Key trends to watch in project delivery: essentials of strong contract management

This is the second instalment of our 'Key Trends To Watch in Project Delivery' series. In this article we look at contract management in the context of engineering, procurement and construction contracts ("EPC"), operation and maintenance ("O&M") and asset management agreements ("AMAs"). We explore the importance of performance monitoring, serving of notices and the prompt enforcement of contractual remedies.

Introduction

After a few years of hiatus in the energy industry, largely due to the uncertainty brought about by the grid connection reform and the Review of the Electricity Market Arrangements ("REMA"), clean energy developers and investors are now starting to work on their project delivery strategy. With increasingly tight timescales to be met and resourcing challenges, performance across the supply chain will be key.

In the context of EPC, O&M and AMAs there are three areas, which are crucial for determining the successful delivery of a project:

1. Monitoring contractor performance;
2. Timely notices; and
3. Enforcement of remedies.

We consider each of these in the following sections.

Performance monitoring – strong focus on measurable outcomes

When it comes to monitoring performance, clarity, good record keeping and data management is key. With measurable and auditable outcomes, project owners and operators can ensure that any contractual promises made are properly adhered to and delivered.

In an EPC context, the monitoring process should integrate planning, cost forecasting, a focus on expedited procurement and accurate record-keeping. A robust monitoring framework would integrate the following aspects:

• Baseline governance – for instance, clear rules for accepting  or updating the delivery programme;
• Interface monitoring – including design maturity, access, release of information and subcontract boundaries; and
• Contemporaneous record-keeping – site diaries, inspection and test logs, as well as tagging correspondence and keeping a register of decisions made.

Project owners and operators could consider incorporating a monitoring protocol into the contract, to provide clear guidelines for measuring, assessing and certifying key performance indicators ("KPIs").

When it comes to O&M monitoring, there tends to be a strong focus on performance standards, compensation structures and compliance requirements. These features drive long-term output and lender confidence in financed projects. An effective monitoring framework will usually include KPIs covering the following areas:

• Availability and reliability of the plant;
• Output and performance (including degradation);
• Maintenance delivery; and
• Ongoing compliance (e.g., permits, health and safety and general reporting).

For AMAs, governance is key. This includes quality of data, reporting, lifecycle planning and risk-based decision-making. Using a recognised asset management system in the AMA monitoring process can be useful for ensuring clarity and consistency.

Notices and compliance – know the requirements

EPC contracts will typically contain strict requirements for notices. These may include multi-step processes (e.g., initial notice, particulars in support and a fully-detailed claim to follow). Contract administrators should map out any contractual notice requirements and triggers. Common triggers are delay, disruption, defective work, late provision of information and payment defaults. Importantly, no two contracts are the same, so the team managing the contract should ensure that: (i) it knows what is required when it comes to serving notices and (ii) that these requirements can be (and are) met.

O&M agreements will often include cure pathways that is, structured procedures allowing a contractor to remedy defaults or breaches rather than the owner or operator terminating a contract outright. This might involve giving a notice of failure, allowing an opportunity to rectify the issue, escalation procedures and remedies. Remedies might include service credits, performance damages and step-in or termination rights). O&M notices should refer to particular KPIs, measurement periods and calculations and it is crucial that relevant evidence is preserved to support any notices served.

In the context of AMAs, the focus will be on missing reports, poor data quality, unapproved changes and failure to ensure ongoing compliance with licenses or permits. It is important to define information defaults explicitly and notices should be linked to audit findings, management review outputs and corrective action plans.

Enforcement of remedies – strong protection when implemented correctly

An owner or operator will usually have a wide-range of remedies available to cure a default under an EPC, including delay- or performance-related liquidated damages and the ability to rely on performance security provided (in the form of bonds or guarantees). To ensure that such remedies are effective any enforcement attempts need to be: (i) backed by evidence and (ii) proportionate.

Under O&M agreements, remedies tend to be designed so that performance can be restored promptly. They will usually include service credits, performance liquidated damages and rectification plans amongst others. It is good practice to link penalties with incentives and require transparent reporting.

Remedies under AMAs often include governance interventions, such as mandatory corrective action plans post-audit, enhanced reporting and replacement of key personnel.

The choice of available remedy or combination of multiple remedies (where available) has the potential to significantly affect project outcomes. Where projects have been financed, any enforcement action needs to be coordinated and sanctioned by the lender, to avoid potential defaults under any facility agreement.

Comment

Project monitoring, notice management and the enforcement of remedies are all key ingredients for sound contract administration. Project owners and operators should ensure they have the necessary resource in place to avoid unwanted surprises throughout the lifecycle of an asset.

The project's lifecycle should be considered as a single lifecycle risk system – it is often at handover from construction to operation and/or asset management that things could go wrong. Performance testing, warranty management and responsibility transitions need to be drafted back-to-back between EPC, O&M and AMAs with evidence and data continuity to ensure that operational baselines actually reflect commissioning outcomes. Although different contract forms express similar risk-management goals, it is crucial to connect those dots, so there is a clear route from early warning through to contractual notices and remedies, thereby mitigating failures across the board.

Those who actively reduce the gap between contractual rights and real-world outcomes are the ones who continue to benefit from better protection of programme, cost and long-term asset value.

Key trends to watch in project delivery: managing interface risks in clean energy projects
At Foot Anstey, we advise across the full lifecycle of E&I assets. We regularly support clients to understand the requirements of their agreements and guide them through difficult times both at pre- and post-litigation stage. If you have questions relating to the points discussed in this article or other elements of EPC, O&M and AMAs (including dispute avoidance / dispute resolution), then please do reach out. If you missed our first instalment, you can find it here: Key Trends To Watch in Project Delivery series.