CAPEC Business Opportunities Seminar
New developments
N
d l
t in
i best
b t practice
ti for
f
plant and design-build
p
g
contracts
CAPEC Business Opportunities Seminar
Xining - September 2015
Peter Boswell
Plant contracts – huge, growing demand
Offshore
Off
h wind
i d ffarms
22 of the world’s 25 largest operational wind parks in Europe.
London Array: world’s largest off-shore wind farm (Phase 1
construction: €2.6 billion):) 175 wind turbines over 100 km2; 3
substations; 450 km of off-shore cables.
Contracts:
- foundations:
construction installation
- wind turbines:
construction installation
- off-shore substations: construction installation
- cables:
installation
export cable production
array cable production
- vessels:
supply
Outline
O tli
Outline
What is plant?
p
Need to quantify plant
Plant investment (GFCF)
(
)
GFCF category > GHG emissions
Net Energy Analysis > GFCF category
Plant procurement
Plant contracts
New Engineering Contract - FIDIC Plant Contract
FIDIC Plant Contract: general developments
Renewable energy sector
The new normal
Standard forms of contract
What is plan?
What is plant?
“the apparatus,
pp
machineryy and vehicles
intended to form or
formingg ppart of the Permanent Works”.
Plant = 50% cost?
Wind farms (87% plant)
Hydro: dam + powerhouse (multicontracts?)
Need to quantify plant
Need to quantify plant
- Appropriate
pp p
regulations
g
- Procurement strategies
- Contract provisions
p
...... and climate change
Plant GFCF
Plant investment (GFCF)
Impossible
p
to surveyy individual pplants.
Need an overall approach:
- National Accounts (GDP) gives balances between all parts of
the economy.
- Gross Fixed Capital Formation (GFCF) is part of GDP.
- GFCF = net investment: that part of economic output which is
building everything else.
GFCF breakdown
GFCF breakdown
GFCF > Emissions
GFCF category > GHG emissions
Power and industryy GHG emission sector
(electricity & heat production, manufacturing industry, construction,
industrial processes)
p
)
= Other machinery and equipment GFCF category
(machinery & equipment that generate & use electricity)
No correlation!
OECD 2012
Net Energy Analysis
Net Energy Analysis
National Accounts = jjobs, energy
gy and economic volume flows
throughout the economy.
UK NEA
Net Energy Analysis
Test: models UK GFCF
UK energy policy
GFCF
Equipment
GFCF investment
Onshore wind power
Offshore wind power
PV
Solar hot water
Cars better -30% energy
PHEV (plug-in hybrid electric
vehicles)
LCVs (light commercial vans
-38% energy
HGVs (trucks)
(tr cks) -44%
44% energ
energy
Aviation, improved efficiency
Aviation, new aircraft
Construction New low-energy dwellings
Commercial buildings &
factories,, renovation
Dwellings, renovation
Dwellings wall insulation
Dwellings,
Amount
+50%;
+300%;
+75%
+1200%
50% new use
7% new
80% new
50% new
-15% energy use
-21% energy use
50% new build
7% properties/y
2.5%
properties/y
2 4% properties
2.4%
per year
UK energy policy - NEA
Energy sector investments
emissions
The same can be done for all
plant sectors to quantify plant!
Plant procurement
Plant procurement
Type
Traditional
design-bid-build
D i
Design
E l
Employer
Construction
Contractor
Contract
Construction
Plant
Design-Build
Contractor
C
t t
D B team
D-B
t
Contractor
D-B team
Plant & Design- Build
Turnkey
Contractor
C
t t
Contractor
Turnkey
Plant procurement
Employer’s risk
Target price
M lticontract
Multicontract
Split turnkey
Contractor’s incentive
Contracttor’s rissk
C
Employer’s flexibility
Costreinbursable
Plant contracts
Plant versus Design-Build focus
A pplant contract that allows for design-build
g
involves:
- design-build delivery issues;
- complexities
p
from the manufacture, installation, testing,
g and
commissioning of much technically sophisticated equipment
Design-build
Design
build aspects given little attention since widely used and
much knowledge has been developed:
US 2014
US,
US, 2010
bbuildings
ildi
- non-residential:
49% DB 50%DBB
- industrial:
i d ti l
36% DB ?
public water & waste water: 57% DB ?
Plant contracts
Body
AIA
AGC
CIOB
DBIA
EJCDC
ENAA***
FIDIC***
ICC
ICE
IChemE
Contract
A141 Standard Form of Agreement Between Owner and
Design-Builder
Complex Projects Contract
Document No. 525 - Standard Form of Agreement
Between Owner & Design-Builder - Lump Sum
C-700
C
700, General Conditions
Model Form for Process Plant Construction
Plant and Design-Build Contract
pp y of an Industrial
Model Contract for the Turnkeyy Supply
Plant
New Engineering Contract
Contract for Lump Sum Contracts (Red Book)
IET/IMechE MF/1: Model Form of Contract for design, supply &
installation of electrical, electronic & mechanical plant.
IMCA
Marine Construction Contract
JCT
Major Project Construction Contract
LOGIC
Construction Contract (Edition 2)
Orgalime Turnkey Contract for Industrial Works
NT Int Date
Use
Not
special
p
x
-
2014 Buildings
x
x
x
x
-
Moderately complex plant
2013 Buildings with complex systems
Moderately complex plant
x
x
-
x
x
x
2013 Not for plant
plant.
2010 Process plant; power plant
2009 Moderately complex plant
2010
x
x
x
x
x
x
Minor plant items
x 2013 Complex systems-based plant;
process plant
x 2010 Complicated wiring elements
x
x
x
-
x
x
x
x
-
2012 Marine construction
2011 Large scale civil works
Oil and gas; offshore wind energy
2003 Any process or industrial plant
* Used by multinational or national development banks
x
x
x
x
x
-
x
x
New Engineering Contract
NEC3 (for civil engineering works +/- ‘minor plant items’)
Format - not traditional ((for project
p j managers):
g )
- part skeleton contract, part management tool;
- assembled to suit a specific
p
pproject;
j
- ‘black book’ front-end core clauses +
‘rainbow’ of contract provisions
Focus - project management:
- high engagement of the employer;
- detailed management procedures and responsibilities;
- regularly updated programme is standard.
Contract conditions - flexible:
- can structure clauses in many ways;
- handles many pricing arrangements as standard;
- variations are compensation events based on forecast cost.
New Engineering Contract
FIDIC Plant (for supply & installation of plant & erection on site)
Format - traditional ((for lenders):)
- separate documents;
- ppart of a harmonised ‘rainbow suite’;
- General Conditions + Particular Conditions.
Focus - balanced risk:
- employer’s requirements vital;
- contractor design; usually associated with a plant supplier;
- responsibilities allocated; procedures for programme updating.
Contract conditions - coherent:
- 20 structured clauses;
- limited number of pricing arrangements as standard;
- variations’ cost and time extension claimed separately.
FIDIC Plant Contract
FIDIC Plant Contract - a dedicated contract
Procuringg the supply
pp y & installation of pplant follows the
same procedure as for employer-designed construction works.
Certain significant
g
differences owingg to different types
yp of pprojects:
j
- plant is largely manufactured off-site at a factory;
- contractor usuallyy associated with a manufacturer or supplier;
- detailed design of the plant is the contractor’s responsibility;
- design to fulfil performance specification;
- engineer administers the contract, monitors manufacture and
erection on site and certifies payment;
- testing and commissioning are comprehensive;
- payment is mainly on a schedule of payments based on
predefined measurable milestones; generally lump-sum basis.
FIDIC Plant Contract: general developments - 1
FIDIC Plant Contract: general developments - 1
p
for 2016.
FIDIC Rainbow suite updates
New elements
- formats and new features of MDB Construction
Contract, Construction Subcontract and
Design,
g Build and Operate Contract.
- 20 clause structure reordered and changed to 21 clauses with
Clause 20 only for claims (both contractor’s and employer’s).
Principles restated
- fitness
ess for
o pu
purpose
pose
- good faith
- pproactive contract management
g
((e.g.,
g , earlyy warning).
g)
FIDIC Plant Contract: general developments - 2
FIDIC Plant Contract: general developments - 2
q
strengthened
g
Documentation requirements
- Employer’s requirements
- Contractor’s programme
p g
- Contractor’s contemporary records
Management systems
systems’ requirements strengthened
- Quality/Environment
Detailed drafting
- Further conditions precedent to the Commencement Date.
- Variation procedure after an Engineer
Engineer’ss instruction
instruction.
- Withheld Interim Payment Certificates follow-up.
- Extension of the Defects Notification Period following retesting
retesting.
- Contractor bound to remedy all defects.
Renewable energy sector – the new normal?
Renewable energy sector – the new normal?
Today,
y few single-source
g
offshore turnkeyy contractors ((too risky;
y
low margins) so multicontracts widespread. Project owner:
- has manyy contractors to choose from for each scope
p of work;
- employs directly and separately the turbine supplier, civil and
electrical contractors, typically
y
y on a target-cost
g
model;
- apportions liability on a case-by-case basis;
- is responsible for co-ordinating the separate packages;
- overlays project-wide alliancing obligations.
Disadvantages:
- increased owner risks;
- contractor interfacing difficult;
- cannot recover the costs of delays.
The new normal?
The new normal? Probably “yes”
Multicontract issues are new ggeneric Plant Contract issues:
- new roles, e.g., Warranty Surveyor;
- more interfaces between contractors;
- more difficult quality control/testing/commissioning issues;
- more complex safety issues,
issues ee.g.,
g wave heights = force majeur;
- more prescribed (nominated) specialist equipment;
- more technology issues, e.g., intellectual property, interfaces;
g , site conditions change
g
- more insurance and liabilityy issues,, e.g.,
continually, equipment deteriorates before completion;
- more contract issues, e.g., how to define fairly Defects
Notification Period, life expectancy, Time for Completion.
Standard forms of contract
Standard forms of contract
Under law, standard forms must be continuallyy updated.
p
They offer many advantages, with few disadvantages:
- reduce negotiation
g
and re-drafting;
g
- less misunderstanding and fewer disputes;
- fair in terms of apportioningg risks, obligations
g
& responsibilities;
- key to opening up projects to international participation;
- facilitate training of project and administrative staff;
- avoid need for intensive effort to interpret contract conditions;
- uncertainties of meaning are likely to be ironed out, so more
predictable outcomes;
- promotes best-practice contract administration and project
management;
- reduced need for legal advice.
Conclusion
Develop standard forms of plant contracts
While new developments
p
in today’s
y pproject
j deliveryy tend to arise
in specific industry sectors, the accompanying issues are mainly
new ggeneric issues that need to be taken upp byy standard forms.
Continue to incorporate generic plant-related contract issues as
opposed to sector-specific
sector specific issues so that valuable features of
standard forms are not lost, namely:
- efficiency
- transparency
- facilitated
ac a ed ddispute
spu e resolution
eso u o
- and above all a coherent contractual
framework for tacklingg climate change.
g
THANK YOU