EPC Contract, win-win negotiation, LNTP on

private investment project

Context:
In a previous case study, we analysed the positive impact on the atmosphere brought by
negotiating a win-win subject like “completing the construction phase early and sharing
the value generated by this”.
Many times, private investment projects take more time than expected to reach financial closure.
To state the obvious:

“The easiest way to finish early is to start early.”

In practice, starting early requires a Limited Notice to Proceed (LNTP) agreement.

A limited notice to proceed (or LNTP) is a notice by the Employer

instructing the Contractor to proceed with a part of the works. This
situation occurs when all the conditions to fully proceed with the project
have not yet been fulfilled. Typical obstacles to a full notice to proceed
(or NTP) are the need to reach financial closure, lacking some permits
or ongoing contract negotiations. Usually, the Contractor and the
Employer share the risk for the spending during the LNTP period in
case the full NTP is never achieved.
The advantages of an LNTP for the Project Owner
are:
 More work done before NTP (Notice to Proceed) can lead to a shorter time required
between NTP and taking-over, which means less IDC (Interest During Construction).
 If some extra project float is generated by the early start, the project risk is reduced.
 It is a good opportunity to see the Contractor in action before full NTP. If this turns out to
be a disaster, it is not too late to take the necessary actions (to put some pressure on the
Contractor to implement corrective actions or, in the worst case, go back to the second
evaluated bidder).

Contractor can benefit from the following

advantages:
 Reduction of the painfully long waiting time between contract signature and NTP will
avoid increased cost from pre-mobilised resources that are just standing-by. The costs of
pre-NTP idle time can rarely or never be recovered from the Owner.
 Usually, Contractors have to overcome some inertia to start and reach good working
speed. Nothing better than an LNTP period to do so and not accumulate delay in the first
months after NTP.
 Additional float generated during the LNTP period will reduce the risk of being late and
of paying corresponding delay liquidated damages.
The challenges to conclude an LNTP
agreement include:
 Agreement on payment during the LNTP period: The Owner has considerable
difficulties to pay out-of-pocket amounts because the development expenses often exceed
initial expectations. Only at financial closure fresh cash will be available. On the other
hand, one cannot expect the Contractor to finance the project during the LNTP stage. A
compromise should be found.
 Agreement on a potential reduction of the post-NTP time for completion: This reduction
can rarely be on a-day-for-a-day basis because of the lack of full mobilisation.
Agreements going from no reduction to where 40-50% of the effective LNTP period was
deducted from the time for completion, have been noted.
 Agreement on the scope of the works that should be performed during the LNTP. This
goes together with the two previous bullet points; the wise thing to do is to select as
LNTP works only those activities that have the most favourable impact on risk reduction
and time for completion.
 Agreement on the deliverables that can justify interim payments during LNTP or at
termination. Because the LNTP period is usually relatively short (3 to 6 months), it can
be extremely difficult to identify deliverables that can actually be completed and/or
handed over to the Owner. Design documents are often the only realistic deliverables.
Regularly, the only payment during the LNTP is a preliminary advance payment against a
bank guarantee. This preliminary advance payment is then absorbed into the full advance
payment at NTP by deduction.
 Termination of LNTP, without direct continuity into the EPC Contract, is definitely the
most difficult subject. If the Owner/project developer is a special purpose vehicle, not
reaching financial closure almost certainly means liquidation with no recourse available
to the Contractor. The parties need to reflect jointly and realistically on this regretful
scenario and on the consequences of never reaching financial closure/full NTP.
Conclusion:
While negotiating an LNTP agreement represents additional work for the Owner’s and
Contractor’s negotiation teams, they are worth the effort. The win-win outcomes brought by
starting early include risk reduction, smoother project start-up and cost savings. Negotiating this
can be a catalyst for a positive negotiation process and can avoid impatience and conflict
between Owner and Contract before full NTP.