Professional Documents
Culture Documents
Construction Management
Week 3
Module Code: CE 324
Module Credits: 4
By: Awesar Abid
General Overview
Introduction to CC Construction Group
Purpose of presentation
Outline of presentation
Context
Roles
Philosophy
Structure
Form
Key risks and contract terms
2
Context - Economic
Effect of cycles
Participants
Procurement methods and structures
Price
Risk allocation
Funding sources and methods
3
Context – Business Culture
Most countries embrace market economics
(in theory)
In practice there are exceptions – helpful
and otherwise
So relationships are to some extent
adversarial/competitive
And negotiations can be complex
(especially if lenders are involved)
4
Context – Legal/Regulatory
Legal system is part of business culture
The rule of law/contract is important,
especially in project financed deals
Civil and common law systems differ in
form and substance
Impact of procurement rules
On owner’s behaviour
On bidding tactics
5
Roles
Prime contractor (not always EPC)
Vendor
Technology licensor
Investor
Funder (deliberate or by default)
6
Philosophy
As a contractor
Open bidding or sole source?
Immediate profit or market penetration/profile?
Sole or in consortium?
Legal and practical consequences of joint
liability?
Equity or contracting role only?
7
Philosophy (cont’d)
As an owner
Alliance or risk transfer?
Linked to funding method
Some sectoral patterns
Also varies between public and private sector
Philosophy is influential only if shared
within supply chain
8
Structure – the Project
Privately procured
On balance sheet
Off balance sheet
Publicly procured
May still be accounting considerations, eg in PPP
Combinations
PPP projects
Concessions
Others – eg PPAs
9
Typical PPP Structure
PUBLIC ENTITY
SPONSOR
EQUITY
CONCESSION INSURERS
CONTRACT
THIRD PARTY
EQUITY SPV
SURPLUS REAL ESTATE
INVESTORS DISPOSAL
INVESTORS
MEZZANINE
FUNDERS OPERATION & DEVELOPER
CONSTRUCTION
MAINTENANC
E
SENIOR BONDS &
FUNDERS SUBCONTRACTOR 1 GUARANTEE
EQUIPMENT SUPPLY
(BANK/BOND) SUBCONTRACTOR 3 S
DESIGNERS
10
Structure – the Main Construction Contract(s)
EPC/design and build
Owner designed
EPCM/CM
Other variants
11
EPC Structure
“Traditional”
OWNER
ARCHITECT/ENGINEER
CONTRACTOR KEY
= Building Contract
SUB-CONTRACTORS = Sub-Contracts
= Appointments
12
EPC Structure (cont’d)
Where does EPC fit in?
Owner RISK SPECTRUM
Contractor
assumes retains risk
risk
13
EPC Key Features
Single point responsibility
Subject to caps and carve-outs
High degree of risk for contractor
Also high (but not absolute) degree of
contractor control
Priced accordingly
The preferred structure for project
finance/PPP transactions
Linkage to shareholder support
14
EPC Key Features (cont’d)
Sensitive to market conditions – recent
history
Wide choice of standard contracts (eg
FIDIC Silver and Yellow)
Commonly used in infrastructure, thermal
power and downstream petchem
15
Owner Design
“Traditional”
OWNER
ARCHITECT/ENGINEER
CONTRACTOR
KEY
= Building Contract
SUB-CONTRACTORS = Sub-Contracts
= Appointments
16
Owner Design Key Features
More control for owner
Design and other risks also retained by
owner
History of disputes
Use has declined in recent decades but still
used in, eg, public civil works and
technology projects
Incompatible with project finance approach
17
EPCM/CM
OWNER
CONSTRUCTION MANAGER
TC TC TC TC TC TC TC TC TC
TC = TRADE CONTRACTOR
18
EPCM/CM Key Features
EPCM contractor is essentially a consultant
Owner bears substantial risk
Interface
Recourse/leverage
Can produce the lowest cost and fastest
completion
But is heavily dependent on specialist skills,
experience and resources
Can be disastrous if those are not present –
examples
Widely used in upstream oil and gas, 19
Variants
Timing – two-stage contracting
Market driven and mixed feedback
Conversion mechanism
Scope – is FEED included?
Can be attractive for contractors
Pricing – target cost/GMP
Usually a consequence rather than a choice
Examples – eg 2012
Link to philosophy
20
Forms of Contract
21
Forms of Contract
Standard or specially drafted?
Relevance of wider structure
Origin of standard forms
Example of FIDIC
Other standard forms, eg NEC, AIA, ENAA,
EIC
Why amend a “proven” form?
To correct perceived anomalies or bias
(examples)
22
Forms of Contract (cont’d)
To reflect deal specifics or sector practice
(examples)
To incorporate material from other contracts (eg
in PPP)
To reflect requirements of funding (which may be
23
Key Risks and Contract Terms
Law and language
English language and style commonly used
Precedence and integration of documents
Distinguish language of contract and of
communications
Common law preferred but less strongly these
days
Impact of local law in any event
Wide choice of methods and places for dispute
resolution
24
Key Risks and Contract Terms (cont’d)
Quality and scope
“Wrapping” eg of technology or existing works or
design
Fitness for purpose and reasonable skill and care
Insurance and risk retention implications
Compliance with laws and consents
Special importance of environmental
requirements
Pass-down from other project documents
25
Key Risks and Contract Terms (cont’d)
Intellectual property
Ownership by contractor
Assigned or licensed to owner?
Scope of license
Indemnities for infringement – capped or not?
26
Key Risks and Contract Terms (cont’d)
Performance Security
Joint liability
Guarantees
Bonds
– Types and purposes
– Issues with on-demand bonds
– Credit issues in current market
Retention funds
27
Key Risks and Contract Terms (cont’d)
Subcontracting
Approval
Step-in rights
Site conditions
Can threaten viability of project/parties
Mitigants
– An open-minded approach
– Government support
– Surveys and staging
– Flexibility in design
28
Key Risks and Contract Terms (cont’d)
Labour
Local laws
Local preference
Time
Status of programme
Remedies for delay
Defects liability
Typical periods
“Evergreen” clauses
30
Key Risks and Contract Terms (cont’d)
Variations
Instructed by the owner
Resulting from changes in law or standards
Milestones or measurement?
Offsite materials
31
Key Risks and Contract Terms (cont’d)
Advance payments
Cashflow neutrality
Payment security for contractor
Set-off and correction
ECA requirements
Remedies for non-payment
Role of lender’s engineer
32
Key Risks and Contract Terms (cont’d)
Termination
For owner convenience
– Payment of profit
For force majeure
For owner default
– Typical grounds
– Remedies
For contractor default
– Typical grounds
– Remedies (to include rejection?)
33
Key Risks and Contract Terms (cont’d)
Risk
Indemnities
Treatment of hazardous sites
Care of the works
Excepted risks
Link to insurance
Liability
Liability cap
Exclusion of “consequential loss”
Exceptions
34
Key Risks and Contract Terms (cont’d)
Insurance
Main categories
– CAR/EAR
– TPL/PL
– PII
– Plant and vehicles
– DSA/ALOP
– Latent defects
– Operational insurance
Who arranges cover?
Other contract terms
35
Key Risks and Contract Terms (cont’d)
Force Majeure
Open or closed clause?
Territorial limits?
Exclusions
Consequences
36