As offshore wind scales globally, developers should be wary of construction contract risks

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The offshore wind sector has reasons to be cheerful, with Joe Biden’s win in the US presidential election providing further good news for the sector.  This follows Boris Johnson’s pledge last month that offshore wind farms will generate enough electricity to power every home in the UK by 2030.

Related: Clean energy industry applauds US President-elect Joe Biden victory

Continued success in the offshore wind sector – and the achievement of the PM’s wind power pledge – needs continued focus on construction contract risk management.  Construction contract risk management allows key risks to be identified and mitigated, and disputes avoided. 

If the construction works do not complete on time, to budget and to specification, then revenue cannot be generated and obligations under the offtake agreements cannot be met. Additional funding may be needed to complete the works and bring them into compliance. It is therefore essential to successfully manage risks that might have an impact on cost, delay completion or affect the quality of the asset.  This applies at the contract negotiation stage, during the construction phase, and into the operation phase. 

To do this, it is important to identify key risk areas.  These include:

Design responsibility and design life commitments – There is often a tension between the project developer wanting to impose a fitness for purpose obligation, which is resisted by contractors in favour of a less onerous obligation to use reasonable skill and care.  Achieving clarity in the contract as to the required standard of care is fundamental.  A careful review of the contract before signature, to ensure that the technical specification at the ‘back’ of the contract matches the legal conditions at the ‘front’ of the contract, will help avoid nasty shocks as regards design liability.

Package interface issues –  The most common procurement route for construction contracts in this sector is through the appointment of multiple contractors, dealing with individual specialist elements of the project, rather than a single contractor responsible for all elements.  An inherent risk of this approach is that the various contractors will cause delay and disruption both to each other and to the project as a whole.  The inclusion of appropriate contractual mechanisms to manage the interface between different contractors is an important first step.  Contractual mechanisms alone are not enough.  A high standard of project management throughout the lifetime of the project (including regular interface meetings, appropriate early warning notices and the careful maintenance of a risk register) significantly reduces risk and the scope for disputes. 

Weather risk – It goes without saying that adverse weather is one of the greatest delay risks to offshore projects.  Clear allocation of the delay risk within the contract is essential (perhaps by reference to ‘worked examples’ if that helps), so that all sides understand the risk that they are accepting and the contract price reflects it.   Good programming at the start and good reporting during the project are equally important.

Defects —  The term ‘defects’ covers a multitude of potential issues.   It may be that one party’s ‘defect’ is in fact not a defect, but a misalignment between the parties as to scope.  The implementation of correct procedures for variations (and omissions) is important.  If defects disputes do arise, have a look at the regime for defects liability within the contract.  It may be that there is a different liability period for each individual turbine or collections of turbines. There may also be provision for extending the liability period where parts are repaired or replaced. Contractors may seek to carve out certain obligations and/or resist any obligation to repair serial defects which require extensive (and often costly) investigation.

Payment procedures – Payment procedures (in particular pay less notices) can often be managed better, so as to offer optimal cash flow protection.

Think it through

Even with careful contract drafting and excellent project management, disputes can and do arise.  It is almost inevitable given the scale and complexity of offshore wind projects.

A clear analysis of the main issues and a bespoke strategy for finding a resolution will change a potentially frustrating, costly and time-wasting experience into a successful outcome. This can take the form of scenario testing — for instance we have found that the offshore wind construction risk reduction games we run with clients can help generate clear thinking around strategies for the way forward. 

Make sure you have taken a step back and considered your dispute resolution strategy as a whole.  Arbitration is often the ultimate way of settling disputes (and if it is chosen, then proper preparation and careful planning are key), but there may be other options, such as seeking the opinion of an independent expert to strengthen your position; seeking a quick determination of the issue through an adjudication; and/or a facilitated negotiation and settlement process such as mediation. 

In summary, construction contract risk reduction throughout all project phases is a key tool in the successful delivery of offshore wind projects.

About the Author

Mary Anne Roff, Partner at Clyde & Co specializing in managing and avoiding disputes in clean energy construction projects. Co-designer of the Clyde & Co offshore wind construction risk reduction game

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