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Transformation in the construction industry: Keeping pace with change

What's inside

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.

Foreword

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

Microgrids are an increasingly attractive means to provide reliable electricity, generated on-site, customized for the needs of the individual location and sensitive to the environment.

construction arbitration square US Distributed energy

Untangling a failed energy startup

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.

construction arbitration square US Untangling

Impact of COVID-19 restrictions on Mexico’s construction industry

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.

construction arbitration square Mexico- Case study

Bankability of contractor performance security in Latin American construction projects

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.

construction- arbitration square atAm Bankability

Impact of insolvency reform on the construction industry

With the threat of increased insolvencies as an effect of the COVID-19 pandemic remaining very real, the construction sector needs to be aware of the impact of changes to insolvency laws.

construction arbitration square UK Insolvency

UK case law emphasises need for clear drafting in descoping and vesting of goods

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.

construction arbitration square UK descoping

Opportunities and challenges in battery storage

By Richard Hill, Sofia Lambert and Kit Goodfellow

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. 

construction arbitration square uk-battery storage

Opportunity and risk in African construction contracting

By Matthew Richards and Rhulani Matsimbi

Investment in infrastructure in Africa has soared in recent years, and construction activity has risen with it.

construction arbitration square africa contracting

Finding an appropriate contractual bedrock for procurement of mining & metals projects in Africa

With its huge mineral potential, Africa is likely to see a number of mining projects move from exploration and feasibility to construction. 

construction arbitration square africa mining and metals

Risk allocation in recent construction projects in Russia

By Chris Duncan and Daria Plotnikova

The past few years have seen a shift in the way contracts for construction projects in Russia have been drawn up and scrutinized in response to growing awareness of risk.

construction arbitration square russia risk allocation

A sustainable future: Smart cities in the Middle East

Urban environments are in the middle of a revolution. The powers of technology and data are being harnessed to make cities safer, more efficient and more sustainable.

construction arbitration square middleeast smartcities

Saudi Supreme Court clarifies COVID-19 effects on contractual arrangements

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.

construction arbitration square ksa supremecourt

Navigating through construction disputes in India

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.

construction arbitration square india construction disputes
Construction

Untangling a failed energy startup

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.

Insight
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4 min read

Owners and contractors should be aware of the potential liabilities associated with mixed commissioning and start-up teams so that risks can be appropriately allocated by the parties ahead of the time

Health and safety risks are always a primary concern when hydrocarbons or other precursors are initially introduced into a facility. The actions or inactions of operations personnel—nearly all of whom are undergoing facility-specific training during this period—can also result in substantial damage and significant delays. If that occurs, the contractual allocation of responsibility between owners and contractors will play a crucial role in determining the rights and remedies of the parties.

"Commissioning" generally spans completed construction with commercial operations and is generally recognized as beginning after the completion of all or the majority of construction activities—a completion milestone often referred to as "mechanical completion." Commissioning includes energization and testing to check that each system or subsystem is fabricated, installed, cleaned, and ready for operation in accordance with the facility's design.

Once these steps are successfully completed, the facility is typically considered ready for startup. This stage includes the introduction of feedstock, performance testing and the gradual escalation from the operation of individual subsystems to system and facility-wide operation.

Leaving aside the health, safety, and damage concerns intrinsic to commissioning and startup, this period represents an anxious time for both the owner and contractor since they will find out whether the facility—as designed and built—is operational and capable of meeting the performance guarantees for the project.

If a contractor's guaranteed completion date is tied to the completion of commissioning and startup, which is typically the case if the contractor is responsible for these activities, there is rarely sufficient schedule float to account for any scheduling delays that arise due to unexpected performance or construction issues. Any such delays generally result in delay-liquidated damages becoming due from the contractor and offtake-related headaches for the owner.

Who is responsible?

Given these sensitivities, the ultimate responsibility for commissioning and startup is frequently a contentious point of negotiation between owners and contractors. Sophisticated owners with experienced teams will often demand that the contractor turn over care, custody and control of the facility at mechanical completion to allow the owner to conduct commissioning and startup with unfettered control and decision-making.

Less experienced owners, however, will likely look to the contractor to provide a "turnkey" solution by having the contractor retain custody and control over the facility until commissioning and startup is complete. Even experienced owners may request that the contractor provide these services when the facility contains new, complex or proprietary technology that the owner is unfamiliar with.

Insurance coverage can also play a role in determining who will conduct commissioning and startup, since the insurer will want to be sure that the party responsible for this critical phase can perform safely and without undue risk to the facility.

Even if a contractor agrees to commission and start up a facility, the owner's staff are nearly always involved in some capacity. Owners must be ready to assume control and operate the plant upon completion of start-up, and contractors are typically requested to provide training to and incorporate the owner's operations personnel into the contractor's commissioning and start-up teams. Mixed teams of contractor and owner personnel, however, can result in difficult questions of liability if a facility is damaged.

For example, during the commissioning phase for a large power generation facility utilizing a mixed team of owner and contractor personnel, damage occurred after the contractor's control room supervisor instructed the owner's operations trainee to perform a task using the facility's distributed control system. The trainee failed to carry out the task correctly and this failure, together with other facility problems, resulted in substantial damage and delay.

The contractor alleged that the trainee's failure to properly carry out the supervisor's instructions excused its delay in completing the facility. The owner argued that the parties' contract required the contractor to both train and supervise the owner's personnel. Ultimately, an arbitration panel determined that the contractor's duty to train and supervise imposed some measure of liability on the contractor for the error committed by the owner's operators.

As a result, owners and contractors should be aware of the potential liabilities associated with mixed commissioning and start-up teams so that these risks can be appropriately allocated by the parties. Common discussion points include the contractor's right to require that certain owner staff are removed, and what the owner's responsibility is for certain types of operator failures, including gross negligence or wilful misconduct.

Commissioning and start-up are integral for most major construction projects. Both owners and contractors should carefully consider who is the best party to assume the overall risk of commissioning and start-up; if the contractor agrees to assume these risks, further thought needs to be given on how to allocate responsibility for the owner's operations staff.

Thinking ahead in these situations can prevent much bigger headaches down the line.

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2021 White & Case LLP

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