construction risk in p3 projects - mcmillan llp · construction risk in a p3 – key contractual...
TRANSCRIPT
![Page 1: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/1.jpg)
Construction Risk in P3 Projects
Timothy J. MurphyPartner
McMillan LLP
![Page 2: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/2.jpg)
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
![Page 3: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/3.jpg)
3
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
![Page 4: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/4.jpg)
4
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
![Page 5: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/5.jpg)
5
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
![Page 6: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/6.jpg)
6
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)
![Page 7: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/7.jpg)
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
![Page 8: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/8.jpg)
8
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
![Page 9: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/9.jpg)
9
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
![Page 10: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/10.jpg)
10
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
![Page 11: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/11.jpg)
11
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
![Page 12: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/12.jpg)
12
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
![Page 13: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/13.jpg)
13
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)
![Page 14: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/14.jpg)
14
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
![Page 15: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/15.jpg)
15
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
![Page 16: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/16.jpg)
16
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)
![Page 17: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/17.jpg)
17
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
![Page 18: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/18.jpg)
18
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
![Page 19: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/19.jpg)
19
Construction Risk in a P3
– Surety bonds– Multiple obligee riders– Standard form changes
• Permitting construction contract changes• Lender rights• Assignability
![Page 20: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/20.jpg)
20
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)
![Page 21: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/21.jpg)
21
Construction Risk in a P3
– Early involvement with the project agreement
![Page 22: Construction Risk in P3 Projects - McMillan LLP · Construction Risk in a P3 – Key contractual terms – Fixed completion date for construction phase – Guaranteed construction](https://reader035.vdocuments.us/reader035/viewer/2022081402/5f10d5dc7e708231d44b0bbe/html5/thumbnails/22.jpg)
22
McMillan LLPProjects Group
Brookfield Place181 Bay Street, Suite 4400Toronto, OntarioM5J 2T3
Attention: Tim [email protected](416) 865 - 7908