construction risk in p3 projects - mcmillan llp · construction risk in a p3 – key contractual...

Construction Risk in P3 Projects

Timothy J. MurphyPartner

McMillan LLP

2

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

3


– 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

4


– 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

5


– 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

6


– 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)

7

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

8


– 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

9


– 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

10


– 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

11


– 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

12


– Subcontractors– Project size requires qualified subs– Risk passdown to the subs

• LDs• Security

– Assignability of subcontracts– Design Risk

– Build/finance issues– Design/builders

13


– 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)

14


– 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

15


– 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

16


– Mitigating the risk– Insurance

– All Risks – Wrap up– Pollution– Automobile– Commercial general liability– Professional liability– Equipment issues (overlap with service period)

17


– 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

18


– 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

19


– Surety bonds– Multiple obligee riders– Standard form changes

• Permitting construction contract changes• Lender rights• Assignability

20


– Limitations of Liability– Dropdown principle– Interface with Service Provider– Caps and exclusions

• Insurance proceeds• Fraud• Contract price (or a portion thereof)

21


– Early involvement with the project agreement

22

McMillan LLPProjects Group

Brookfield Place181 Bay Street, Suite 4400Toronto, OntarioM5J 2T3

Attention: Tim [email protected](416) 865 - 7908

construction risk in p3 projects - mcmillan llp · construction risk in a p3 – key contractual...

Documents