Completion Certificates for major works

There are many milestones in a renewable energy facility project, and the contract should have a breakdown of these milestones in the milestone schedule.  These help everyone involved in the project to keep track of how works are progressing, and where there are possible risks to the project completion date.

There are a few major milestones that signify the end of a large piece of work, the shift from one activity to another or the handover of works from the Contractor to the Employer.  These major milestones may be accompanied by a certificate, included in the contract schedules, that formally recognise the completion of a certain aspect of works.

Let’s look at three major milestones that may merit the inclusion of completion certificates.

Mechanical completion

This milestone signifies the end of all construction and installation activities.  The facility is sitting there, like a dormant giant, ready to be switched on and commissioned.  All visual checks have been completed by the Contractor, as well as checks and tests that confirm that bolts have been tightened, cables have been connected properly, roads have been compacted, structures have been erected and equipment has been installed.  And these checks have been done in accordance with the accepted project inspection and test plan.  The resulting paperwork has been compiled and signed off by the Contractor’s duly authorised representative and it has been filed in a way that makes it available to the Employer to review (easily, so it needs to be filed logically).

This is a big milestone, because it means that the facility is considered to be safe to electrify.  The Contractor has done their due diligence through their quality inspections, and there is no perceived risk to human life in turning the thing on.  There may be minor works outstanding, but these should be just that, MINOR, and they should be recorded in detail on a snag list.  Snags should not affect how the facility operates, nor should they encompass a major portion of the works.

Practical completion

Also called commercial operation, this is the point at which the facility has been commissioned, initial performance tests have been completed, and the facility is ready to start exporting power to the grid.  This is a major milestone, as the facility can start generating revenue from the sale of electricity.  As mentioned in a previous post on commercial operation, this also typically triggers the Defect Liability Period, and is the start of the performance monitoring period.  Any adjustments to the contract price resulting from the actual installed capacity not meeting the contracted installed capacity are agreed here.

As I’ve covered this milestone already, I won’t talk in too much detail about it, other than to say that there will probably be a lot of stakeholders who have an interest in how the milestone has been achieved.  Independent engineers appointed on behalf of the utility, the lender or other interested or regulatory bodies may require access to test results and performance data.  They may also have a say in whether the milestone has been achieved.  This will depend on the contracting strategy, the local context and regulations and the number of stakeholder with a say in how the project is run.

There will probably be a lot of pressure from the Contractor, at this point, to confirm that this milestone has been achieved, as they will be looking to minimise the risk of liability for delay liquidated damages.  It can be quite a stressful part of the project, with pressure from all sides to ensure that data and information is reviewed thoroughly, without causing undue delays.  It is for this reason that the conditions to be met for practical completion should be clearly defined in the contract.

Schedule_programme

The contract should allow for the Employer to confirm that this milestone has been achieved even if all of the conditions have not been met, without giving up their rights under the contract.  It can be in the project’s interest to start seeing positive cash flow, before everything is 100% complete.  The big caveat here is that this should not be at the expense of the health and safety of those operating the facility, or result in any environmental damage.

Final completion

This is the milestone where the Employer and the Contractor shake hands and walk away from each other (with relatively small strings still attached).  This signifies the end of the Defect Liability Period and the performance monitoring period, and any compensation to the Employer resulting from facility underperformance is agreed.  The Employer is effectively saying that they accept the facility as it is, and that the Contractor has made good on any issues (mechanical or performance) that have come up since practical completion.

There are some conditions that will survive this milestone.  Most notably of which is the warranty on equipment (module performance warranty is typically 20 years at least).  Manufacturer warranties may be transferred from the Contractor to the Employer, and the Employer may follow up with the manufacturer if defects become apparent, or the the liability to resolve equipment malfunction may remain with the Contractor.

Latent defect warranties would also survive final completion.  These protect the Employer from construction issues that may only manifest way down the line, and are often linked to legal requirements (depending on the country).

Defining the Commercial Operation Date in EPC Contracts

Reaching Commercial Operation is a massive project achievement.  I remember lying on the floor of my office with tears streaming down my face when the project I was working on for nearly two years reached this milestone.  So what is it?

Commercial Operation is the point from which the project becomes a revenue generating entity, the point at which electricity generated is being fed onto the grid, and the Employer can start receiving payment for each kWh.  It means that the construction and commissioning of the facility has been completed, with minor, immaterial snags still remaining, the facility is compliant with relevant grid codes and standards and all relevant parties are satisfied that it can operate as intended, and safely.  It is also typically the start of the defect liability period, meaning that the Contractor’s liability for the facility starts to tick down.

COD

Clearly this is incredibly important, and therefore one thing that should definitely be well defined in the contract.

Some considerations:

  • The contract should allow the Employer to confirm that Commercial Operation has been achieved, even if all the individual requirements making up the full definition of CO have not been fully achieved.  This means that the Employer can get the facility to CO, get some revenue coming in, without relieving the Contractor of any obligations that they may still have to meet.
  • Once Commercial Operation is achieved, the actual Commercial Operation Date (COD) would likely be determined, and any delay liquidated damages (DLD) would therefore be applied up to that point.  If the Employer says that CO has been achieved prior to the Contractor fulfilling all the obligations, they can be let off the hook for any further DLD’s.  Depending on what rate has been set for the DLD’s, it may be better, financially, for the Employer to forego DLD payments, in favour of revenue from the sale of electricity.
  • There is typically a certificate included in the schedules of the contract, outlining what the Employer is confirming has been achieved at CO.  This would refer to the definitions of Commercial Operations in the contract, and would include the conditions on which the Employer is signing it off as being completed.
  • The contracts that I’ve seen have the requirements for Commercial Operation set out in the contract definitions.  These requirements may relate to the final completion of construction and commissioning activities, the inspection and sign off by external stakeholders (like the utility, lenders etc), in the projects in South Africa, the determination of Achieved Capacity and other requirements outlined in the PPA, the handover of all operational documentation, any relevant financial obligations relating to guarantees or insurance etc.  The requirements would vary by project, and would be negotiated based on the perceived risks particular to the project and Contractor.