Avoiding the Worst of Delay Claims on Wind Projects

This article appears in the December 2005 edition of North American Windpower (www.zackin.com/naw) and is reposted here with their permission.

In this article, an experienced construction attorney provides his insights on the type of claim that is most significant to the wind industry: delay claims. As the author points out, given the losses sustained by owners, developers, vendors, contractors and installers when wind projects are late, delay claims can expose project participants to millions of dollars of liability. The author offers his perspective on what can be done before and during projects to reduce the occurrence and adverse impact of claims.

Timely completion is absolutely crucial to the success of a wind energy project.

For owners and developers, the importance of timely completion goes beyond the most basic goal of generating revenue as soon as possible. In many cases, owners and developers have commercial operation deadlines under their power purchase agreements or financing arrangements. In addition, new projects must be placed in service before production tax credits expire, a consideration that has driven many projects in the past and may well again.

For installers and contractors, late projects tie up resources that could be used on other jobs, and increase overhead expenditures.

In light of all the negative consequences of late completion, when projects finish late, and the reasons are not obvious, the parties can be expected to consider and pursue legal avenues of relief, by asserting delay claims against other project participants.

Delay claims are expensive, time consuming and distracting for the parties. As with delays themselves, delay claims are to be avoided but are not always avoidable. This article offers—from the perspective of a construction lawyer who sees many claims arising from late and troubled jobs—ideas on how to avoid the occurrence of delay claims as well as ideas on how to minimize the adverse impact of such claims, when they do occur.

Proper Planning and Scheduling. Jobs finish late for all kinds of overlapping reasons, including:

• Inaccurate geotechnical information.

• Failure to secure needed permits.

• Late equipment manufacturing.

• Late equipment deliveries.

• Design changes.

• Failure to provide proper site access.

• Bad weather.

• Labor problems.

• Late or poor performance by installation subcontractors.

• Problems with testing and commissioning.

Management of the risk of late project completion starts with the development of the project schedule. The various factors that have the potential to make the job late should be reviewed. Resources should be allocated to minimize the chance that those factors will in fact cause delay. When it comes to avoiding delays and delay claims, it is far more important to have a proper schedule, and experienced and capable project participants who have committed to the schedule, than any number of favorable, legalistic contract clauses.

Late and troubled projects repeatedly have schedules marked by inadequate detail and/or unrealistic, "perfect case" durations. In addition, late and troubled projects frequently feature late performance by parties who may have signed a contract agreeing to a particular schedule, but in reality never fully committed to the timeframes for their performance. All of the attributes suggested here of a good schedule require attention—appropriate level of detail, realistic durations and, most of all, buy-in to the schedule. The more aggressive the schedule, the greater the need for buy-in from all key project participants.

Proper Incentives and Security in Contracts, Especially Subcontracts. In addition to proper scheduling, another way to avoid claims is to insist on contracts that have proper incentives for timely performance.

Considerable care and attention are typically given to the turbine supply and installation agreement, with owners and developers typically insisting on robust delay liquidated damages, and either bonds or letters of credit as security. Such provisions provide powerful incentives to contractors and turbine suppliers to do their work on a timely basis. Relatively less care is typically given to the various other agreements for essential elements of the project, such as balance-of-plant contracts, and subcontracts for the installation or site work. Yet the performance of the companies working under these other contracts may be absolutely vital to the timely completion of the job. Care should be taken at the front end to ensure that these contractors are properly motivated to perform timely. In particular, provisions such as delay liquidated damages, performance surety bonds (which are typically secured by the owners of the party putting up the bond), and standby letters of credit, should all be considered.

For instance, the preparation of access roads to and around the site may be absolutely essential, and the late construction of access roads may cost the parties huge sums in lost production or liquidated damages. But if the contract does not include sufficient incentives for timely performance, then the project may be at the mercy of contractors who are over-extended, who have taken on other, more profitable work, or who have key equipment tied up on another job. The situation where contractors with relatively limited exposure to damages can cause millions of dollars of monetary loss should be avoided if at all possible.

Obviously, there are limits, and contractors with smaller scopes of work are unlikely to accept total liability for late project delivery of a major wind farm. The key is incentive—and what may motivate a small or medium sized contractor to do whatever it takes to ensure timely performance may be considerably less than the full consequences of late performance to the project. Attention to incentives (such as liquidated damages for delay and/or bonuses for early completion) and proper security (such as performance surety bonds or, better still, standby letters of credit) can go a long way to ensuring timely performance.

Other Contractual Provisions. In addition to incentives, contractual provisions specifically related to schedules, scheduling and extensions of time should also be reviewed in advance, with the goal of minimizing the occurrence of delay claims. The following issues should be considered:

• Under what circumstances does the contract allow for time extensions?

• Does the contract allow for time extensions based on actual delays caused by events outside one’s control?

• What must be shown to obtain the time extension, and is it too much or too little in terms of fair and appropriate proof?

• What kinds of schedule reporting is required, is it too much or too little in terms of useful and realistic reporting?

• Are there provisions that, if followed, will result in all affected parties receiving sufficient advance notice of delays so efforts to mitigate the problem can be evaluated and implemented?

• Will the project managers working on the job be able to work within the provisions of the scheduling and time extension clauses?

The Central, But Limited, Role of the Contract. When claims are made, it is commonly said that the starting point for analysis is the parties’ contract. But such statements can be misleading. To be sure, the contract is fundamental, as it defines the parties’ rights and responsibilities (and, most important, who was to do what). But in the context of delay claims, the contract generally does little more than set forth the basic ground rules for the dispute by identifying which party is responsible in the event particular events or circumstances are found to have caused the delay.

For instance, under the contract, the owner will in most cases be responsible for delays caused by unforeseen soils conditions, late project approvals, and for late performance by other firms, if any, with whom the owner has separate contracts. On the other hand, under the contract, the turbine vendor and installer will typically be responsible for the late delivery of its equipment, and for the untimely performance of its subcontractors. But while the contract defines who is responsible for what, it typically does not answer the key question—what actually caused the project to finish late?

Analyzing Project Delays—The Importance of Good Records. Disputes concerning what exactly caused a project to finish late are fact intensive, which makes such disputes expensive and distracting for the parties.

In disputes involving a significant amount of money, both sides will typically retain scheduling consultants, and competing accounts of what actually caused the project to finish late will be developed. In this kind of dispute, a party can acknowledge responsibility for certain delays so long as those delays did not actually cause the project to be late (or, in scheduling terminology, the delays were not on the "critical path" or only operated to reduce "float," or cushion, in the schedule). In order to prevail, a party must prove that events for which the other party is responsible caused critical path or actual delay.

These facets of delay claims makes record-keeping during the job extremely important. Good record keeping is always advisable, but when it appears that delay claims will arise, efforts to keep good records should be redoubled. Good records are essential to piece together the disputed and frequently complex chain of events that led to project delays. Good records are also needed by scheduling consultants and attorneys working on delay claims.

When litigation or arbitration proceedings commence, the need for good records is all the greater. The larger and more complex disputes are typically decided a year or two after the key events transpired. By that time, memories may be suspect, and key project personnel may have transferred to other positions or employers.

For all of these reasons, the existence of good records tends to support one’s position while the absence of records tends to discredit.

In general, all deviations from plan, and any oral instructions received from others, should be recorded as accurately and completely as possible. The most useful and credible kinds of records are factual, regular and contemporaneous. While correspondence and email are essential documentation tools, on troubled jobs, they often carry emotion and commentary that diminishes their utility. Such communications should be matter of fact, accurate, moderate and polite. When delay claims are presented to neutral parties, accusatory letters or emails rarely support the parties’ position. Conviction in one’s position is generally good, but personal attacks, or allegations of intentional misconduct, are more likely to detract. Purely factual forms of documentation, such as daily logs, photographs, video, meeting minutes, schedule updates and accounting records, are also essential tools for the properly documented project.

If the points made about the importance of good record-keeping seem obvious, then why is record-keeping so frequently poor? Part of the reason lies in the fact that the men and women charged with making projects happen in the field are busy, prefer taking action to writing things down and want to be seen as getting the job done, not preparing claims. While such tendencies are admirable, they provide no excuse for poor record-keeping. The importance of good record-keeping should be emphasized with project managers, both owner’s and contractor’s, and re-emphasized at the first sign of trouble.

Virtually all design and construction contracts require that notice be given if events or circumstances appear to give rise to project delays. To give "teeth" to such notice requirements, many contracts provide that if timely notice is not given, the claim is barred. When evaluating otherwise meritorious claims, judges and arbitrators frequently take pains to find ways to permit the claim to proceed even where formal notice was not given. However, not all judges and arbitrators have this proclivity, and one will probably not know for a year or two after the event in question which kind of judge or arbitrator has been drawn to determine the dispute. Parties with notice requirements (including contractors and equipment vendors contractually responsible for installation) must have a system for ensuring compliance. In particular, project managers should be cautioned that it is very common for notices not to be given in the early stages of the job—when the project teams are optimistic, working together well and desire to avoid confrontation. This failure of documentation during what one might call the "honeymoon" period of a construction project must be resisted. Polite, measured and accurate notices should be provided as a matter of course throughout the job.

Prompt notice should not only be viewed as necessary to comply with technical contract requirements. Owners frequently assert that the provision of timely notice is essential to their ability to address the problem at hand. Unwelcome surprises can cause havoc in an owner organization under pressure to deliver timely project completion to management and investors. Such surprises frequently engender frustration and even distrust, all of which increase the likelihood of claims. Moreover, where an owner can show that it would have taken other, remedial steps had the contractor provided timely notice, the dispute may be harder to resolve and the risk that the contractor’s claims will be barred increases substantially. In these ways, the failure to provide timely notice may reflect poorly on the contractor’s desire to mitigate actual delay.

The more one learns about delay claims, the more reasons one has to avoid them. But no participant in the design and construction process can immunize their jobs from claims. Attention at the front end (careful planning, including proper scheduling and contract preparation) and during projects (good record keeping and prompt attention to problems) can substantially reduce the occurrence and negative impact of delay claims.

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.