The construction contract in an international project financing
serves to give the project company a fully completed and equipped
facility. In addition, it provides for delivery by the contractor
of a facility that satisfies specified performance criteria, for a
fixed or predictable price, and completed on a specific date. There
are four types of construction contract which are engineering,
procurement, construction and EPC contracts. EPC contracts concern
all the stages namely; engineering, procurement, construction.
THERE ARE A MULTITUDE OF CAUSES FOR COST OVERRUNS
Devaluation in the currency, which is converted resulting in
increased cost of imported building material, an embargo against
the host country resulting in increased fuel, energy and
transportation costs, unexpected legal problems in land acquisition
requiring additional expense in litigation or negotiated
settlement. A certain measure of control can be exercised over some
of these risks. Therefore project sponsors need to expand their
flexibility in their contractual arrangements. Otherwise they can
face with pecuniary loss. In order to avoid this loss, project
sponsors can make a new contract, they can alter existing actual
contract or they can add some guarantees and contractual terms.
Generally project sponsors prefer to hold contractor liable to
fully and timely completion of the project construction for a fixed
OBLIGATIONS OF PROJECT COMPANY AND THE CONTRACTOR
There are some obligations which are allocated between Project
Company and the contractor. In case of failure of these
obligations, Project sponsors should be compensated by liquidated
damages provision which is divided into two types; delay liquidated
damages and buy-down liquidated damages. Firstly, it is obvious
that this provision mitigates risks on project finance sponsors and
built flexibility by contractual arrangements. When the contractor
fails to meet certain milestones dates then Delay liquidated
damages become payable. Generally, cover additional interest cost
arising from the delay and may compensate equity investors for
additional interest during construction period. Latter is buy-down
also called as performance liquidated damages. In addition buy-down
liquidated damages are used to pay down project debt to equalise
the expected turn down in net operating cash flow. Buy-down
liquidated damages are set at a value that will permit the debt
service coverage ratios to remain unchanged and stable.
CONTINGENCY RESERVED FUNDS
Alternatively, the other significant risk mitigation tool the
creation of contingency reserve funds is in order to ensure
flexibility. This fund is a line item in the construction budget,
supported with loan or equity commitments, to pay cost overruns
during the construction period.
The project sponsor will in turn obtain performance bonds from
his contractors and sub-contractors in order that the persons
having the most control over timely completion of the different
project components are made responsible for the consequences of
their actions, inactions, oversight, or incompetence. The delay may
be caused by external events beyond the control of parties. While
contractors may be willing to bear responsibility for delays
attributable to them, they may not be amenable to being strictly
liable for delays like civil disturbances and acts of God which are
beyond their control. Some of these risks are insurable at
reasonable premiums, others are not. Amongst the project
participants, the project sponsor is often left as the bearer of
residual risks. Performance bond -and also it can be issued by a
INSURANCE CAN BE AN ALTERNATIVE
In addition, Insurance is the other alternative for project
sponsor to have greater flexibility. During construction period,
construction all risk insurance is an insurance cover in order to
protect the project construction against property damage and the
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Where standard printed terms and conditions of a contract are inconsistent with its special terms and conditions, the special conditions will prevail so as not to defeat the main object and intention of the contract.
The Common Reporting Standard is, like FATCA before it (a regime established by US legislation, the Foreign Account Tax Compliance Act), an information exchange regime aimed at international tax transparency.
An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation.
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