News & Insights

Energy Law Exchange

June 8, 2017

Taking the Long View - How Appropriate Foresight Supports the Development and Execution of Large-Cap Construction Projects


Introduction

The arduous, start-to-finish process of developing and constructing a large-scale project is akin to a marathon that begins at the earliest stages of development and ends after several years (or more) of technical and design development, complex commercial considerations, and lengthy engineering, procurement, construction, commissioning and start-up periods. Most owners and developers already fully appreciate the significant, upfront technical efforts necessary for such projects to be successful. This article highlights some of the other early challenges faced by commercial, technical and legal personnel, and how early engagement between these personnel can yield significant positive results for the ultimate finish line i.e., the on-time and on-budget construction of a fully functional facility. As set forth below, these challenges include (i) the appropriate validation of early-stage commercial opportunities, (ii) staying focused on long-term goals during project development, (iii) evaluating sole-source versus competitive RFP bidding processes, (iv) negotiations with key technology providers, suppliers, and original equipment manufacturers (OEMs), and (v) developing all commercial, technical, and site information necessary to successfully design, construct, and operate the project.

Validating Commercial Opportunities

Commercial opportunities often require rapid technical substantiation prior to the greenlighting of development. Understandably, every dollar spent is scrutinized in these early stages, which often leads owners to use existing agreements or standard, off the shelf contract forms in lieu of consulting with legal counsel. While using shortcut forms may result in lower upfront costs, they can also result in much larger and costlier impacts later in a projects lifecycle. In particular, clauses regarding the ownership and use of intellectual property and confidential information (which are commonly disadvantageous to owners in standard form agreements) can impair an owners ability to use these preliminary designs in their intended manner, potentially impacting an owners ability to proceed with its preferred contractor and commercial structure. Even where pennies are being pinched, a quick, relatively inexpensive call to legal counsel will eliminate these potentially project-altering issues and ensure that commercial/technical teams keep all options on the table at this early juncture.

Project Development

Once a commercial opportunity evolves into a full-fledged greenlit development, owner technical teams are often provided high level commercial goals from executives and commercial teams with either schedule, price, or performance (or a combination of all three) placed as a priority. The technical teams are then sent off to the races with respect to key decisions such as project location, commercial structuring, technology options, resource constraints, potential contractors, and expressions of interests, all of which cumulate in the selection of a construction contractor. To an owner, the involvement of legal counsel throughout this process may not be seen as valuable or even desirable; admittedly, attorneys are often seen as impediments and not as resources during the development process. A lawyer who is viewed by the owner as the person who always says no is likely not the right lawyer for the job, while the right lawyer will lay out all options, provide the pros and cons of those options, and provide candid advice given the specifics of each project.

Contractor Selection Process: Competitive RFP Versus Sole Source Development

It is an age-old question not just in construction, but business as a whole - should owners pursue a competitive RFP process or engage in sole source negotiations? Unsurprisingly, contractors prefer and actively encourage sole source negotiations by espousing, among other things, the lesser upfront costs and additional collaboration that purportedly arises from the sole source method. If contractors are busy enough, certain contractors will go so far as to threaten no-bids due to, among other complaints, the significant costs associated with competitive bids.

On the other hand, competitive bidding has the advantage of driving down overall project costs, driving advantageous scheduling commitments, and maintaining leverage with respect to other key terms. Given the inherent leverage afforded to owners in an RFP process and our experience in negotiating numerous large-scale project contracts, it is our opinion that competitive bidding almost always represents the better option for large scale projects, including even when competitive bidding requires multiple contractors to perform front-end engineering. Indeed, it is not uncommon in our practice to see continuously improving price and schedule proposals all the way up through the date of contract execution. Moreover, contractors rarely follow through with threats not to compete, and any contractor concerns related to bidder proposal costs that involve significant front-end engineering can be addressed in certain industries by the owner agreeing to reimburse bid costs (which costs are still far outweighed by the benefits incurred through an RFP procurement).

Sole source contracting may make better sense under certain circumstances. For example, the costs associated with an RFP procurement may not be appropriate if the project is still in an exploratory phase, or make less sense in certain industries where contractors utilize similar designs and technologies that provide owners with reliable market baselines with respect to pricing and schedule. Also, the original contractor will generally represent the better choice for expansion work, lessening the need for a competitive process.

Given the significance of this decision, we strongly suggest getting all internal stakeholders on the same page, including commercial, technical and legal stakeholders. They will likely have different perspectives and experiences, including experiences with specific contractors and prior projects, that should be considered. And to avoid second guessing, all opinions should be solicited and evaluated at this crucial fork in the road.

Negotiations with Technology Providers, OEMs, and Key Suppliers

In our experience, technical teams often focus on evaluating technology, OEMs, and other suppliers without full consideration of the project as a whole. For example, if an owner wishes to fully ring-fence the cost and performance aspects of a construction project, owners will generally engage an EPC contractor to warrant all aspects of (or wrap) the project such that the EPC Contractor is responsible for delivering a fully functional facility. If, however, the owner has already selected the winning technology (or even further, executed a contract for the supply of such technology), the Owner can encounter some difficulty wrapping the performance aspect of the project under a single contract. Moreover, pre-selection of technology can alter the balance of negotiations between the EPC contractor and the selected technology provider that can, in turn, complicate negotiations between the owner and the EPC contractor. While the example above focuses on technology, the same concepts apply to OEMs and other key equipment. We strongly recommend early engagement of legal counsel to review not only the terms and conditions of various agreements, but also the owners contracting strategy to ensure such strategy aligns with the owners ultimate commercial and technical goals.

Commercial/Technical Documentation and Site Details

It is nearly impossible to find commercial clients who enjoy wading through the legalese found in construction contracts. Nevertheless, it is important that legal counsel review all pertinent documents to ensure that the terms of the contracts reflect the intent of the parties. Importantly, contracts are more than just a collection of indemnities and limitations of liabilities - your attorney should be kept in the loop when developing commercial/technical documentation to ensure that key concepts (such as payment structures, scopes of work and performance guarantees) are clearly drafted. No matter how good the terms and conditions may be, a project is ripe for disputes if the scope of work lacks clarity. In our experience, commercial and technical stakeholders are hesitant to engage attorneys for the purpose of reviewing technical documents, but experienced construction counsel will identify ambiguities or other problematic language that project technical personnel most likely will not identify. Lawyers are trained to view documents through a different lens, and ultimately this viewpoint ensures the continuity of concepts from the terms and conditions through the commercial and technical details. Likewise, experienced construction counsel will identify other potential red flags and provide necessary guidance to allow owners to make informed decisions while minimizing the impact to project cost and schedule.

Finally, the development of (or failure to develop) site information can significantly impact the risks ultimately assumed by the owner and the contractor under the construction contract. Contractor claims related to unexpected subsurface conditions, differing soil conditions, pre-existing contamination and hazardous waste represent significant risk to cost and schedule for even the most carefully developed projects. Owners should carefully review the potential long-term consequences associated with the performance (or non-performance) of site, environmental, survey, and other investigations on a project-by-project basis.

Conclusion

Taking the long view with respect to the issues set forth herein may require additional up-front costs and attention that may seem unnecessary at the time. In our experience, however, these investments more than pay for themselves when the time comes to ultimately construct the project. Similarly, the benefits of engaging experienced and effective construction counsel early in the development process will reduce an owners exposure to cost and schedule slippage while providing the owner with early and proactive counsel to overcome both expected and unexpected development challenges. Of course, legal counsel alone will not (and cannot) ensure a problem-free project, but as the saying goes, it takes a village , including an attorney, to build a large-cap construction project.