Navigating Brownfield Projects: A Practical Playbook for Owners and Developers

The Middle East projects market is seeing a surge in “brownfield”¹The term “brownfield” usually refers to projects for either: (i) the refurbishment or upgrade of existing operational assets; or (ii) development of a site previously used for an industrial purpose. This client alert focusses on the first category. expansion projects where owners are seeking to refurbish or upgrade existing operational assets to maximise their utility (and value).²Recent high-profile examples include luxury tourism expansions, energy, industrial and power plant extensions, new runways and additional rail lines. This Client alert sets out the key legal and commercial considerations for owners and developers when procuring brownfield projects, including how to successfully integrate new technology with legacy assets and coordinate expansion works and managing unforeseen risks.

Key motivations for undertaking a brownfield project can include: (i) extending the operational life of critical plant (e.g. power generation); (ii) replacement of or retrofitting existing equipment to keep pace with technological or regulatory developments (e.g. installing electric industrial equipment to lower the carbon emissions used in production); and/or (iii) expanding capacity to meet increased demand (e.g. expanding a data centre to provide more hosting capacity).

A brownfield project is inherently more complex than a clean-slate greenfield development. This is because of the complications involved in integrating new technology with existing assets and coordinating construction work with existing operations. To help owners and developers navigate these issues, this alert provides a high-level summary of key considerations for operational assets and mitigations to include in brownfield project contracts to reduce potential risk exposures.

There is no “one size fits all” when it comes to brownfield projects. The optimal solution will depend on a number of factors including the nature of the works, the type of plant, the facility's product, the underlying contractual arrangements and who controls the various parties. There are, however, several common themes that owners and developers should consider when preparing to undertake a brownfield project. King & Spalding’s project and construction team have extensive experience across the region in helping clients anticipate, navigate and overcome issues that can arise on brownfield projects. We would be pleased to discuss the contents of this alert further with parties interested in developing a brownfield project.

Interface between new and existing facilities

a. Issues:

1. Poorly designed interfaces between new and existing facilities (e.g., incompatible equipment, not accounting for increased system loads) can delay project completion.
2. Partial upgrades combining new and legacy technology can breach licensing agreements, especially if new assets are from a different supplier.
3. Contractors can be reluctant to provide robust performance guarantees where new assets rely on legacy assets that they did not construct, or which have not been refurbished.

b. Mitigations:

1. Ensure that design risk of interface points is passed down to the contractor, and that the contractor is responsible for demonstrating compatibility of the new and legacy assets as part of the design process.
2. Identify all necessary licenses and IP rights as part of the design process and ensure that the contractor responsible for obtaining them.
3. Owners should retain design review rights and engage technical advisors to independently validate the contractor’s interface designs.
4. Include testing and commissioning procedures which demonstrate that interfaces function as intended and, where possible, allow performance of new assets to be assessed in isolation.
5. Engaging the same contractor that installed legacy assets can make it easier to obtain performance guarantees and further mitigate the risk of missing licenses and IP rights.

Coordination of works with existing operations

a. Issues:

1. Because brownfield works occur in operational facilities, failure to properly coordinate construction works with existing operations can result in the operator causing delays or disrupting the contractor (or vice versa), damage to the existing assets or unexpected downtime.
2. Carrying out construction works during operation of an asset can also have implications for existing insurance policies.

b. Mitigations:

1. Schedule the brownfield works to cause the least possible disruption to existing operations (e.g. carrying out work, testing and commissioning during scheduled periods of downtime/maintenance for the assets, periods of low demand, etc.). If technically feasible, sectional completion can be used to limit disruptions to the operations of the legacy assets.
2. Establish coordination regimes to govern interactions between all interfacing parties that ensure compliance with operational procedures, speed up dispute resolution and allow direct recourse between parties. This can require additional commercial incentives to convince incumbent parties to agree to coordination regimes with brownfield contractors.
3. Engage insurance advisors to ensure appropriate coverage for the brownfield contractor’s activities.
4. Ensure liquidated damages and indemnity regimes are tailored to the contemplated work schedule (e.g., for contractor failure to complete work within a planned outage period).
5. Permit owner step-in or accelerate works in defined scenarios (e.g., to ensure timely resumption of operations), with costs borne by the party at fault.

Clearly defining the scope of work and each party’s responsibilities

a. Issues:

1. Vaguely drafted scopes of work can lead to disagreements about the parties’ responsibilities and, ultimately, claims variations and disputes.
2. Information about the assets may be incomplete/out of date if they have been operational for some time (e.g. as built drawings prepared on completion of the legacy assets may not reflect subsequent maintenance).
3. Brownfield works often require third-party approvals (e.g., regulatory, landowner, or lender approvals), which can be time-consuming to obtain and cause project delays.

b. Mitigations:

1. Include a detailed responsibility matrix outlining the duties of each party’s (e.g., obtaining site access, regulatory approvals).
2. Identify required third party approvals early and ensure the responsible party acts promptly. Consider making critical approvals conditions precedent to the contract's effectiveness.
3. Define any reliance information to be provided by provided by owners, and when this must be provided by. To mitigate risk, owners can seek to provide information about legacy assets for the contractors information only and require them to verify such information at their own risk.

Unforeseen risks causing price uncertainty

a. Issues:

1. Obtaining fixed lump-sum prices can be difficult for some brownfield projects, particularly where the full scope may only become apparent once work begins (e.g. refurbishment projects).
2. Contractors are rarely prepared to accept the risk of unforeseen conditions. If they cannot assess risks beforehand, they may include significant risk premiums in their proposals, resulting in a higher contract price.
3. Contractors may seek “cost-reimbursable” pricing for unforeseen works, which can prove costly and difficult to manage for owners.
4. The time and cost uncertainties inherent in some types of brownfield projects can make them difficult to finance for.
5. For site remediation projects, assessing the extent and risk of site contamination can be difficult (particularly in the context of groundworks on former industrial sites).

b. Mitigations

1. Provide for pre-construction surveys to enable the contractor to price as much of the work as possible.
2. Require bidding contractors to identify potential issues they may encounter and provide provisional sums for rectifying those issues if they are discovered once work begins.
3. Agreeing a pre-agreed, streamlined variation procedure based on a schedule of rates used to agree fixed prices for unforeseen work can also improve cost certainty for owners.
4. Consider adopting alternative pricing structures for brownfield works (e.g. guaranteed maximum prices, target costs with pain/gain shares, etc.) if appropriate for the project.