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By John W. Ralls
Howrey LLP
Timely completion is absolutely crucial to the success of a wind energy project.
For owners and developers, the importance of timely completion goes beyond the most basic goal of generating revenue as soon as possible. In many cases, owners and developers have commercial operation deadlines under their power purchase agreements or financing arrangements. In addition, new projects must be placed in service before production tax credits expire, a consideration that has driven many projects in the past and may well again.
For installers and contractors, late projects tie up resources that could be used on other jobs and increase overhead expenditures.
In light of all the negative consequences of late completion and especially when the causes are not obvious, the parties may well seek legal relief by asserting delay claims against other project participants.
Delay claims are expensive, time-consuming and distracting for the parties. As with delays themselves, delay claims are to be avoided but are not always avoidable. This article offers - from the perspective of a construction lawyer who sees many claims arising from late and troubled jobs - ideas on how to avoid the occurrence of delay claims and how to minimize the adverse impact of such claims when they do occur.
Avoiding Delays and Delay Claims
Proper Planning and Scheduling
Jobs finish late for all kinds of overlapping reasons, including:
|  | Inaccurate geotechnical information.
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| | Failure to secure needed permits.
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| | Late equipment manufacturing.
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| | Late equipment deliveries.
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| | Design changes.
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| | Failure to provide proper site access.
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| | Bad weather.
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| | Labor problems.
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| | Late or poor performance by installation contractors.
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| | Problems with testing and commissioning.
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Management of the risk of late project completion starts with development of the project schedule. The factors that have the potential to make the job late should be reviewed. Resources should be allocated to minimize the chance that those factors will in fact cause delay. When it comes to avoiding delays and delay claims, it is far more important to have a proper schedule and experienced, capable project participants who have committed to the schedule than any number of favorable, legalistic contract clauses.
Late and troubled projects repeatedly have schedules marked by inadequate detail and/or unrealistic, "perfect case" durations. Late and troubled projects also frequently feature late performance by parties who may have signed a contract agreeing to a particular schedule but in reality never fully committed to the timeframes for their performance. All of the attributes suggested here of a good schedule require attention - appropriate level of detail, realistic durations and, most of all, buy in to the schedule. The more aggressive the schedule, the greater the need for buy in from all key project participants.
Proper Incentives and Security in Contracts, Especially Subcontracts
Another way to avoid claims is to insist on contracts that have proper incentives for timely performance.
Considerable care and attention typically are given to the turbine supply and installation agreement, with owners and developers typically insisting on robust delay liquidated damages and either bonds or letters of credit as security. Such provisions provide powerful incentives to contractors and turbine suppliers to do their work on a timely basis. Relatively less care typically is given to the other agreements for essential elements of the project, such as balance-of-plant contracts, subcontracts for installation or site work. Yet the performance of the companies working under these other contracts may be absolutely vital to timely completion of the job. Care should be taken at the front end to ensure that these contractors are properly motivated to perform timely. In particular, provisions such as delay liquidated damages, performance surety bonds and standby letters of credit all should be considered.
For instance, preparation of access roads to and around the site may be absolutely essential, and the late construction of access roads may cost the parties huge sums in lost production or liquidated damages. But if the access-road contract does not include sufficient incentives for timely performance, then the project may be at the mercy of a contractor who is over-extended, who has taken on other, more profitable work, or who has key equipment tied up on another job. The situation in which contractors with relatively limited exposure to damages can cause millions of dollars in losses should be avoided if at all possible.
Obviously, there are limits, and contractors with smaller scopes of work are unlikely to accept total liability for late project delivery of a major wind farm. The key is incentive - and what may motivate a small or medium-sized contractor to do whatever it takes to ensure timely performance may be considerably less than the full consequences of late performance to the project. Attention to incentives (such as liquidated damages for delay and/or bonuses for early completion) and proper security (such as surety bonds or, better still, standby letters of credit) can go a long way to ensuring timely performance.
Other Contractual Provisions
Contractual provisions specifically related to schedules, scheduling and extensions of time also should be reviewed in advance, with the goal of minimizing the occurrence of delay claims. The following issues should be considered:
| | Under what circumstances does the contract allow for time extensions and delay damages?
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| | Does the contract allow for time extensions based on actual delays caused by events outside one's control?
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| | What must be shown to obtain the time extension, and is it too much or too little in terms of fair and appropriate proof?
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| | What kinds of schedule reporting is required? Is it too much or too little in terms of useful and realistic reporting?
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| | Are there provisions that, if followed, will result in all affected parties receiving sufficient advance notice of delays so efforts to mitigate the problem can be evaluated and implemented?
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| | Will the project managers working on the job be able to work within the provisions of the scheduling and time extension clauses?
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When Claims Do Arise
The Central, But Limited, Role of the Contract
When claims are made, it is commonly said that the starting point for analysis is the parties' contract. But such statements can be misleading. To be sure, the contract is fundamental, as it defines the parties' rights and responsibilities (and, most important, who was to do what). But in the context of delay claims, the contract generally does little more than set forth the basic ground rules for the dispute by identifying which party is responsible in the event particular events or circumstances are found to have caused the delay.
For instance, under the contract, the owner will in most cases be responsible for delays caused by unforeseen soils conditions, late project approvals and late performance by other firms, if any, with whom the owner has separate contracts. On the other hand, under the contract, the turbine vendor and installer typically will be responsible for the late delivery of its equipment and for the untimely performance of its subcontractors. While the contract defines who is responsible for what, it typically does not answer the key question - what actually caused the project to finish late?
Analyzing Project Delays - The Importance of Good Records
Disputes concerning what exactly caused a project to finish late are fact intensive, which makes such disputes expensive and distracting for the parties.
In disputes involving a significant amount of money, both sides typically will retain scheduling consultants, and competing accounts of what actually caused the project to finish late will be developed. In this kind of dispute, a party can acknowledge responsibility for certain delays so long as those delays did not actually cause the project to be late (or, in scheduling terminology, the delays were not on the "critical path" or only operated to reduce "float," or cushion, in the schedule). In order to prevail, a party must prove that events for which the other party is responsible caused critical path or actual delay.
These facets of delay claims make record-keeping during the job extremely important. Good record keeping is always advisable, but when it appears that delay claims will arise, efforts to keep good records should be redoubled. Good records are essential to piecing together the disputed and frequently complex chain of events that led to project delays. Good records also are needed by scheduling consultants and attorneys working on delay claims.
When litigation or arbitration proceedings commence, the need for good records is all the greater. Larger and more complex disputes typically are decided a year or two after the key events transpired. By that time, memories may be suspect, and key project personnel may have transferred to other positions or employers.
For all of these reasons, the existence of good records tends to support one's position while the absence of records tends to discredit.
In general, all deviations from plan and any oral instructions received from others should be recorded in writing as accurately and completely as possible. The most useful and credible kinds of records are factual, regular and contemporaneous. While correspondence and e-mail are essential documentation tools, on troubled jobs they often carry emotion and commentary that diminishes their utility. Such communications should be matter of fact, accurate, moderate and polite. When delay claims are presented to neutral parties, accusatory letters or e-mails rarely support the parties' position. Conviction in one's position generally is good, but personal attacks or allegations of intentional misconduct are more likely to detract. Purely factual forms of documentation, such as daily logs, photographs, video, meeting minutes, schedule updates and accounting records, are essential tools for the properly documented project.
If these points about the importance of good record-keeping seem obvious, then why is record-keeping so frequently poor? Part of the reason lies in the fact that the men and women charged with making projects happen in the field are busy, prefer taking action to writing things down and want to be seen as getting the job done, not preparing claims. While such tendencies are admirable, they provide no excuse for poor record-keeping. The importance of good record-keeping should be emphasized with project managers, both owner's and contractor's, and re-emphasized at the first sign of trouble.
The Importance of Notice and Prompt Attention to Problems
Virtually all design and construction contracts require that notice be given if events or circumstances appear to give rise to project delays. To give "teeth" to such notice requirements, many contracts provide that if timely notice is not given, the claim is barred. When evaluating otherwise potentially meritorious claims, judges and arbitrators frequently take pains to find ways to permit the claim to proceed even where formal notice was not given. However, not all judges and arbitrators have this proclivity, and one probably will not know for a year or two after the event in question which kind of judge or arbitrator has been drawn to determine the dispute.
Parties with notice requirements (including contractors and equipment vendors contractually responsible for installation) must have a system for ensuring compliance. In particular, project managers should be cautioned that it is very common for notices not to be given in the early stages of the job - when the project teams are optimistic, working together well and desire to avoid confrontation. This failure of documentation during what one might call the "honeymoon" period of a construction project must be resisted. Polite, measured and accurate notices should be provided as a matter of course throughout the job.
Prompt notice not only should be viewed as necessary to comply with technical contract requirements. Owners frequently assert that the provision of timely notice is essential to their ability to address the problem at hand. Unwelcome surprises can cause havoc in an owner organization under pressure to deliver timely project completion to management and investors. Such surprises frequently engender frustration and even distrust, all of which increase the likelihood of claims. Moreover, when an owner can show that it would have taken other, remedial steps had the contractor provided timely notice, the dispute may be harder to resolve, and the risk that the contractor's claims will be barred increases substantially. In these ways, the failure to provide timely notice may reflect poorly on the contractor's desire to mitigate actual delay.
Conclusion
The more one learns about delay claims, the more reasons one has to avoid them. But participants in the design and construction process cannot immunize their jobs from claims. Attention at the front end (careful planning, including proper scheduling and contract preparation) and during projects (good record-keeping and prompt attention to problems) can substantially reduce the occurrence and negative impact of delay claims.
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For more information about the issues covered in this report, please contact John Ralls in our San Francisco office at 415-848-3362 or at rallsj@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2006 Howrey LLP
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