CAPEC Business Opportunities Seminar

N d l t i b t ti fNew developments in best practice for plant and design-build contractsp g

CAPEC Business Opportunities SeminarCAPEC Business Opportunities SeminarXining - September 2015

Peter Boswell

Plant contracts – huge, growing demand

Off h i d fOffshore wind farms22 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:Contracts:- foundations: construction installation- wind turbines: construction installationwind turbines: construction installation- off-shore substations: construction installation- cables: - installationcables: installation

export cable productionarray cable productionarray cable production

- vessels: supply

Outline

O tliOutlineWhat is plant?pNeed to quantify plantPlant investment (GFCF)( )GFCF category > GHG emissionsNet Energy Analysis > GFCF category Plant procurementPlant contractsNew Engineering Contract - FIDIC Plant ContractFIDIC Plant Contract: general developmentsRenewable energy sectorThe new normalStandard forms of contract

What is plan?

What is plant?“the apparatus, machinery and vehicles pp yintended to form orforming part of the Permanent Works”.g pPlant = 50% cost?Wind farms (87% plant)Wind farms (87% plant)

Hydro: dam + powerhouse (multicontracts?)

Need to quantify plant

Need to quantify plant- Appropriate regulationspp p g- Procurement strategies- Contract provisionsp

...... and climate change

Plant GFCF

Plant investment (GFCF)Impossible to survey individual plants. p y pNeed an overall approach:- National Accounts (GDP) gives balances between all parts ofNational Accounts (GDP) gives balances between all parts of

the economy.- Gross Fixed Capital Formation (GFCF) is part of GDP.Gross Fixed Capital Formation (GFCF) is part of GDP.- GFCF = net investment: that part of economic output which is

building everything else.building everything else.

GFCF breakdown

GFCF breakdown

GFCF > Emissions

GFCF category > GHG emissionsPower and industry GHG emission sector y(electricity & heat production, manufacturing industry, construction, industrial processes)p )= Other machinery and equipment GFCF category

(machinery & equipment that generate & use electricity)(machinery & equipment that generate & use electricity)

No correlation!OECD 2012OECD 2012

Net Energy Analysis

Net Energy AnalysisNational Accounts = jobs, energy and economic volume flows j gythroughout the economy.

UK NEAGFCF GFCF investment AmountEquipment Onshore wind power +50%;

Net Energy AnalysisTest: models UK GFCF

Offshore wind power +300%;PV +75%Solar hot water +1200%Cars better -30% energy 50% new usePHEV (plug-in hybrid electric vehicles)

7% newvehicles)LCVs (light commercial vans-38% energy

80% new

HGVs (tr cks) 44% energ 50%HGVs (trucks) -44% energy 50% newAviation, improved efficiency -15% energy useAviation, new aircraft -21% energy use

Construction New low-energy dwellings 50% new buildCommercial buildings & factories, renovation

7% properties/y,

Dwellings, renovation 2.5% properties/y

Dwellings wall insulation 2 4% propertiesUK energy policy Dwellings, wall insulation 2.4% properties per year

UK energy policy

UK energy policy - NEA

Energy sector investments emissions

The same can be done for allThe same can be done for all plant sectors to quantify plant!

Plant procurement

Plant procurement

Type Traditionaldesign-bid-build

Plant Design-Build Turnkey

D i E l C t t D B t C t tDesign Employer Contractor D-B team ContractorConstruction Contractor Contractor D-B team ContractorContract Construction Plant & Design- Build Turnkey

Plant procurement

Employer’s risk

Cost-reinbursable

ty skTarget price

reinbursable

flexib

ili

tor’s

risTarget price

M lticontract

loye

r’s

Cont

ractMulticontract

Split turnkey

Emp CSplit turnkey

Contractor’s incentive

Plant contracts

Plant versus Design-Build focusA plant contract that allows for design-build involves:p g- design-build delivery issues; - complexities from the manufacture, installation, testing, and p g

commissioning of much technically sophisticated equipment Design-build aspects given little attention since widely used andDesign build aspects given little attention since widely used and much knowledge has been developed:

US 2014 b ildiUS, 2014 buildings- non-residential: 49% DB 50%DBB

i d t i l 36% DB ?- industrial: 36% DB ?US, 2010 public water & waste water: 57% DB ?

Plant contracts

Body Contract NT Int Date Use Not specialp

AIA A141 Standard Form of Agreement Between Owner and Design-Builder

x - 2014 Buildings

AGC x - Moderately complex plant xCIOB Complex Projects Contract x x 2013 Buildings with complex systemsDBIA Document No. 525 - Standard Form of Agreement

Between Owner & Design-Builder - Lump Sumx - Moderately complex plant x

EJCDC C-700 General Conditions x - 2013 Not for plantEJCDC C 700, General Conditions x 2013 Not for plant.ENAA*** Model Form for Process Plant Construction - x 2010 Process plant; power plant xFIDIC*** Plant and Design-Build Contract x x 2009 Moderately complex plant xICC Model Contract for the Turnkey Supply of an Industrial - x 2010 xy pp y

PlantICE New Engineering Contract x x Minor plant items xIChemE Contract for Lump Sum Contracts (Red Book) x x 2013 Complex systems-based plant;

process plantx

process plantIET/IMechE MF/1: Model Form of Contract for design, supply &

installation of electrical, electronic & mechanical plant.x x 2010 Complicated wiring elements -

IMCA Marine Construction Contract x x 2012 Marine construction -JCT Major Project Construction Contract x x 2011 Large scale civil worksLOGIC Construction Contract (Edition 2) x x Oil and gas; offshore wind energy xOrgalime Turnkey Contract for Industrial Works - x 2003 Any process or industrial plant x

* Used by multinational or national development banks

New Engineering Contract

NEC3 (for civil engineering works +/- ‘minor plant items’)Format - not traditional (for project managers):( p j g )- part skeleton contract, part management tool;- assembled to suit a specific project; p p 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;- part of a harmonised ‘rainbow suite’;p- 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 contractProcuring the supply & installation of plant follows theg pp y psame procedure as for employer-designed construction works.Certain significant differences owing to different types of projects:g g yp p j- plant is largely manufactured off-site at a factory;- contractor usually associated with a manufacturer or supplier;y- 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 - 1FIDIC Rainbow suite updates for 2016.pNew elements- formats and new features of MDB Construction

Contract, Construction Subcontract andDesign, Build and Operate Contract. g

- 20 clause structure reordered and changed to 21 clauses with Clause 20 only for claims (both contractor’s and employer’s).

Principles restated- fitness for purposeess o pu pose- good faith- proactive contract management (e.g., early warning).p g ( g , y g)

FIDIC Plant Contract: general developments - 2

FIDIC Plant Contract: general developments - 2Documentation requirements strengthenedq g- Employer’s requirements- Contractor’s programmep g- Contractor’s contemporary recordsManagement systems’ requirements strengthenedManagement systems requirements strengthened- Quality/EnvironmentDetailed draftingDetailed drafting- Further conditions precedent to the Commencement Date.- Variation procedure after an Engineer’s instructionVariation procedure after an Engineer s instruction.- Withheld Interim Payment Certificates follow-up.- Extension of the Defects Notification Period following retestingExtension of the Defects Notification Period following retesting.- Contractor bound to remedy all defects.

Renewable energy sector – the new normal?

Renewable energy sector – the new normal?Today, few single-source offshore turnkey contractors (too risky; y g y ( ylow margins) so multicontracts widespread. Project owner:- has many contractors to choose from for each scope of work;y p- employs directly and separately the turbine supplier, civil and

electrical contractors, typically on a target-cost model;y y g- 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 generic Plant Contract issues: g- new roles, e.g., Warranty Surveyor;- more interfaces between contractors;more interfaces between contractors;- more difficult quality control/testing/commissioning issues;

more complex safety issues e g wave heights = force majeur;- more complex safety issues, e.g., wave heights = force majeur;- more prescribed (nominated) specialist equipment;- more technology issues, e.g., intellectual property, interfaces;- more insurance and liability issues, e.g., site conditions change y , g , g

continually, equipment deteriorates before completion;- more contract issues, e.g., how to define fairly Defectsmore contract issues, e.g., how to define fairly Defects

Notification Period, life expectancy, Time for Completion.

Standard forms of contract

Standard forms of contractUnder law, standard forms must be continually updated.y pThey offer many advantages, with few disadvantages:- reduce negotiation and re-drafting;g g- less misunderstanding and fewer disputes;- fair in terms of apportioning risks, obligations & responsibilities;g g- 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 contractsWhile new developments in today’s project delivery tend to arise p y p j yin specific industry sectors, the accompanying issues are mainly new generic issues that need to be taken up by standard forms.g p yContinue to incorporate generic plant-related contract issues as opposed to sector-specific issues so that valuable features ofopposed to sector specific issues so that valuable features of standard forms are not lost, namely:- efficiencyefficiency- transparency- facilitated dispute resolutionac a ed d spu e eso u o- and above all a coherent contractual

framework for tackling climate change.g g

THANK YOU