Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual...
Transcript of Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual...
Construction Risk in P3 Projects
Timothy J. MurphyPartner
McMillan LLP
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Risk Transfer in a P3
– Key aspects of a P3:– Private sector financing– Public sector clarity through output
specifications– Integrated design and lifecycle obligations
– Key principle:– Allocating risk to the party best able to manage
it
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Risk Transfer in a P3
– Public Sector Benefits– Procurement process emphasizes public sector
clarity around needs• Decreased change orders
– Lowers likelihood of budget creep– Assumption of financial risk by the private sector
• Payment at commencement of operations– Incentive to on time completion
• May permit acceleration of infrastructure
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Risk Transfer in a P3
– Public Sector Benefits (Cont’d)– Transfer risk of cost overruns
• Private sector bids to fixed price and takes pricing risk• Annual payment structure, subject to market testing
and benchmarking, leaves cost inflation risk with private sector
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Risk Transfer in a P3
– Public Sector Challenges– Reduced Transparency and Accountability
• Offset by disclosure standards, value for money audits, online posting of key contracts, clear RFP process
• Lobbying restrictions– Increased transaction costs
• Cost of money• Bid costs• Increased legal and financial complexity• Offset by value for money in the risk transfer
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Risk Transfer in a P3
– Public Sector Challenges (Cont’d)– Credit crunch
• Lower lending limits• Increased rate spreads• Increased covenants• Value for money problems?
– The challenge of effective communications (reluctant governments and active labouropponents)
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Construction Risk in a P3
– P3 project structure– The role of the Special Purpose Vehicle– The role of the lenders– The role of equity
– The drop down principle: no stranded risk
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Construction Risk in a P3
– Special considerations for the contractor as consortium partner– Negotiating with consortium members –equity, service
subcontractors– Negotiating with lenders– Retaining professional advisors
• Legal, tax, accounting, financial model auditors, lender counsel, lender technical advisors
– Role of contractor as subcontractor vs consortium lead
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Construction Risk in a P3
– Key contractual terms– Fixed completion date for construction phase– Guaranteed construction price– Full design and construction risk pass down– Performance guarantees– Liquidated damages for delay– Security from the contractor and/or the parent– Limitations on contractor termination rights
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Construction Risk in a P3
– Key contractual terms (Cont’d)– Equivalent project relief– Large caps on liability
• Fraud, contract cost, insurance proceed exemptions– Restrictions on claims for time extension and
additional costs– Bankability
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Construction Risk in a P3
– Contractors beware– It’s not your father’s CCDC
– Passdown of financial risk– Credit crunch: increased pressure for
indemnities– EPR principle applied to:
• Delayed public authority payments• Insurance proceeds
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Construction Risk in a P3
– Subcontractors– Project size requires qualified subs– Risk passdown to the subs
• LDs• Security
– Assignability of subcontracts– Design Risk
– Build/finance issues– Design/builders
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Construction Risk in a P3
– The role of architect/consultant– SPV retains independent certifier– Lender technical advisor as payment certifier
– Interface issues with the service provider– EPR relief– Design cooperation– Defects repair– Insurance overlap (equipment etc)
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Construction Risk in a P3
– Supervening events– Entitlement to extra time, extra costs or simply waiver of certain
payment obligations depends upon type of event
– Types of supervening events– Change in Law– Variations– Delay Events– Compensations Events– Excusing Causes– Relief Events– Force Majeure– Defaults
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Construction Risk in a P3
– Default and compensation– Termination for convenience– Project Co Default– Public entity default
– Special mechanisms imposed by lenders and project entities– Construction reserve accounts– Liquidated damages
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Construction Risk in a P3
– Mitigating the risk– Insurance
– All Risks – Wrap up– Pollution– Automobile– Commercial general liability– Professional liability– Equipment issues (overlap with service period)
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Construction Risk in a P3
– Insurance (Cont’d)– Pay attention to:
• Limits• Deductibles• Additional insureds• Insurance Trust Agreement• Uninsurable risk• Coverage:
– Testing and commissioning, soft costs, delay in start-up, profit, resultant damage
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Construction Risk in a P3
– Bonding and Subguard Insurance– Subguard Insurance
• Protects GC against Sub default risk• Does not protect subs against owner or GC risk
– Qualified subcontractors– General coverage vs project specific– Gap bond– Definition of self-performed work– Sureties and new lender covenants
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Construction Risk in a P3
– Surety bonds– Multiple obligee riders– Standard form changes
• Permitting construction contract changes• Lender rights• Assignability
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Construction Risk in a P3
– Limitations of Liability– Dropdown principle– Interface with Service Provider– Caps and exclusions
• Insurance proceeds• Fraud• Contract price (or a portion thereof)
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Construction Risk in a P3
– Early involvement with the project agreement
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McMillan LLPProjects Group
Brookfield Place181 Bay Street, Suite 4400Toronto, OntarioM5J 2T3
Attention: Tim [email protected](416) 865 - 7908