Caught in the Crosswinds: Anticipating (and alleviating) construction pinch points

Michael Weatherley:

Welcome to Ashurst's Caught in the Crosswind podcast series. I'm Michael Weatherley, a disputes partner at Ashurst and co-author of Ashurst's recent Caught in the Crosswinds article series. For those joining us for the first time, the series is a collaboration between disputes, lawyers, and transactional lawyers, both in-house and at law firms who are active in the wind energy space and looking to close the loop, as it were, figuring out how we can learn from the recent surge of wind power disputes and try to do better for the good of the industry going forward.

Today, we turn to the construction phase of wind projects, hoping to explore some of the common pinch points experienced by developers and contractors, often unsurprisingly revolving around time, cost, and quality, and some practical steps to avoid or manage those pinch points before they turn contentious. Like our article on the same subject, we'll be talking about everything but the turbines, which you'll be glad to hear gets its very own instalment.

Joining me for the discussion today are two industry leaders, one from the developer side, George Fisher, senior contentious construction solicitor at SSE Renewables, and one from the contractor side, Kia Hua Tan, senior legal counsel at Seatrium Limited. Thank you both for being here.

George Fisher:

Thank you, Michael. Pleasure to be here.

Kia Hua Tan:

Thanks, Michael.

Michael Weatherley:

Now, you've both been around the block when it comes to construction and indeed construction disputes in the wind industry, of course, but also on other major projects earlier in your careers. I want to start with why construction on wind projects feel different from other major projects. From your vantage points in the industry, what makes wind construction, onshore but especially offshore, distinct from other major projects? And why do the familiar issues around time, cost, and quality escalate differently in this context? George, maybe if you go first.

George Fisher:

Yeah, sure. I mean, I always think that wind farm projects effectively start from the back foot and struggle onwards from there, and I say that for three principal reasons which I'll go into more detail on, but one, tight margins, two, what I call the ambition, and then three, the supply chain. So sticking with the tight margins, from the off, wind projects, whether onshore or offshore, have to be competitive. So here in the UK, obviously you've got the CfD process. They have to be competitive in that process to win the CfD, and to be honest, most projects have to be at least bankable. So that brings with it myriad impacts. First of all, I think we've all seen over the last, well, probably 15 years now, a split from being a single EPC contractor down to three and now way more than that. So that is obviously to spread the risk and lower costs, but it brings with it significant issues, particularly from the developer side in terms of interface risk, but also for contractors in that they are often depending on other contractors to do work before they can do their work.

So that's a challenge for all parties. Also, the tight margins bring with it reduced contingencies. Effectively, there is less margin for error. So when things go wrong, there are not necessarily the funds there to sort it out in a quick and effective way. And then obviously that tight margin has an ongoing impact in terms of keeping up the pressure to keep costs low, while still ensuring that the works are delivered in a quality way, but above all, safely. So that's an ongoing challenge.

So coming on to the ambition, now this is where it gets really interesting, I think, from a wind perspective, that the best producing wind farms are those in the harshest environments as a general rule of thumb. So that's either hundreds of miles offshore or, from an onshore perspective, on the wild, windy, rainy moorlands. So that above all else brings weather challenges, I think it's safe to say, and I know we're going to talk a bit about that on this podcast. But it's not just weather. There are numerous logistical challenges, including transportation, ground conditions. All the usual challenges that you get from the environment for a construction project are times a thousand when it comes to wind projects.

And then finally, I think sticking with the ambition, it's the tech risk. There's a pressure to maximise the return, sort of linking back to the tight margin point. So projects tend to want to use the latest technology to increase the return and increase generation, but that brings more risk of things going wrong. So finally, the last of the unholy trinity, I think is supply chain. It's still, even now, I mean, obviously the wind industry has been going for a number of decades but particularly in earnest over the last 10 years or so, but it's still a relatively small and stretched supply chain, particularly for offshore wind, and above all else, vessel availability severely restricts workflow. So that not only impacts on project planning, but it also, if there are delays or any minor slippages, that can have a significant impact in terms of the chosen vessel remaining available.

Michael Weatherley:

You've hit on a number of really key issues and a number of which we're going to explore, I think, in subsequent questions because what you are talking about, I think is what everyone is feeling in the industry, and I do want to dive into a few of them in a moment. But Kia Hua, perhaps you can give your answer first.

Kia Hua Tan:

Yeah, sure, Michael. And I'm totally behind George when he says the vessel availability, and that is a very significant constraint. I think for the most, the largest wind farms I suppose there is a very limited pool of vessels which have the capacity or the ability to even install these huge, massive substations offshore, the platforms, and it can come down to maybe one or two vessels in the world which have the capacity to do that. Talking about weather windows, I think that's something you don't really experience in onshore construction because your weather windows don't limit when you can perform your work. But when you're talking about offshore construction, weather is a huge issue, and when you go into the next weather window, it could cause massive knock-on delays. An early delay in the project doesn't mean that you have the same amount delay later because once you get pushed in the next weather window, it just snowballs exponentially.

Similarly, I think another challenge that is very, very unique to offshore construction is that the offshore logistics costs can be of an exponentially different scale compared to onshore construction, and this often means that you need different risk allocation mechanisms or at least to consider them. So for example, in your typical onshore civil construction projects, it's quite a given that the contractor would rectify defects fully at his own risk and cost. But if you apply exactly the same principles to offshore construction project, this could theoretically mean that a contractor would need to book a helicopter flight all the way to the platform in order to change your light bulb. Of course, this would not happen in practise, but you could see that there could be minor issues on the platform which don't warrant the cost of the offshore construction of the logistics that needs to be incurred in order to rectify that defect, or at least that they should be consolidated.

So there need to be different risk allocation mechanisms to kind of share the risk sometimes between the operator of the wind farm and the party which is responsible to remedy the defect, for example, and this is only complicated by the fact that very often as a EPC contractor you will not get back-to-back warranties for the equipment that is on the wind farm. No smaller subcontractor is going to willingly sign up to say, "Okay, well, I'm going to take on the logistics cost to deliver my faulty equipment all the way to the platform." They will deliver halfway, you have to pick it up, and somebody has to bear the cost of the logistics to bring it there. Somebody has to bear cost of the personnel to fix the defect, and this will not be a back-to-back warranty, right? So when you have disaggregated procurement, there are so many parts of a wind farm, then this issue gets even more complicated. So I think that's very, very unique to the offshore wind industry.

Michael Weatherley:

Yeah. And we'll come back to quality in particular a bit later on. And one thing that has been really interesting in both of your answers is that you've been quite explicit about acknowledging the differences between onshore wind projects and offshore wind projects, the latter widely acknowledged as being more complex in more extreme environments. One of the obvious reasons for that is you're not on land. We're working in the ocean, we're dealing with extreme weather, with marked seasonal swings, we need to use highly specialised vessels in limited supply, and those factors, of course, are particularly relevant when it comes to programme planning and the mechanisms in the contract for managing delay, as you alluded to, Kia Hua.

Now I want to try and, on that theme, get your insights on how you think parties should plan for these things, MetOcean windows, vessel availability, seasonal constraints, so that delay risk is kind of being more realistically modelled and fairly allocated. Maybe Kia Hua, you can go first this time.

Kia Hua Tan:

Yeah. So Michael, I think one of the important mechanisms I think is to make the vessel and the port slot assumptions very explicit. I think in several of our contracts, in many of our contracts, especially where there are very limited choices in terms of technical solutions for the vessels, we have to say our programme depends on, or one assumption in our programme is that this vessel will be available at this time to pick up our platform in order to transport it, this vessel or equivalent, because there are only very few vessels which are able to do that. If you don't make that explicit, then you could really run the risk of the developer saying, "Well, why don't we try something else?" but we have not designed for that.

So that's really important to us, and because that's something which is very, very difficult to control from a contractor's perspective. There is very little that you can actually do, other than baking a lot of contingency in your programme which is not in the interest of all the parties, because the developer as well does not want you to bake three months of contingency into your programme just to wait for a vessel.

Another approach that I've seen done, and in fact, I think this is done by TenneT, is that they had framework agreements to reserve slots, installation slots in the North Sea for their two gigawatt programme. So they actually signed these framework agreements with, I think, Heerema and Allseas to reserve their installation vessels for their programme, and I think that that was really very helpful because they had so many projects to deliver that they could very effectively do that. But of course, I'm sure that will not apply for every developer.

George Fisher:

For me, this is... well, I agree with Kia Hua that it's about clarity above everything to the extent you can get that, and for me about planning, planning, and planning, and then being realistic with that plan. So no matter how good your contract is, if you don't get your programme and your underlying assumptions as accurate as you can get, then there's nothing that the contract can do to bail you out of the situation where you get significant delays. You have to try and get it right from the start. So gather as much MetOcean data from the site as you can, gather weather data, and then build a realistic weather calendar to sit behind the programme. How many days of offshore work can you do in any given calendar? That's what you build your programme on.

And then it's also, I guess from a developer perspective in particular, demand from all your contractors, clear and realistic time assumptions. Don't overpromise is probably the key message from the developer side. Let's just be realistic here because overpromising does no one any favours. And then develop that not just into a contract specific programme, but cross-package programmes which all the contractors can see, do, interface effectively. And then again, probably speaking more from a developer's perspective, but if there are key milestones, key interface milestones, ensuring that there are adequate liquidated damage milestones in the contract to protect against one contractor's claims for impact if it's been impacted by another contractor. That's obviously a really key point. And then if there's one rule of thumb with particularly offshore wind farms, it's something always goes wrong. So float has to be built into that programme. I mean, obviously you don't want to build a year's worth of float. It needs to be realistic, but building sufficient contingency such that you are prepared for the unknown.

Michael Weatherley:

I mean, it's an area, if you don't get this right upfront, you are into very complex disputes about delay, and we disputes lawyers, we like to talk about the "dark arts of delay" because of how complex and at times impenetrable the subject can be. But to each of your points, being explicit upfront really does help make the topic somewhat less opaque and easier to proactively manage when delays arise.
I mean, even with disciplined scheduling and clarity on topics of delay, cost volatility can still ambush a project, and we've seen in recent years that's been a big driver for why some projects are being paused or shelved and some market players are even exiting altogether. Do you have any tips from your experience about how to best address things like inflation, swings in commodity and material prices, tariffs, so parties are sharing risk transparently and the bankability of project is maintained? Maybe, George, to you first.

George Fisher:

Yeah. Again, this probably comes back to planning before you enter into a contract. I mean, it's going to be a running theme, I think, that horizon scanning for what risks are likely to impact a project. I mean, it's the obvious ones like commodity pricing and labour and the like, but then making sure that they are reflected as tightly as you can in the contract. So if it's going to be a fixed-price contract, make sure that that is as clear as it can be, that you have addressed the obvious risks, and assigned clear liability responsibility for that risk or, and/or, sorry, that you've made the fixed price expressly exclusive of those risks, so it remains set in stone.

Alternatively, you have the common mechanisms for price escalation, the obvious one being change in law and the impacts associated with that. But I've seen multiple instances where what should be a relatively straightforward mechanism breaks down because it hasn't been defined closely enough. For example, what is law? And I'll give you an example that I had a number of years ago about whether a marine guidance note issued by the Coast Guard could be seen as law because there was a change in that guidance. And then an obvious one is where is that law, which law are you talking about when it comes to changing law provision.

And then you have your indexation provisions, steel and fuel and commodities like that. Again, aim for clarity. Define what the accepted margin is. Is there a margin within which, say, the contractor bears the risk and then above or below it switches? But have a clear mechanism for adjusting that if the threshold is closed. And then also have a clear pathway for a quick determination if there is no agreement. It happens quite frequently that parties can't agree it, but you don't want to go to a full-scale arbitration. So is there a way of getting an expert determination or even the likes of a DAB involved for price escalation matters?

And then the doomsday scenario, the price increases affect the commercial reality of the project such that it's no longer viable. Make sure there's provisions in the contract again to deal with that scenario. We all hope we don't get there, but if we do, both parties want a quick and clean exit to the extent that they can. So termination right potentially, but with some degree of recognition for costs on the contractor side, and just setting all that out in advance makes it a lot easier.

Michael Weatherley:

Planning, planning, planning.

George Fisher:

Exactly.

Michael Weatherley:

It is going to be a theme. Kia Hua, how about you?

Kia Hua Tan:

Yeah, I agree with George, but of course, from a contractor point of view, there's a lot that can go wrong in a project, and very frequently both developers and contractors are in some sense price takers in this market. In terms of the equipment which you get, in terms of the raw materials, you can be ambushed by cost volatility in very unexpected ways. We've seen that in the past few years with, in 2022, the Russia-Ukraine war, and even after that, when we had issues with, for example, the hostilities in the Red Sea. All of these can occur and really ambush your project, and I think the key is really how to find a method of allocating that risk, because that risk will always be there, right?

So I think one thing that has been tried is, of course, a cost plus where the contractor simply charges a markup on top of what third party charges. It's quite a interesting mechanism if the developer accepts a non-lump sum contract, but there are times when I do hesitate to recommend it from a legal perspective because it so frequently leads to disputes and there are so many grey areas. So just for an example, if you have cost plus on certain materials, and you get two quotes, one is slightly lower than the other, but using the cheaper quote would result in massively increased construction costs maybe because the raw material is not cut to the sizes which you want.

And from the developer side, from the paying party side, they'll be like, "Yeah, of course, cost plus means you take the lowest of the available quotes." But perhaps that comes with massive costs to be borne by the contractor because that has not frequently been made explicit in the contract. I'm going to assume that I'm going to use this supplier as long as they're within the same ballpark. But actually, if I use this other supplier, it's going to massively increase my construction costs. And the developer says, "Well, yeah, I don't care because that's your fabrication cost. You go ahead and pay it." So the mechanisms to align interests in cost plus are not well-defined as yet. It's a very useful and interesting mechanism that can help, but at the moment, in my view, it's not very, very mature, and that's why we see a lot of disputes over cost plus.

Michael Weatherley:

It's an interesting, practical example of how even simple concepts can become overcomplicated, including by disputes lawyers such as myself. We've talked about time, we've talked about cost.
I want to shift gears a little and talk about the third common driver of tension on construction projects, one we mentioned earlier, the third side of the golden triangle or the iron triangle, depending on how you refer to it, which is quality. In offshore wind in particular, the quality of one package is inseparable from the quality of connected packages, given the intraoperatability of civil electrical control systems across these package boundaries. In my experience, this can significantly complicate the question of causation of defects and quality issues, different contractors and subcontractors looking to shift responsibility to those who are handling closely connected components or even to the employer in their coordination role. I want to get your views on this. How can parties reduce these interface-led disputes and avoid the blame game that tends to ensue? Kia Hua, maybe you can go first this time.

Kia Hua Tan:

Yeah. So I think, Michael, one way is very detailed interface matrixes, both at the engineering stage as well as even later on. So just for example, for engineering you need the different packages to really be able to work together, to fit together, to be able to operate together. And very frequently, the programme doesn't go into sufficient detail to say exactly when something is required in order for one party to base its design on the design or the input of another party.

So in order to reduce all these disputes, I think you really need to go down into a lot of detail into when everything is needed, and a lot of the issues with interfaces is all down to engineering really. So in my view, I think this is the crux of it. There are, of course, possible issues further on with construction, fabrication, and how defects in one item can affect defects somewhere else. Everything flows from how it is designed, and if there isn't sufficient time given, if there isn't that interface matrix which sets up exactly when something is required, then you run a lot of disputes between separate contractors.

George Fisher:

I think there's three key areas that parties need to focus on with this. One is similar to what Kia Hua was just saying, setting out clear responsibilities that's normally done by way of a common detailed interface matrix with clear obligations and who is responsible for that. I think the second aspect, probably again, building on what Kia Hua said, but is communication. From the developer's side, we need our contractors to talk to each other about key engineering issues so that they can be resolved together and in a timely manner. So I think that starts very early and preferably before contracts are signed so that risks are appreciated, understood, and appropriately addressed in the separate contracts when you get there. So I mean, I think this is relatively standard, but you get sort of a technical query exchange between the different contractors where you say, "Okay, well, your work scope is going to impact on my work scope in these ways. Please give me the following details to help me address that in my engineering." And that's absolutely critical for the success of any project.

Well, then the third one is we all would love to avoid quality issues, but we need to prepare for it going wrong and inevitably disputes arise, and parties, in my experience, can have genuinely contrasting views as to what has caused that issue. It's not that one party is been difficult. They can have a genuine different belief in the cause. So to ensure that that dispute is resolved as quickly and as efficiently as possible, I think all contracts should have harmonised dispute provisions which allow for related disputes to be joined together to be resolved as efficiently as possible.

I think another suggestion I have seen over the years is the possibility of trying to agree a joint investigation strategy for when things go wrong, and it's definitely a nice idea in principle, but I think when there are millions at stake, I could see that very quickly breaking down as parties saying, "There's only one way that this is going and we want our own experts to support our view of the world." So it's a nice idea in theory and one that parties should explore, but I think we should have one eye on the reality as well.

Michael Weatherley:

Well, when you said harmonised dispute provisions, I perked up, and you're clearly a man after my own heart because it's something I bang on about constantly.

George Fisher:

Yeah.

Michael Weatherley:

And surprisingly, it is, I think, understood that it's a benefit but so rarely implemented in a way that actually gives the benefit of efficient dispute resolution across packages. It is a complex area and we've given advice in this space, but I am always struck when I pick up a set of contracts and think, "Did someone actually ask that question? Did someone take the time to implement it properly?" And sadly, the answer is often "no, it doesn't seem so". It's a good point, and certainly I've always said that your rights are only as effective as your dispute resolution clause. Got this hard bargained ... you've been bargaining for these rights, you think you've reached a good position, but they mean nothing if you can't effectively enforce them in a dispute context.

Kia Hua Tan:

Michael, perhaps a quick counterpoint to the idea of harmonising, at least from a EPC contractor's standpoint, very frequently the subcontracts have such low limits of liability that when a dispute arises in the main EPC contract it hardly makes sense to pull in some hapless subcontractor who will really not have much to contribute in terms of if an award is given, it hardly makes sense to pull them in because of such a low limit of liability.

Michael Weatherley:

I think that's a good point, and you do need to think about on a case by case basis which aspect of the chain are you talking about here and who you want to be involved in your dispute. And clearly developers will have one view and contractors and certainly subcontractors will have a completely different view. I think certainly at that higher level interaction between the developer and the main contractors, there has to be some level of coordination, but absolutely point taken when you're dealing with lower level subcontractors in the supply chain where that is possibly just not realistic.

I want to move on to our last topic. It's a topic I raised in our last podcast, and I thought it yielded some particularly interesting insights. So I'll carry on the tradition here. If you could rewrite industry practise tomorrow, what single change would you make and why? George, do you want to lead us off?

George Fisher:

Yeah. Well, I have to say, Michael, when you sent over the draft questions, this is the one I have struggled with the most because, well, largely because of the points we've covered, that this is a very, very challenging industry and we would all love for there to be some great big solution which makes it all work seamlessly and everyone's happy. I think the obvious answer is obviously to get the offshore wind or offshore specific contracts in place, and obviously FIDIC and others I believe are in the process of publishing those. But I'm interested to see how that will work in practise.

I think clearly it's welcome to try and standardise the approach to vessels and weather in particular, but in my experience, it's not like the contracts which exist already haven't recognised those risks. They are breaking down for risks which neither party foresaw or something weird and wonderful has happened. And like I say, these are challenging projects where the weird and wonderful happens more frequently perhaps than other projects. So it would be great, but I can still see significant issues in the future.

Michael Weatherley:

And it's a good point. We do sometimes look at these standard forms and think they're a silver bullet, but actually the complexity of the projects in and of themselves mean that you cannot plan for every scenario, and sometimes, not infrequently, the standard forms don't do the best job and blind trust in them is actually a mistake. But no, I certainly commend the efforts of organisations like FIDIC in at least trying. I think that's important, and at least it gets a conversation going. Kia Hua, same question. What single change would you make and why?

Kia Hua Tan:

Yeah, I agree with George that there's no silver bullet to fix the difficulties that will arise. Maybe just to build on a point that I made earlier about cost plus, I actually love the idea, but I hate the execution, and if the principles on which cost-plus contracting works can be much more clearly defined, I think this would be helpful to the industry. It'll give a lot more comfort to developers to know that, well, we're not giving the contractor a blank check to get whatever subcontractor it wants and have us pay the cost. So there needs to be some mechanisms to align the interest of the developer and the contractor here, but it also gives the contractor some protection against the cost volatility that can ambush the contractor in the case of a purely lump sum contract. So if the principles on which cost-plus contracting work are much better understood and much clearer, more clearly defined, I do think this would be helpful to industry as a whole where at least this could be an option which in certain cases developers and contractors could consider as a method of allocating certain risks.

Michael Weatherley:

Well, It sounds like you need to get in touch with the FIDIC committee and get them on the case. Perhaps you could be the consulting lawyer on it. Unfortunately, we are out of time. Thank you, George, and thank you, Kia Hua, for your candid insights.

George Fisher:

Thank you very much. Been a pleasure.

Kia Hua Tan:

Thanks, Michael.

Michael Weatherley:

Next up in our Caught in the Crosswind series, we'll delve into turbine supply and O&M arrangements. Keep an eye on Ashurst's website and LinkedIn feed for the relevant article and podcast. In the meantime, I'm Michael Weatherley. Thanks for listening and goodbye for now.