Technical specifications – listing performance obligations for equipment

The contract’s technical specifications (or the Employer’s Requirements) are typically included in a contract schedule, and they list the minimum technical requirements that are to be met by the Contractor in the design, construction, commissioning and operation of the facility.

The most important point in putting these together is that the specs need to be a good balance between detail and not over-specifying technical aspects of the facility.  What this means is that there should be enough defined in the specs to ensure that there is no ambiguity with regards to the Contractor’s obligations, without defining each technical item in its minutiae, to the point where the slightest change in the technical details of the facility requires a contract variation (even if there is no real impact on how the facility will operate).

SPECIFICATIONS

Let’s consider a bit of a silly example.

Say the contract defines the type, make and manufacturer of the DC cables to be used in a PV facility.  Let’s imagine that ACME inc has an 8mm aluminium cable, model XYZ.  According to the contract, the Contractor is required to use this type of cable for connecting PV modules.

Now imagine that for some reason that one of the following happens:

  1. ACME inc goes out of business and are no longer manufacturing cables;
  2. The interpretation of local legislations indicate that, after signing the contract, an 8mm cable is not compliant;
  3. In operations, it is discovered that this cable is not suitable for the facility design, and there is a risk of overheating/damage; or
  4. In operations, it is discovered that the cables have a much higher level of electrical losses associated with it than was anticipated when the cable type was specified.

Now, for scenarios 1, 2 and 3 it is probable that the cable type used would need to be replaced with an alternative make and model.  Clearly if you can’t get it any more, you’d need to find another type, if it doesn’t comply with local regs you can’t use it, and if it presents a danger to the facility’s operation or human safety, it cannot be used.  What this means is that a different cable type would need to be sourced.  Depending on the other terms of the contract (including force majeure with scenario 1), the Contractor may rightly claim that the responsibility for any additional cost or time associated with procuring, installing and testing an alternative cable should be borne by the Employer.

And in scenario 4?  What may come of this is that the overall operation of the facility does not meet the minimum performance requirements.  The Contractor may argue that they were obliged to use the cable specified in the contract, and if they can prove that this is the reason that the facility is underperforming, they may be able to argue their way out of paying performance liquidated damages.

So what to do?  Key components that have been selected based on a review of manufacturer track record, proven equipment performance, stated warranty considerations etc (such as the module type to be used) should be defined in terms of the make and model, as the Contractor should be obliged to procure that specific product.  But for other components, that are not so sensitive, the contract should rather specify the minimum performance requirements that are to be met by the equipment selected by the Contractor.

Should any of the above scenarios occur (outside of any triggering force majeure) the Contractor would be hard pressed to push any time or cost risks onto the Employer.  They should have designed the facility appropriately, selected suitable equipment and carried out energy yield assessments and calculations to ensure that the facility will operate as intended.

Things that should be considered when defining the performance requirements:

  • certification requirements required (e.g. IEC/TUV etc)
  • manufacturer track record requirements
  • compliance with local and/or international standards and regulations
  • equipment operational requirements (such as maximum loss allowance/minimum availability obligations etc)

The difference between contract variations and design amendments

Contract variations

The processes to be followed for any changes to the contract terms, clauses and schedules should be outlined and detailed appropriately; we’ll call these contract ‘variations.’  The contract should cover how to deal with variations proposed by the Employer or the Contractor.  Variations are important to understand fully, as they will almost inevitably end up with additional time and/or cost requirements.

dilbert_misinterpretation

If the variations relate to the technical specifications, they should result in improvements to how the facility operates; to generate more energy, to operate more safely or to result in cost reductions.  Variations may also change certain clauses or obligations set out in the contract, relating to either party’s obligations.  For example, the Employer may require additional reporting functions over and above what is required in the original contract, or there may need to be changes made to the way that performance guarantees are calculated.  These naturally need to be negotiated and agreed upon.

What is important here is that there will be requirements for written notification of the intention for a variation, the impact of this variation will need to be reviewed, and any additional cost imposed on the Contractor will inevitably be reflected in changes to the overall contract price.  Extensions to the scheduled completion date may also come into effect (if, for instance, additional equipment needs to be procured, impacting on the critical path.)

Variations requests and the outcomes of the requests should be documented and recorded and all relevant parties and stakeholders should be informed of the variation and the impact that this has on the project.  Reports, programme of works, design documentation, test plans, manuals etc should be updated accordingly.

Design amendments

Changes to the design are different.  The contract should outline the process to be followed for the Employer to review Contractor designs.  This will typically provide the Employer with a certain period in which they are able to provide comment on the design.  At the end of this period the Contractor may proceed as if the Employer has no comment if no feedback has been received.

This does not mean that the Employer has accepted that the design is in compliance with technical specifications of the contract.  Regardless of the Employer’s review, the responsibility for ensuring that the design is in compliance with contract remains with the Contractor.  This is very important, and both parties should understand this key concept well.  This is also an important reason for the Employer to be incredibly cautious in directing the Contractor to include any specific items in the design, as this may cause a conflict between what is set out in the contract, and what the Employer requested.

I digress slightly here, but the above is very important and is relevant for the point I want to make here which is as follows: the Contractor can make amendments to the design, submitting said amendments to the Employer for comment, but as long as the overall design is still in compliance with the technical requirements set out in the contract, this does not constitute a contract variation, and the variation clauses should not be triggered.  The Employer may comment or not, but if the Contractor has simply issued a drawing update, or a minor layout change, for instance, no formal contract variation processes apply.

I’ve seen confusion over this principal in practice.  The Contractor submits a design change for comment (a design change that was not in accordance with the specs), and when no response from the Employer is received they considered it to have been accepted as a variation.  When the Employer later questions why they are not fulfilling the technical requirement of the contract, the Contractor has said, “well, you accepted a change when we submitted the design.”

“No Mr Contractor”, you say, “where did you submit in writing that you were after a contract variation, and what documentation did you provide to me to show that this presented an improvement to the facility’s efficiency, safety, or cost?”

Clever Employer.

But first, to be such a clever employer, you first need to ensure that you have the correct tools at your disposal, which, in this case, are the suitable contract clauses are in place, where the processes to be followed for contract variations and design reviews are clearly defined.