Most offshore renewable energy projects are procured on a multi-contract rather than a single EPC (turnkey) basis. This is generally found by developers to be the most commercially viable procurement solution because it:
- reduces the risk premiums that contractors add to their price as they better understand the delivery risks involved;
- ensures that each package is delivered by a contractor confident and experienced in delivering works of that nature; and
- provides a more attractive opportunity to the supply chain thereby encouraging a competitive tender process.
However, this approach does lead to developers (and funders) retaining potentially significant levels of interface risk. Understanding and managing that risk is crucial to the successful outcome of the project (and to the likelihood of it securing funding).
The interface issues that need to be dealt with include:
- Design: the various packages must not only fit together but work together. The interfaces between them must therefore be designed collaboratively by all relevant contractors.
- Programme: both the design and delivery phases need to be coordinated. There must be timely exchange of information to allow the interfaces to be correctly designed and, once on site, the contractors’ activities need to be coordinated so that they don’t hinder each other.
- Testing: from a developer’s perspective it is not only important that the various packages do what they are supposed to individually but that they all work together to meet the project output requirements.
- Disputes: any major disputes that do arise are likely to concern more than one package so common dispute resolution procedures, including joinder provisions (so related disputes with different contractors may be decided together), are essential.
There are, principally, two contractual ways of dealing with these interface issues:
- an interface agreement between the developer, all package contractors and possibly the employer’s engineer; or
- common interface provisions in all package contracts.
The developer’s aim in adopting either of these approaches is to establish contractual mechanisms which allow the interfaces to be managed effectively and robust terms to ensure that contractors comply with them.
Often the developer’s (and funders’) preferred solution is an interface agreement which requires contractors to sort out between themselves the effects of delay or disruption they have caused rather than channelling claims through the developer. This reduces the developer’s administrative burden and insolvency risk. However, it is very hard to negotiate in practice as it leaves each contractor to rely on the ability and willingness of the other contractors to meet any liabilities they may incur under the terms of the interface agreement. This is likely to be less attractive than simply bringing a claim against the developer and leaving the developer to pursue any reciprocal claim against the responsible contractor.
A common compromise is to use a carrot and stick approach in the common interface provisions. A combination of robust terms providing clear and binding obligations to cooperate and swap information and financial incentives that contractors can only claim if the project as a whole is completed on time and to spec often works well.
Either way, much can be done at the planning stage to minimise risks and then mitigate the risks that remain. Simple steps include keeping the number of packages to a minimum (thereby minimising the number of interfaces), appointing an experienced project manager to manage the interfaces and holding multiple pre-contract meetings between the PM and contractors to develop the design to a high level of detail and familiarise all parties with the operation of the interface provisions.
We have been involved in a number of renewables projects, both onshore and offshore, that have successfully adopted this approach.