Contracts must spell out risks and liabilities

Offshore wind power is emerging as a leading energy technology in the UK, forcing project owners, developers and contractors to keep up with the pace of change. We present the options on offer for drafting contracts that work best for all involved

Contractual arrangements must be set out at the  start of a project  so that risks can be appropriately shared
Contractual arrangements must be set out at the start of a project so that risks can be appropriately shared

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The UK offshore wind energy sector has come a long way since the first offshore wind farm was completed in 2000 at Blyth harbour in the northeast of England, with just two turbines totalling 4MW. Installation has grown almost exponentially since — a level of growth that is essential if the UK is to achieve its ambitious renewables targets for 2020 and beyond.

But the principal challenge for offshore wind is the UK government’s edict that it must reduce the cost of electricity from around £140/MWh today to £100/MWh by 2020. A critical element of this is to address the contractual interface between owners/developers and contractors early in the project lifecycle, so that risk and responsibility can be considered in detail and allocated.

Contracting strategy

When deciding which contracting strategy to use for the construction of an offshore wind farm, a project owner has a number of options. These include: an engineering, procurement & construction (EPC) contract; multi-contracting; and alliancing contracting (see box).

In the context of offshore wind, each of the above options has advantages and disadvantages. An EPC contract, for example, may appear attractive to a project owner since its fixed price and relatively low risk makes it easier to finance. However, presently there are few offshore wind EPC contractors who are able and willing to take on the high level of risk involved — adverse weather and subsea conditions being just two of the perils. This can mean limited options and a high price tag for a project owner wishing to use this model.

Multi-contracting allows the project owner a greater variety of contractors to choose from for each scope of work. Liability can be apportioned between the owner and the contractors on a case-by-case basis, depending on each contractor’s appetite for risk — often dependent on its insurance arrangements. The up-front price for the project owner can be lower in a multi-contracting scenario, but downsides are likely to include retention of adverse weather risk and geotechnical risks. The owner is also often left to manage the interface between all the contractors, which can be a project in itself.

Alliancing contracting is a relatively new and untested model in offshore wind. Under this strategy, which was recommended by the UK Offshore Wind Cost Reduction Task Force (CRTF) in its June 2012 report, the aims of all the parties are, in theory at least, aligned. Its main advantage is that all members of the alliance share in the overall gain if the project is completed within budget, which creates an incentive for them to complete their element of the work on time and without wasted expenditure. The flipside is that each alliance member must be prepared to share in the pain if the project is delayed by the failure of another member or by external forces beyond the control of any of the parties. These are often difficult to negotiate and define in the contract.

Because a high degree of trust and transparency is required, this model necessitates experienced and financially robust contractors, which could be an automatic barrier to entry for smaller contractors that the industry is otherwise seeking to encourage. It is too early to say how effective and successful this model will be, but experience in offshore oil and gas is mixed, and contractors often find it does not benefit them.

Which contract form?

The prevalent contracting strategy in the UK offshore wind sector to date has been multi-contracting. When considering the appropriate contract form for such a scenario, a number of options are available to the parties, including:

    a standard form contract with amendments

    a bespoke contract, usually produced by the owner.

Although the use of a standard form contract might appear a time- and cost-effective choice, there is a danger that it will simply not be fit for purpose. For example, the use of a standard form contract drafted for use in the oil and gas construction industry, such as LOGIC, or even for the onshore construction industry, such as FIDIC, is rarely the best starting point for the negotiation of an offshore wind contract. Substantial negotiation, amendment and lengthy additional clauses are needed to adapt it to a particular project.

There are no standard forms designed specifically for offshore wind yet, but moves are afoot to develop suitable forms. A key recommendation of the CRTF report was the establishment of a common knowledge forum of senior industry practitioners to identify best practice and models.

International non-governmental organisation BIMCO, which provides regulatory, information and education services to the shipping industry, is developing a "WINDTIME" contract for smaller crew maintenance and support transfer vessels, due to be published in 2013. However, it is early days, and experience shows that development and acceptance by an industry of such standard forms takes some years.

In the meantime, utility companies and contractors will have to continue negotiating their own bespoke wordings or other standard forms. They will have to ensure that all risk and liability provisions are included in sufficient detail, and that the respective obligations of the parties are clearly and thoroughly expressed.

What works for one project will not necessarily work for another, and the advantages and disadvantages of each contracting strategy should be considered on a case-by-case basis. As for choice of contract form, parties need to think carefully about whether standard form contracts can be adapted to the needs of the project. Experience to date shows that if risks and liabilities are identified early on, clearly defined and allocated to the party best placed to bear them, costs will be reduced for all involved, to the benefit of the wider industry.  

The main contract options available for offshore wind projects

    Engineering, Procurement & Construction (EPC) contract. A contractor agrees to design, develop and build the entire project, which is delivered to the owner on a ‘turnkey’ basis. Under this model, the EPC contractor agrees to bear the development risks for an agreed price.

    Multi-contracting. The project owner awards different contracts for separate scopes of work, for example: a turbine supply contract; a cable supply contract; a turbine transportation and installation contract; a cable transportation, laying and burial contract; and, in due course, an operation and maintenance contract. Under this model, the aim is to allocate interface risk and responsibility to the party best placed to bear it.

    Alliancing contracting. In its purest form, this involves the project owner, contractors and suppliers entering into a transparent partnership, in which they pool their combined expertise and work together to complete the project on a ‘pain share/gain share’ basis. The aim of alliancing contracting is that all parties are responsible for the single project objective and that, in the process, traditional contract interfaces are eliminated to a large extent.

Chris Kidd is a partner and Mark de la Haye a senior associate at law firm Ince & Co in London, UK

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