to a specified level
§ Because EPC Contracts involve Contractor taking a high level of
risk they are, to some extent, resisted by contractors (partially due
to high insurance costs). That said, they are still the dominant
model because sponsors and lenders prefer certainty they offer
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3. FIDIC Silver Book
§ FIDIC – International Federation of Consulting
Engineers
§ Standard Forms of Contract widely used in international
engineering and construction projects
§ Range of contracts – White, Red, Yellow, Orange and
Silver Books
§ Silver book – Turnkey contract which departs from usual
balance of risk allocation in FIDIC contracts
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4. Basic Contractual Structure
of a Power Project
Government
Equity Support Concession Financing and
Agreement Agreement Security Agreements
Sponsors Project Co Lenders
EPC Longterm Fuel Supply
PPA
Contract O&M Contract Agreement
EPC O&M Contractor Fuel Offtaker
Contractor (often a Sponsor) Supplier
Direct Agreement
Note: Contractors often become one of sponsors in large projects now although ordinarily
sell down their interest after financial close as they wish to free up their capital for other
projects 4
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5. Bankability
§ EPC contracts must have risk allocation that satisfies Lenders
§ Lenders focus on ability (or more particularly the lack of) Contractor to
claim:
§ Additional costs; and/or
§ Extensions of time
§ Lenders also look to Contractor s security (e.g. parent company
guarantees/bank guarantees securing Contractor s performance)
§ The less comfortable Lenders are with the above, the more equity the
Sponsors will be required to contribute
§ Lenders will also need to be satisfied with technical risk
§ Price is a general bankability issue also (but a broader project issue)
§ Engineering, procurement and construction contracts are most common
form of contract used
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6. General Bankability Issues in
Construction Contracts
§ Fixed completion date (Silver Book Art. 8.2)
§ Fixed completion price (Silver Book Arts. 4.11 and 14.1)
§ No or limited technology risk (Silver Book Arts. 5.8, 7.5, 9.1 and 11
etc)
§ Output guarantees (Silver Book – no performance LDs, rather
obligations to remedy defects and/or reduction in contract price)
§ Liquidated damages for both delay and performance
§ Security from Contractor and/or its parent (Silver Book Art. 4.2)
§ Large caps on liability – ideally none but often one is negotiated
(Silver Book Art. 17.6)
§ Restrictions on ability of Contractor to claim extensions of time and
additional costs (Silver Book Arts. 13.1 and 13.4)
§ An EPC Contract (and Silver Book with amendments) generally
delivers above
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7. Key Clauses in EPC Contracts and
Common Approaches (1)
§ Single point of responsibility – Contractor is responsible for all design,
engineering, procurement, construction, commissioning and testing
activities. If EPC Contractor is a joint venture, liability/responsibility is joint
and several (Silver Book Arts. 4.1 & 5 – fit for purpose )
§ Fixed Contract Price – limited opportunities for Contractor to claim extra
costs/time. Generally limited to directed variations to works (Silver Book
Arts. 13.1, 14.1 and 20)
§ Fixed completion date – guaranteed date for completion. Failure to meet
this date will attract LDs. In order for these to be enforceable they must be
a genuine pre-estimate of the loss that the project company will suffer if the
power station is not completed on time (Silver Book Arts. 8.2, 13 and 20)
§ Note: Additionally extension of time clause must provide for an EOT to be
granted where Contractor is delayed due to act/omissions of owner/project
company (Silver Book Art. 8.4(c))
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8. Key Clauses in EPC Contracts and
Common Approaches (2)
§ Performance Guarantees: Project Co s revenue will come from revenue
from project. This is important to service project debt. It is vital then that
facility performs in respect of output, efficiency and reliability. This is
purpose of the Performance Liquidated Damages payable by the
Contractor if performance requirements are not met. (Silver Book does not
provide for performance liquidated damages – see e.g. Art. 9.4. Can be
amended as required.)
§ Performance Liquidated Damages must also be genuine pre-estimate of
loss. They are usually calculated on net present value (less expenses)
calculation of revenue foregone over the project
§ E.g. in case of a power station what this might mean is if plant output is 5
MW less than required performance liquidated damages will be designed
to compensate project company for that loss of revenue for life of project
by being unable to sell that 5 MW
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9. Key Clauses in EPC Contracts and
Common Approaches (3)
§ Caps on liability: most EPC Contractors will baulk at unlimited
liability. Market is generally a cap at 100% of the Contract Price.
Sub-caps of 20% of Contract Price on delay and performance
liquidated damages also common (Silver Book – LOL is dealt with
in Special Conditions – see Art. 17.6)
§ Consequential damages are also generally excluded. Profit also
often expressly excluded (Silver Book Art. 17.6)
§ There may be some exceptions to those caps (e.g. wilful
misconduct, breach of patent rights)
§ Security – EPC Contract will require that performance security be
supplied by the Contractor in respect of its obligations under EPC
Contract (Silver Book Art. 4.2)
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10. Key Clauses in EPC Contracts and
Common Approaches (4)
§ Market security includes:
§ Bank guarantee for between 5-15% of Contract Price
§ Retention (withholding of 5-15%) of each payment under EPC
contract (Silver Book Arts. 4.2 and 14.3(c) and Annex F)
§ Advance Payment Guarantee – if an advance payment is made
(Silver Book Art. 4.2 and Annex E)
§ Parent Company Guarantee – to secure Contractor s
performance if it does not perform (Silver Book Art. 4.2 and
Annex A)
Variations
§ Project Co must have right to order variations/agree to suggested
variations – clause must contemplate omission of work as well as
pricing (Silver Book Arts. 3.5 and 13)
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11. Key Clauses in EPC Contracts and
Common Approaches (5)
Defects Liability
§ Contractors required to repair defects 12-24 months following
completion of performance testing – can be one period or tiered
(Silver Book Art. 11)
Intellectual Property
§ Contractor must warrant it has the rights regarding any proposed
LP. Also note there is often an indemnity for breach (Silver Book
Art. 17.5)
Force Majeure
§ Parties excused from performance for certain Force Majeure events
(Silver Book Art. 19)
Suspension
§ Project Co has this right (Silver Book Arts. 8.8 to 8.12)
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12. Termination
§ Contractor has very limited rights e.g. non-payment/
extended suspension, material breach by employer
(Silver Book Art. 16.2)
§ Project company has much broader rights. This will be
tied with third party agreements. Can terminate:
§ For convenience (Silver Book Art. 15.5)
§ For breach/insolvency, otherwise (Silver Book Art.
15.2)
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13. Power-specific Clauses in EPC
Contracts
§ General interface issues:
§ Commencement and completion dates
§ LDs amounts and trigger points (NB: Silver Book does not
provide for performance liquidated damages and will need
adaptation)
§ Caps on liability
§ Indemnities
§ Entitlements to extensions of time
§ Force Majeure (Silver Book fairly wide, beyond a Party s
Control and could not reasonably have been provided against
before entering into the Contract )
§ Third party interfaces
§ Intellectual Property
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14. Key Power Issues
§ Grid Access
§ EPC Contract must provide that Project Company provides Grid Access –
this has 2 levels:
§ (a) obligation to ensure that the infrastructure is in place; and
§ (b) obligation to ensure that Contractor is permitted to export power
§ Interfacing of commissioning and testing regimes (fuel for testing?)
§ Consistency between testing/offtake/PPA regime? – important that they
relate
§ Interfacing of issues between the Offtaker and EPC Contractor
§ Project company must control relationship with Offtaker (on-going
relationship)
§ Silver Book will require substantial modification – issues such as
connection, metering, point of delivery and third party interfaces to be dealt
with
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15. Key Performance Issues in Power
Projects (1)
§ Liquidated Damages is main relevant provision governing
performance
§ Output LDs (how many mega watts produced)
§ Heat rate (how much fuel burnt to produce required power
output)
§ Delay liquidated damages
Testing performance – most common approaches
§ Functional Tests – pumps/conveyers/pressure vessels. Test
functionality of parts at station but not whole station. Important as
condition LDs will attach
§ Emissions Tests – compliance against environmental requirements.
Absolute obligation – generally not linked to LDs
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16. Key Performance Issues in Power
Projects (2)
§ Silver Book will require substantial modification to provide for
performance liquidated damages and testing in power projects:
§ Employer s remedy for defective plant accepted into service is
a reduction in the Contract Price; and
§ Testing and commissioning provisions are generally defined
and require further definition – can use technical schedules
§ Guarantee Tests – these are the ability of power station to meet
the performance criteria set out in Contract
§ Generally these are set at maximum level of required
performance. Lender s input will be important in determining
this level. Lender s interest though will be that debt service
obligations are met – Sponsor s interest will be to get optimal
performances
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17. Key Performance Issues in Power
Projects (3)
§ Hand-over ought to occur after all performance tests are
satisfied. This retains Sponsor s potential rights to both
performance and delay damages
§ Contractor s will often request a right to modify station in event
performance guarantees are not met (EPC Contract must
allocate costs for this eventuality)
§ Silver Book provisions will need modification to be made
applicable to project specific requirements (See Art. 9 of Silver
Book)
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18. Technical Issues
§ Testing procedures ought to be set out in EPC Contract including:
§ Testing Methodology (i.e. American Society of Mechanical
Engineers)
§ Testing Equipment – (who must provide it, where will it be, how
sensitive)
§ Tolerances – what is margin of error?
§ Ambient Conditions – what atmospheric conditions are
assumed to be base case (testing results will need to be
adjusted to take into account any variance from these
conditions)
§ If a multi-unit station individual unit tests and then whole of plant
testing
§ Provision of fuel and consumables
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19. To EPC or not to EPC?
Advantages Disadvantages
1. Bankable 1. Higher Contract price than
2. Certainty (as far as that is possible) alternative structure due to risk
3. Turnkey responsibility on the allocation (and built-in Contractor
EPC Contractor contingencies)
2. Limited scope for Project Sponsor
to intervene if problems arise
during construction
3. Not many players
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20. To Silver Book or not to Silver Book?
§ Silver Book very general and requires modification for
complex process driven projects
§ No provision for lender or concession grantor step-in in
project-financed (including PPP and BOT) deals
§ Dispute resolution provisions require consideration –
currently dispute adjudication board appointed (can be
expensive)
§ Performance liquidated damages against Contract Price
reduction – lenders requirements and debt servicing
§ Substantial modification required for project-financed
deals
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