The financing of an infrastructure or energy construction project always involves a review of the main contracts the project company (also known as special purpose vehicule - SPV) will enter into. Among all agreements, the construction contract comes under the closest scrutiny. The version ultimately presented to lenders is usually the result of multiple compromises.
First, the sponsor drafts the contract to secure the strongest guarantees from the contractor responsible for building the asset. This is the so-called "turnkey contract", or EPC for "Engineering, Procurement, and Construction". However, to attract competitive bids, the sponsor may be tempted to reduce the usual commitments in this type of contract: the price may no longer be fixed and could include a variable component; the project may no longer be fully turnkey, with certain lots remaining the responsibility of the SPV.
The contract then enters the negotiation phase. The prospective contractor will try to narrow the scope of the guarantees granted to the SPV, but also to introduce events entitling them to extensions of the completion deadline or additional payment, or even reimbursement of costs.
At times, the market cannot meet the sponsor's expectations. The recent U.S.-initiated trade war is just one recent example of the disruptions that can affect a globalised market for the supply of components. A contractor will then no longer be able to make firm commitments on deadlines and costs under a turnkey construction contract. Several solutions exist: submit a bid with a high-risk premium, proceed with a significant allotment of the work to be carried out, or opt for a so-called "EPCM" (engineering-procurement-construction management) contract: the contractor then becomes a service provider responsible for designing the asset and concludes all contracts for the supply of parts and labour on behalf of the SPV.
In the latter case, ten-year guarantee, the guarantee of perfect completion or proper functioning no longer apply: the EPCM contract is not a contract for work within the meaning of Article 1787 of the French Civil Code, but a simple service contract.
Negotiation flexibility, according to lenders' comments, is therefore quite limited. The revised contract is a compromise that has enabled the parties to reach a satisfactory balance in terms of price and risk allocation. Any subsequent changes are difficult to negotiate.
In order to improve lenders' risk assessment of such contract, several best practices can be implemented.
The first concerns terminology matters: these contracts should not be presented when seeking financing offers as "EPC contracts", when an allotment has taken place and the SPV does not have a single point of legal and contractual responsibility.
The second concerns the contractual structuration of guarantees: what the French Civil Code no longer provides can be obtained through negotiated contractual clauses. For example, the SPV may ask its co-contractor, who coordinated the on-site work and advised it on acceptance, for a guarantee of proper functioning of the asset for a period of one or two years, even though that co-contractor was not involved in the construction work.
The SPV can also ensure that certain compliance guarantees for components supplied by multiple co-contractors are consistent across all contracts, in identical terms, as well as a joinder clause: this will prevent its co-contractors from shifting responsibility for a malfunction or design fault onto each other, and allows the SPV to consolidate claims into a single legal dispute.
The third concerns the delay or performance penalties to which the SPV would be entitled under the project contracts it has entered into: these penalties must be negotiated on a "back to back" basis to cover any penalties to which the SPV may be liable to its buyer in the event of a delay in production (e.g. electricity generation) or reduced quality (gas output).
