Taking over – it really matters

One of most the relevant milestones in the life of a wind farm is the taking over.

It happens when the contractual requirements for the wind farm are considered fulfilled by the subcontractor, except for smaller items that are noted in a “punch list” and have to be fixed as soon as possible.

The requirements for taking over are defined in the contract. They usually include a (very, very long) list of documents to be provided and all the tests to be performed.

The taking over is officialised by a taking over certificate. From this point delay liquidated damage stop accruing, and usually there is a reorganization of the bond structure (for instance the performance bond can be replaced by a warranty bond).

Additionally the clock for the defects liability period start ticking. Subcontractors have the obligation to replace defective items or equipment (for instance, a transformer) and this usually “reset” the clock for that specific equipment.

The obligations of the subcontractor are usually guaranteed by retention of payments for the punch list items and by the warranty bonds for the defect liability period.

Under FIDIC and FIDIC-like contract the subcontractor can make a claim if he consider that the employer is avoiding to issue the taking over certificate without a justified reason. This is particularly relevant if delay liquidated damages are accruing – in this case an independent third party expert is usually involved to solve the dispute.

“Sectional taking over” is another relevant concept – it means that the wind farm is not taken over as a whole but in smaller sections. Usually those sections match the wind farm internal circuits, but in theory even a single wind turbine (or even a foundation) can be taken over.

“Deemed taking over” means that if certain events happen (for instance, the wind farm start its operation) or a number of months elapse for when the takeover certificate is requested by the subcontractor the taking over is consider to have happened

The gentle art of EPC wind farms: design responsibility

In the ideal FIDIC world there is little space for the discussion about design responsibility.

Either the Employer (FIDIC Red) or the Contractor (FIDIC yellow & silver) is going to do all (or almost all) the design.

Unsurprisingly, real life is more complicate than this. You will have an hard time trying to get reasonable offers from subcontractors without providing at least a preliminary design: subcontractors are usually bidding on many project at the same time, and their engineering department is often quite busy with running projects.

There are basically several different scenarios:

Employer provide the design, contractor build the wind farm. This happen often. In this situation, you will have a tight control over what it’s build. However, if something goes wrong it can be a problem to prove that the problem has been the construction and not the design – that is, you are left with an interface risk.

Employer provide the preliminary design, contractor provide the constructive project. This second option is very common as well. The gentle art here is to force the subcontractor to take full responsibility on the existing design.

Design “started” by employer and completed by the subcontractor. The main difference with the previous point (preliminary design for tender) is that something more detailed than a preliminary design but less detailed than a ready for construction project. Same story, you will usually want the subcontractor to warrant the existing documentation to avoid disputes.

Both design and construction provided by the contractor. This would be the “pure” EPC. In the wind energy business is not as frequent as you might think.

In general, the employer will try to retain some control on the design process and at the same time unload the risk and responsibility on the subcontractor. The gentle art consist in incorporate in the contract provision for design review.

Additionally, the employer will need to drive the subcontractor in the right direction using the proper mix of technical specification, quality requirements, industry standard and a properly drafted scope of work.

Last but not least, sometime the employer has a “main employer” or commitments with other parties (e.g. lenders) – all this obligation that can (and usually will) impact the design must be passed down as back to back as possible.

FIDIC contracts in EPC Wind Farms

I’ve recently had the pleasure to be exposed recently to the FIDIC contracts structure. Therefore I want to share with you my impression regarding the possibility of using this type of contract in wind farm EPC tenders.

The first FIDIC contract was released in the fifties. After half a century, the FIDIC contract family is expanding over the years to match the necessity of the market.

As you probably are aware, the different types of contracts are commonly referred to with different colors (red, green, yellow, etc.) from their cover. For instance “red” is for construction (of projects designed by the Employer), and “green” is for small work (maybe less than 500.000 USD).

The three types more appropriate to my particular sector would be the red, yellow or silver book.

Although there is obviously much more, I will resume the main characteristics of each of these 3 contracts type in the following table. I’ve not included the other books because they are not applicable to the wind farm sector.

DesignEmployerContractorContractor carries the risks
Design ApprovalEngineer may approve changes or ask for variationsEngineer approves or rejects before executionsN.A.
ProposalUnit PricesLump-sum PriceLump-sum Price
Payment SchedulesMeasured quantitiesPayment percentagesPayment Calendar / Payment percentages
EngineerYesYes"Employer's representative"
Risk DistributionEmployer carries design risksMore DistributedContractor carries the risks

So, which contract type makes sense in a wind farm EPC?

Let’s start to the easiest contract to discard: the silver book.

This typology of contract would be a full EPC where almost the full risk is suffered by the contractor. There is no engineering available, therefore quantities are estimated and risk such as subsoil quality must be included in the contractor price.

Obviously, this made the contract not operative for projects such as tunneling, wind farms or other “high geotechnical risk” activity.

Theoretically, it is possible to include in foundation price this risk. We even have done it in the past, for clients not willing (or not able) to pay even for a preliminary geotechnical survey. But the price of a piled foundation can be 2 times the price of a standard, shallow foundation. Therefore numbers become huge quickly, and this approach kills the majority of the projects.

Also, the client is not really willing to pay for something that it might never get (that is, major civil works). This basically eliminates the possibility to use the silver book, a contract that makes sense in situation where both party knows that little deviations are to be expected (maybe some type of plant).

These leave us with the yellow and red books.

In the red, engineering is made by Employer and payments are made on the basis of the real quantities executed. Employer carries the risk for contract amount increases: as you might guess, this point is not particularly welcome by banks or by companies such as Vestas.

In the yellow, Employer prepares only the «Employer’s Requirements», including Draft layout, Operational Parameters, Technical Specifications and Financial Proposal.

Tenderers submit their technical proposals together with their financial proposals, including at least methodology, basic design and drawings, bill of and similar supporting documents.

So maybe you think that finally we’ve found of dream contract, the FIDIC yellow book.

Well, no. The problem is that contractors are unwilling to give a real closed price: basically, construction companies don’t have an engineer department big enough to properly follow each tender and give a good price. Being a really specialized business, often you ask price to good local companies with no wind experience.

This lead to misunderstandings, unreasonably low or high prices and (even worst) discussion during execution, when you already have a closed price with your client and accept a reclamation of the subcontractor would go against contract margin.