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With mega projects being kicked-off at rapid pace and with the green transition requiring massive investments in infrastructure and renewable energy, contractual frameworks must keep up with the latest contracting and project trends to meet the requirements in the market. In this update, we provide an introduction to some of the key trends that we see in our work with large-scale CAPEX projects, and which are reflected in the work currently undertaken by FIDIC to issue new model contract forms.
Following the tumultaneous recent years with a force majeure epidemic, supply chain blockades, and severe inflation, the use of the classic turn-key or EPC project/contract set-up is often challenged, e.g. by contractors’ hesitant risk appetite and employers’ desire to establish joint incentives to optimize project schedules and budgets.
Market forces are thereby driving new contracting trends to emerge and develop, as is the impact and inspiration from a global scene and emerging sectors and project types.
With large-scale CAPEX projects more often than not being executed by a global mix of employers, contractors and vendors, the adjacent project contracts also reflect international standards and trends.
From a Danish perspective, this implies, inter alia, that the relatively simple but well known and well-tested AB suite of contract standards, which are the predominant contract standards for local Danish construction works, is often not the prefered or even possible choice for projects that involve fit-out elements, liability structures, fee arrangements, and/or a turn-key project structure with international stakeholders playing the key roles.
Below, we have summarised our comments to some of the key trends that we experience in our work with large-scale CAPEX projects.
The increase in (very) large private CAPEX projects in combination with prevailing market forces and learnings about recurring pitfalls in large-scale projects have resulted in a significant focus on and use of bespoke collaborative contract formats and contract instruments in CAPEX projects, including complex infrastructure, renewable energy and life-sciences projects.
Whereas the parties, the projects, and the sectors may differ, the need to ensure fruitful collaboration, dispute prevention, and succesful, cost efficient and timely project delivery, is the same.
Many large-scale CAPEX projects will look to adopt a collaborative, tri-party or interfacing agreement or framework, some of which will include “hard” legal risk allocation provisions, whereas others will deal primarily with “softer” collaborative and project-solving obligations.
Collaborative contracts are “relational” contracts that to a large extent focus on process as a means to a succesful project execution.
Collaborative contract models very often include structures and incentive mechanisms that urge the contract parties to work closely together in order to deliver what are often complex, multiparty, high-risk and high-value projects.
Close and committed collaboration supports the parties’ understanding of the project, its problems and its solutions. Transparency and collaborative targets induce more realistic expectations and forecasts as for the actual costs and time needed to successfully and jointly complete the project. In our experience, collaborative contracts and project structures must be designed to generate long-term value and foster win-win outcomes for all parties involved by establishing aligned purposes, true collaboration and transparency from the very early stages of a project up until the end of the contract term. Focus should be on collaborative targets with often both “pain” and “gain” elements, risk and opportunity sharing, and a good faith-attitute.
Whereas – in its most stringent format – the classic EPC (engineering, procurement and construction) contract will often be a contract to deliver a turnkey project with full – or almost full – budget risk on the contractor, the EPCM (engineering, procurement and construction management) contract is in essence a professional services contract, where the contractor’s key responsibility is the supervision, the management and the coordination of the construction interfaces.
In recent years we have seen the classic EPC or turnkey contract structure with a lump-sum fee being challenged, being considered less attractive and being less dominant in the market, to some extent due to lack of appetite from the contractors’ side to assume the majority of project risks.
Nevertheless, the EPC and the EPCM types of contracts are often somewhat mixed and confused – and drafting of concise contract wording is the key to success.
A project based primarily on an EPCM type contract often reflects a more complex project structure where it is essential that the parties have and share a clear understanding of the overall objectives, the scope of work and the roles that they each play in the project.
The parties’ joint effort to determine the allocation of the scope of work and the KPI targets places high demands on the parties’ initial cooperation, and it will often make sense to include an incentive mechanism that rewards budget safety and timely performance and delivery.
The renewable energy sector is seeing a significant increase in large international projects, and with the green transition being pushed from all sides, the amount of projects with global stakeholders will inevitably still increase over the coming years.
Renewable energy project contracts are highly specialised and must – in addition to the customary construction contract provisions – take into account a number of sector-specific components necessary to complete the projects. This includes subjects such as soil investigations, environmental, ecological, and meteorological assessment studies, risk of ship collisions, energy yield projections and additional public approvals.
Furthermore, the project setup often includes power purchase agreements, various service contracts, lease agreements, neighbour agreements etc., all of which must be incoporated into the project and to some extent reflected in the central project construction contract.
In our experience, contracts for renewable energy projects may be based on bespoke (local) contracts, international contract templates or – quite often – a mix of the two.
In particular, the existing FIDIC forms of contract have to a large extent been used also for renewable energy projects, however often with heavily amended provisions to address the specific features and regulatory requirements of renewable projects.
This is especially relevant as regards offshore wind farm projects, where the charactristic issues mentioned above as well as ownership of energy production during periods of testing, energy production warranties, service during the operation of the energy plant, transport by sea etc. all are topics that must be governed by the contract(s).
The Federation Internationale des Ingeniuers-Conseils (FIDIC) has since 1957 produced standard forms of contract. These standard forms of contract are widely and globally used within various sectors, including energy, infrastructure and life sciences, and are continously being updated, expanded and further developed by FIDIC.
In an attempt to respond to the market developments, FIDIC has set off to develop several new types of model contract forms, which will be in addition to the existing standards, including not least the “Rainbow Suite” contract forms. FIDIC’s intention is to streamline some of the key issues that many projects are facing.
In particular, FIDIC is currently working on:
The new FIDIC model contract forms are expected to still maintain and reflect the FIDIC contracts’ core principles of a fair and balanced risk allocation that is reasonably proportionate with the differing risk bearing capabilities, objectives, and obligations of key stakeholders.
Specifically for the new offshore wind farm contract, this is intended to be developed in a flexible, adaptable, and suitable form that can be used for various offshore wind farm project locations, requirements, and delivery methods – recognizing that offshore projects differ significantly.[1]
In Gorrissen Federspiel we have extensive experience with standard form and bespoke CAPEX contracts, including EPC, EPCM and collaborative contracts, across various sectors and project types, including large scale infrastructure, life sciences and renewable energy.
We have significant experience with the FIDIC suite of documents as well as other international contract forms, including the NEC and iChemE.
We assist in all phases of a project, from early stage strategic advise and advise on relevant contract formats, through negotiations of contracts, project execution, and dispute resolution.
If you have any questions or want to learn more about our work and experience, please feel free to reach out to a member of our dedicated team of CAPEX contract specialists.
[1] FIDIC | Work starts on new FIDIC contract for offshore wind farm projects | International Federation of Consulting Engineers