Chapter 4 The Use of EPC Contracts in Renewable Energy Projects

• Jurisdiction: United States

Chapter 4 The Use of EPC Contracts in Renewable Energy Projects

Robert G. Hensley Shannon Lynch Haen Dorsey & Whitney Denver, CO

ROBERT G. HENSLEY is a business attorney that specializes in renewable energy development. Robert partners with clients in complex commercial transactions to help them achieve their strategic goals by offering creative and business-savvy legal advice. With over 20 years of experience working on renewable energy projects, he is one of the few attorneys with long-term experience in the development, construction, and acquisition of wind, solar, natural gas, and pumped storage projects. His work in the renewable energy area includes all aspects of developing a project, including drafting and negotiating Engineering, Procurement, and Construction Agreements, Procurement Contracts, Turbine Supply Agreements, Balance-of-Plant Contracts, Engineering Services Agreement, and Operation and Maintenance/Service Agreements. Robert also has significant Mergers & Acquisitions experience with respect to the purchase and sale of renewable energy projects. He has worked on over 100 wind projects, solar projects, natural gas engine projects, and natural gas/hydrogen turbine projects. Robert is admitted to practice law in Colorado, Montana, Minnesota, California, Texas, and North Dakota and has worked on projects all over the United States.

SHANNON LYNCH HAEN provides counseling on complex construction, mining and energy projects while enabling her clients to successfully navigate day-to-day business challenges. She works with clients to meet long-term goals as well as assist with the daily aspects of their business. She drafts and revises everything from EPC-style construction contracts and renewable energy procurement agreements to narrow-scope professional services agreements. She also provides her clients with everyday business support, such as revising master services agreements and contractor agreements. In addition to her corporate practice, Shannon leverages her IP background as a USPTO-licensed patent attorney to drive client-oriented and actionable solutions for the various business issues that can interact with intellectual property rights.

I. INTRODUCTION

As a starting point to understanding construction contracts, it is important to review the various project delivery methods for a construction project. As a simple example, some projects use an architect or an engineer to fully develop the plans and specifications for the work. Once the plans and specification are developed, a contractor is hired to do the actual construction based upon those plans and specifications. This is a very traditional project delivery method. However, there are many other models to construct a project, and the most common models will be discussed in this Introduction. In addition, this Introduction briefly touches upon the most commonly negotiated terms in the construction contract. Regardless of the project delivery method, these terms are almost always the most negotiated sections of a construction contract.

A. The Top 10 Negotiated Terms in Construction Agreements. Regardless of which project delivery method is used, the following terms and conditions are the most commonly negotiated provisions in construction contracts:

1. Price
2. Liquidated Damages (delay and performance)
3. Maximum Liability Caps
4. Warranty Length
5. Dispute Resolution
6. Amount of Retention
7. Payment Schedule
8. Security for Performance (Bonds/Payment by Owner)
9. Indemnity and Insurance Limits
10. Change Orders (Force Majeure/Pre-Priced/Caps)

Each of these concepts will be discussed in detail later in this paper, but regardless of the project delivery method, this list of terms and conditions should be considered when drafting a construction contract.

B. An Overview of Common Project Delivery Methods.

1. Fully Engineered Projects PLUS a Single Prime Contractor. Using this approach, the Owner retains a separate engineering/design firm to prepare the detailed plans and specifications for the Work. Because the design is usually complete at the time a Prime Contractor is selected, this approach lends itself to the preparation of a bid package for the Work that is competitively bid upon by multiple potential contractors. Once a Prime Contractor is selected, the Prime Contractor enters into multiple subcontracts and procurement contracts with third parties. The single

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Prime Contractor is responsible for the performance of the work, so this method can lend itself to a cost-effective way to deliver a project. However, because the Prime Contractor does not control all aspects of the Work, the Prime Contractor often will inflate the Contract Price (a "Contingency") to buffer against unknown costs and schedule delays.

2. Fully Engineered Projects PLUS Multiple Prime Contractors. This approach is similar to the first delivery method, except that the Owner enters into multiple Prime Contracts with Contractors and/or equipment suppliers. The benefit of this approach is that it can eliminate much of the pricing contingency that a single Prime Contract would factor into its price. On the other hand, because there is not a single Prime Contractor, the project schedule and performance guarantees can be more difficult for the Owner to manage, thereby creating risk.

3. Design-Build Projects. Using a Design-Build Model can be very similar to an EPC Contract (the contract terms are sometimes identical and only the name of the Agreement is changed). Using a Design-Build Model, the Contractor is primarily responsible for the engineering and design of the Project and is also usually responsible for the actual construction of the Project.

4. EPC Projects. As discussed below, in its purest form, an EPC Contract is intended to provide a Project that is designed, engineered, and constructed by the same Contractor.

C. What is an EPC Contract? An Engineering, Procurement, and Construction Contract ("EPC Contract") is a type of contract that has been used for many years in the construction industry. Because an EPC Contract can provide an effective turnkey solution, EPC Contracts are a common form of contract used by the private sector on large-scale and complex infrastructure projects. Under an EPC Contract, a Contractor is obligated to deliver a completed facility to an owner/developer. EPC Contracts are often called "turnkey" or "full wrap" construction contracts because the Owner/developer specifies the desired result (e.g., megawatts produced), but the contractor assumes the risk in designing the facility, procuring equipment that will be installed, and performing all of the construction - on time and for a fixed fee. Specifically, in addition to delivering a complete facility, the contractor must deliver that facility for a guaranteed price by a guaranteed date and it must perform to the specified level. Failure to comply with any of these requirements will usually result in the contractor incurring specified monetary liabilities. Although EPC contracts are commonly used by the developers of a wide range of projects, EPC contracts, or variants of EPC contracts, are also frequently used by utilities and other Owners to construct their own projects in a situation where a private third-party developer is not involved.

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II. THE PROJECT FINANCE MODEL

EPC Contracts have long been used by developers of projects (a "Project Developer") that are financed based upon a "Project Finance" model. Typically, the Project Developer will form a special purpose entity such as a Delaware limited liability company (the "Project Entity"). The Project...