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.

Milestone schedules in renewable energy EPC Contracts

A milestone, for those who don’t know, is a point in time, when you can stop what you’re doing and say “look at what we did.”  It’s an instant, and what you should be able to see from where you sit at that moment is a picture of parts, accumulated into a measurable outcome.  Sounds almost poetic.

Where the difficulty comes in is that the picture that an Employer expects to see for the same measurable outcome may be very different from that presented by the Contractor.  Put these various milestones together in a milestone schedule, and you have the potential for a lot of different expectations along the project programme.

It’s therefore very important that milestones are:

  • Clearly definable and measurable – Both parties should be able to agree easily that a milestone has been achieved when looking at the same evidence.  Should turbines be delivered to site, or is a holding point enough?  Should modules be connected, or is it fine that they’re installed on the mounting structure?
  • For a discrete piece of work or activity – the boundaries of activities making up a milestone should be known
  • For an appropriate amount of work – milestones for very small packages of work may become onerous to monitor. (If, however, they are for overly large pieces of work, it may be difficult to monitor if and when delays start occurring)

The milestone schedule should naturally be linked to the project programme of works.  This PoW will be refined after the completion of the contract, but the key project deliverables should be defined upfront, as these will inform the milestone schedule.

SCHEDULE

Things that should be considered in the milestone schedule (as they will undoubtedly be linked to the payment schedule – so many schedules) are:

  • completed detailed facility design
  • procurement and delivery milestones
  • construction milestones
  • testing and commissioning milestones, including completion certificates

The Contractor will need to be able to demonstrate that the milestone has been completed in accordance with the contract, and in order for the Employer to verify this, they will need to be able to provide relevant documentation, such as:

  • Purchase orders/waybills/delivery notes/inspection sign off slips
  • Construction progress reports
  • Quality inspection reports and check sheets/snag lists
  • Up to date construction programme of works
  • Up to date project risk register

The contract should outline the Employer’s right to request relevant documentation in order to carry out the verification of completed milestones.  It should also explain whether or not the Contractor is allowed to make claims for a portion of a milestone.