New energy, old problems: How to keep contract disputes from derailing your energy infrastructure project
By Todd Conley. Retail electricity sales could grow by 25 per cent by 2040, and renewable energy generating capacity is expected to follow that trend, growing by 52 per cent itself over the next 25 years, according to the U.S. Energy Information Administration. This massive shift in energy production presents phenomenal opportunities for utilities, developers and investors alike.
However, with opportunity comes risk, and big projects such as developing energy infrastructure require the creation of comprehensive strategies developed with experienced legal counsel during contract negotiations, project execution and dispute resolution to mitigate that risk.
New technologies are driving a global demand for these types of projects and, like with any building boom, we're seeing some common problems crop up which often aren’t properly addressed by the parties. Oftentimes, however, parties don’t want to involve legal counsel for what they perceive as minor “hiccups.” Unfortunately, those hiccups can quickly morph into disputes so large that they overwhelm the project and make quick, cost-effective resolution nearly impossible.
In one recent case, the project owner and contractor could not agree on who was responsible for cleaning-up ground contamination. Because the project could only be completed if the contamination was remediated, the dispute put a nearly one billion dollar project on hold for years while it was resolved in court, costing each side millions in litigation expenses. Those costs and the long delay would likely have been significantly reduced by having legal counsel involved earlier in the project.
Warning signs that there are problems with a project include: prolonged delays, infrequent and poor quality schedule updates, changes in work sequencing (contractors often target easier work to meet milestones for payment), workforce shortages and disputes with subcontractors.
The first step to avoiding, or at least minimizing, these types of problems is developing a project-specific contract. These contracts are tailored to fit the specific work of the contractor or subcontractors. These contracts require thorough planning on the front end but provide much stronger legal recourse when problems arise.
In essence, a good contract clearly defines the allocation of risks for the project. Disputes over labor availability, payment, scheduling or extra work claims can easily derail a project, and if a contract doesn't clearly define who is responsible for the problems causing the disputes, the parties will lose time and money waiting for it to be sorted out in court, arbitration or mediation.
If the goal is to execute a project as smoothly as possible, then a solid contract is the best place to start. Keep in mind that the project contract should create a “real partnership” and foster a shared set of priorities. This will help you identify performance problems early and uncouple those issues from the rest of the project work — hopefully resulting in timely project completion and efficient, well-ordered dispute resolution.
Some other key items your attorney should recommend when developing a project contract:
- Set objective, or clear achievement, milestones for payment rather than payment for progress which can be little better than a “guess-timate” of the percentage of completion.
- Avoid excessive frontloading of payments so that the amount paid does not far exceed the work actually completed.
- Ensure that completion requirements (e.g. requirements for substantial completion) are clear and, where possible, objectively verifiable.
- Be careful when including bonus and penalty provisions. Contracts that are too one-sided invite disputes.
Unfortunately, even with well-thought-out contracts, disputes do occur and you need a strategy for effectively managing them. Engaging legal counsel early in the life of a dispute will allow you to tailor a strategy for resolving it or — at a minimum — put you in the best position to have the dispute resolved in your favor in court, arbitration or mediation.
Todd Conley is an experienced litigator based in Womble Carlyle's Washington, D.C. office, where he represents utilities, contractors, developers, equipment suppliers, design firms and other related industries in construction contract formation and dispute resolution.
Posted 04/03/2015 by Reg Tucker
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