olswang construction law masterclass: project risks for developers and funders - francis ho

Construction Law Masterclass: Project Risks for Developers and Funders Tuesday, 6 May 2014

Francis Ho, Head of Construction [email protected] | +44 20 7067 3505 | @fkyh

One project risk …

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Types of Project Risk

1. Design and Construction

2. Other Party Risks

3. Environmental and Approvals

4. Force Majeure

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1. Design and Construction

•  Developer risks

•  Design complexity

•  Construction risk:

•  Construction team

•  Site conditions

•  Cost overruns

•  Late completion


2. Other Party Risks

• Sale/letting risk

• Documentation risk


3. Environmental and Approvals

•  Contaminated land

•  Planning permission

•  Listed buildings consent

•  Environmental impact assessment

•  Rights of light, party walls


4. Force Majeure

• Extension of completion date for construction

• Wider than an “Act of God”

• May be a default under credit agreement


Mitigating and Managing Project Risks

•  Due diligence

•  Turnkey construction contract

•  Fixed price construction contract

•  Guarantees

•  Cost overruns

•  Completion/interest shortfall

•  Liquidated damages

•  Insurances

•  Bonds

•  Credit agreement terms


Turnkey Construction Contract

• Design and construction risk lies with Contractor

• Contract negotiations more straightforward

• Novation of design professionals to Contractor

• Suitable for wide range of projects (but not all)


Turnkey Construction Contract

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Sub-Contracts

Direct Contracts

Client

Contractor

Sub-Contractor

Sub-Contractor

Sub-Contractor

Design Consultant

Design Consultant

Design Consultant

Contract Administrator

Cost Consultant

CDM Co-ordinator

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Guarantees

• Sponsors can avoid having to commit finance to cover key risks

• May vary in nature from letters of comfort to absolute guarantees

• Ensure drafted to be absolute and unconditional

• Parent company guarantees


Insurance

•  Works insurance

•  Third party liability

•  Environmental liability

•  Professional indemnity

•  Inherent defects


Bonds

•  Performance bonds

•  Retention bonds (or retention monies)

•  Advanced payment bonds


Facility Agreement

•  Conditions precedent

•  “Drawstops”

•  Events of default


Closing Thoughts

•  Differing attitudes of Developers and Funders to risk

•  Consider risks important to Funders

•  Due diligence can identify and manage risks


Any questions?