Transformation in the construction industry: Keeping pace with change
Three pillars are at the heart of global efforts to boost sustainability and make our built environment cleaner, greener and more socially responsible: construction, energy and technology. These three industries have come to be intricately connected in an era of transformation on a scale never seen before.
Across the world, leading construction industry players are developing innovative projects and deploying new technology to transform the way we live and work.
Meanwhile, energy and mining & metals companies in rural Africa are increasingly installing generating assets and distribution facilities to ensure continuity of energy supply for their operations.
The predicted increase in flexible working may well result in a more widespread move to the development of "smart cities," with technology built into the heart of daily life.
All this is happening amid the fallout from the COVID-19 pandemic, which has shifted perceptions of how the world may look in the future.
But the pandemic has also forced project owners, developers and contractors to look at their contractual terms more closely, as budgets are cut and works are interrupted due to government restrictions.
This compendium of articles, written by colleagues from offices across the world covers a wide range of issues, examines some of the key topics relating to the shifting relationship between the construction, energy and technology sectors in our rapidly changing world.
It looks at the role the construction industry is playing in the development of distributed energy projects in the US and battery storage in the UK.
In the Middle East, the boom in the construction of smart cities has led to the use of new project structures to embed energy -saving measures within the developments. In Africa, renewable energy projects driven by public procurement programs have attracted investors and developers from around the world, drawn by the vast opportunities on the continent.
Increasing work in a volatile environment, however, means that risk allocation and mitigation are more important than ever. Courts in regions as diverse as Russia, India, Latin America, the Middle East and the UK have all been examining force majeure and risk clauses within contracts. Industry players would be wise to take note of these decisions and trends as markets are beginning to return to post-coronavirus normality.
Insolvency can also be another resultant risk, with recent reforms in the UK, Australia and Singapore affecting the construction sector if contracts are not carefully reviewed and, potentially, redrafted to reflect the new rules.
Although the current environment may have raised awareness of risk in construction projects, there is no doubt that the recent disruption and focus on innovation, new technology and sustainability is bringing immense opportunity to the industry around the world with a real chance of lasting impact.
“Focus on innovation, new technology and sustainability is bringing immense opportunity to the construction industry around the world”
Construction considerations in the US distributed energy market
The commissioning and startup phase of any energy project—liquefied natural gas, power, renewables, petrochemical—represents an important, and potentially perilous, transitional period during the construction process.
The coronavirus pandemic has had, and will continue to have, profound effects on the global construction industry. There have been and will continue to be substantial delays and cost impacts as a result of labor shortages, disruption to supply chains and financial pressure.
Delays in construction projects are common and even more so at the moment, and so the question of ensuring that there is a mechanism for the prompt payment of damages in the event of a contractual breach is arguably now more important than ever.
In 2020, the UK courts heard two significant cases with an impact on the way construction contracts and subcontracts are drawn up and carried out, affecting employers, contractors and subcontractors to major projects.
Increased battery storage capacity can and is being encouraged in order to facilitate the move towards the decarbonisation of electricity generation and can contribute to greater resilience and efficiency of integrated grids.
COVID-19 has had a significant effect on construction projects around the world, delaying work and forcing many parties to go back to their contracts and examine whether there is scope for a claim, and Saudi Arabia was no exception.
Where large projects exist, disputes will often arise. The Indian construction sector is no exception, but the lack of a standard form contract and the option of several forms of dispute resolution means that resolving disputes can be complex.
Contracts in the construction industry in Russia have long involved striking a balance between the legitimate expectations and interests of the owner and the contractor. Russian industrial projects are commonly developed using a range of procurement structures. These include single engineering, procurement and construction (EPC) turnkey contracts as well as more complex multi-package arrangements in which the owner, typically a Russian entity, separately contracts the construction works with one or more local contractors.
When engaging international contractors in Russia, owners often seek to maximize risk transfer to the contractor within the limits of the selected procurement model. This can be due to the requirements of financing banks, or simply results from the expectations of stakeholders and investors, and their experience of market practice in Russia.
English law contracts are commonly used by international parties for Russian projects, as this allows a level of freedom of contract that would be difficult to achieve under a contract governed by Russian law.
From a contractor's perspective, English law provides a neutral choice of governing law and may be welcomed by the contractor. However, it can prove to be a double-edged sword if, as is often the case, the owner's proposed contract terms prove to be onerous for the contractor.
Increased owners' demand under FEED and EPC contracts
In recent years, front-end engineering and design (FEED) and EPC contracts proposed by owners for large industrial projects in Russia have generally become more demanding in terms of the requirements and risks placed on the contractor. In some cases, this is because contracts are becoming longer and more detailed. This is a natural development, as clauses are refined and lengthened over time in an effort to protect the owner's position and deal with every eventuality.
That said, the extent to which contractors are willing to take on these risks will of course depend on the specific circumstances of the project, and such additional risks may result in further contingencies being included in the price.
One potential area for negotiation relates to which party assumes or retains responsibility for obtaining approval of the design documentation by the relevant Russian authorities, and linking payment of final installments of the contract price to obtaining such approvals. It is common for an international FEED contractor to engage a Russian Design Institute as a subcontractor to confirm that the design documentation complies with Russian laws and regulations, and to secure approval of the design documentation.
However, the FEED contractor may propose that any deadlines—and associated delay liquidated damages—under the FEED contract relate to delay in completing the FEED package, not delay in acceptance of the design documentation by the relevant Russian authorities.
Similarly, contractors frequently propose that any performance bond under the FEED contract will be reduced upon completion of the FEED package and its acceptance by the owner, not approval by the relevant authorities. On the other hand, from an owner's point of view, it is important to ensure that the contractor is incentivized to prepare design documentation strictly in compliance with Russian laws and regulations and promptly procure the relevant approvals, as failure to do so could delay the project.
Another key issue is the EPC contractor's liability for claims incurred by the owner from other contractors. It is common for large industrial projects in Russia to involve multiple contractors and complex interfacing requirements. In such cases, defects in the contractor's works may potentially result in modifications to other parts of the project, causing the owner to incur additional costs. Some owners of recent projects have tried to pass this risk, either entirely or in part, on to the contractors.
It can be difficult for owners to persuade a contractor to accept full liability for claims by other contractors. Liability for claims under third-party contracts is sometimes excluded under EPC contracts, as such claims are difficult for contractors to predict. Where a contractor does agree to undertake this risk, it may only agree to be liable for a portion of any claims by other contractors and require its overall liability in respect of such claims to be capped.
Another topic of significance at present for English law-governed FEED and EPC contracts in Russia is force majeure. Owners typically seek to define force majeure relief very narrowly, particularly with respect to any right of the contractor to claim additional costs or terminate the contract for extended force majeure.
While this is not a new development, the COVID-19, pandemic has caused force majeure clauses to be more closely scrutinized. For large Russian projects in the petrochemical and industrial sectors, the time from contract signature to completion of the project can be significant, with the most potential for COVID-related disruption occurring during the construction phase.
Given the current level of day-to-day uncertainty, it is hard for contractors to plan so far ahead and adapt their commercial proposals to deal with any potential disruption. However, given that many construction sites in Russia remained active throughout 2020, owners have not been terribly sympathetic to granting widely defined relief for COVID-19 and some may seek to exclude COVID-19 claims relating to home office or design works, particularly if they are performed outside Russia.