EPC Contract, win-win negotiation, LNTP on private investment project

Context:

In a previous case study, we analysed the positive impact on the atmosphere brought by negotiating a win-win subject like “completing the construction phase early and sharing the value generated by this”.

Many times, private investment projects take more time than expected to reach financial closure. Allow me please to state the obvious:

“The easiest way to finish early is to start early.”

In practice, starting early requires a Limited Notice to Proceed (LNTP) agreement. I would propose the following definition :

A limited notice to proceed (or LNTP) is a notice by the Employer instructing the Contractor to proceed with a part of the works. This situation occurs when all the conditions to fully proceed with the project have not yet been fulfilled. Typical obstacles to a full notice to proceed (or NTP) are the need to reach financial closure, lacking some permits or ongoing contract negotiations. Usually, the Contractor and the Employer share the risk for the spending during the LNTP period in case the full NTP is never achieved.

Here below, you will find a summary of the challenges and outcomes observed on several cases I actively participated to. Rather than lengthy descriptions, for once, I felt it was better to write some bullet points:

The advantages of an LNTP for the Project Owner are:

• More work done before NTP (Notice to Proceed) can lead to a shorter time required between NTP and taking-over, which means less IDC (Interest During Construction).
• If some extra project float is generated by the early start, the project risk is reduced.
• It is a good opportunity to see the Contractor in action before full NTP. If this turns out to be a disaster, it is not too late to take the necessary actions (to put some pressure on the Contractor to implement corrective actions or, in the worst case, go back to the second evaluated bidder).

Contractor can benefit from the following advantages:

• Reduction of the painfully long waiting time between contract signature and NTP will avoid increased cost from pre-mobilised resources that are just standing-by. The costs of pre-NTP idle time can rarely or never be recovered from the Owner.
• Usually, Contractors have to overcome some inertia to start and reach good working speed. Nothing better than an LNTP period to do so and not accumulate delay in the first months after NTP.
• Additional float generated during the LNTP period will reduce the risk of being late and of paying corresponding delay liquidated damages.

The challenges to conclude an LNTP agreement include:

• Agreement on payment during the LNTP period: The Owner has considerable difficulties to pay out-of-pocket amounts because the development expenses often exceed initial expectations. Only at financial closure fresh cash will be available. On the other hand, one cannot expect the Contractor to finance the project during the LNTP stage. A compromise should be found.
• Agreement on a potential reduction of the post-NTP time for completion: This reduction can rarely be on a-day-for-a-day basis because of the lack of full mobilisation. I’ve seen agreements going from no reduction and intermediate forms where 40-50% of the effective LNTP period was deducted from the time for completion.
• Agreement on the scope of the works that should be performed during the LNTP. This goes together with the two previous bullet points; the wise thing to do is to select as LNTP works only those activities that have the most favourable impact on risk reduction and time for completion.
• Agreement on the deliverables that can justify interim payments during LNTP or at termination. Because the LNTP period is usually relatively short (3 to 6 months), it can be extremely difficult to identify deliverables that can actually be completed and/or handed over to the Owner. Design documents are often the only realistic deliverables. Regularly, the only payment during the LNTP is a preliminary advance payment against a bank guarantee. This preliminary advance payment is then absorbed into the full advance payment at NTP by deduction.
• Termination of LNTP, without direct continuity into the EPC Contract, is definitely the most difficult subject. If the Owner/project developer is a special purpose vehicle, not reaching financial closure almost certainly means liquidation with no recourse available to the Contractor. The parties need to reflect jointly and realistically on this regretful scenario and on the consequences of never reaching financial closure/full NTP.

Conclusion:

While negotiating an LNTP agreement represents additional work for the Owner’s and Contractor’s negotiation teams, they are worth the effort. The win-win outcomes brought by starting early include risk reduction, smoother project start-up and cost savings. Negotiating this can be a catalyst for a positive negotiation process and can avoid impatience and conflict between Owner and Contract before full NTP.

Click here for other articles on negotiation on this blog.

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