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Project Delivery Methods2021-03-06T19:51:31-05:00

Project Delivery Methods

Construction & Delivery Methods In Major Project Financing

Project delivery methods, which are the means by which projects are built and delivered, are a major factor in project financings, impacting project design, construction budget and schedule, and project risk.

Project Delivery Methods Overview

Project Finance documents are almost always off-putting to first-time project sponsors and inexperienced project stakeholders. Admittedly, project finance documents are voluminous, complex, expensive and time-consuming. They are also essential to the successful construction and operation of the project, and they are absolutely critical to successful project financing.

Project sponsors who have prior experience with project financings don’t view project documentation as a burden. To them, project finance documents are an opportunity to shape the nature and course of project financings from conception all the way through development and operations. Documents for project financings should be looked at as two very different packages of documents that must be created at different times and for very different purposes.

The initial group of project finance documents should be prepared immediately after the project is conceived and well before they are presented to project lenders to arrange the project loan. These are the forecasting documents and include your business plan, financial models, financial feasibility study, marketing feasibility study and the like which we use to convince project lenders to provide you with the project loan. The second group of project documents are the legal documents that will be used to close the financing, develop, build and operate the project. It is this second group of project finance documents which is summarized below.

Because there are so many documents in project financings which are required by various stakeholders, each wanting them to be drafted by their own lawyers, it inevitably seems as if there are too many documents and too many lawyers. Despite the army of lawyers who are involved in the drafting of the project documents, it is a virtual certainty that there will still be gaps because of missing provisions or documents, or there will be overlaps because of duplicative provisions or documents. With legal teams for the project lenders, project sponsors, equity investors and the governmental bodies, conflicts are guaranteed because they all have diverging interests.

Engineering, Procurement & Construction Contract (EPC Contract)

Project Finance Documents Vision of A City Built Using Project Finance

Without exception, Project Finance Documents always include a contract for the construction of the project or the project would never get built. Although there are many types of construction contracts used in project financings, the vast majority of project sponsors and all project finance lenders strongly prefer turnkey contracts. Turnkey contracts are based on the idea that when the project company takes delivery of the project at the completion of construction, all they need do is turn the key and the project will function as intended.

From the perspective of the project company, project sponsor and project lender the most desirable type of turnkey construction contract in project financings is the Engineering, Procurement, and Construction Contract, or EPC Contract. EPC Contracts set forth the obligation of the contractor to design, engineer, build and deliver the project for a fixed-price, by a specified date, according to the construction documents, plans, specifications, shop drawings and other support documents.

EPC Contracts and turnkey contracts are in very similar, but they are not synonymous or interchangeable. In addition to all of the construction risks and responsibilities born by the contractor in turnkey contracts, in EPC Contracts all of the risks and responsibilities of project design, engineering and procurement are also transferred to the contractor for essentially all purposes. Learn more about EPC Contracts in project documents.

Operation & Maintenance Agreement (O&M Agreement)

When construction of the project is complete and the project is turned over from the contractor to the project company, the focus of the project necessarily shifts from development to operation. Project finance documents that govern the operations, management and maintenance of completed project financings are Operation & Maintenance Agreements, or O&M Agreements.

O & M Agreements are contracts which are established between the project company, as the owner of the project, and the operator who is engaged to manage, operate and maintain the project. The project company typically delegates all operations, maintenance and often even performance management of the project to a professional operator. Typically O & M Operators are required to have expertise in both the industry and in the subject locale.

O & M Operators can be the project sponsors, other project stakeholders or third-party professionals, which can be either companies or individuals. In many projects, the project company itself acts as the O & M Operator. This, of course, makes the project company responsible and liable for all operations and maintenance of the project. A hybrid arrangement is also possible where the project company handles operations and maintenance with technical assistance from experienced professional consultants under a technical assistance consulting agreement. Learn more about Operation & Maintenance Agreements in project finance documents.

Project Finance Documents Vision of A City Built Using Project Finance

Offtake Agreement

Project Finance Documents Project Vision Tomoon Architects Engineers

Offtake Agreements are only one document in a package of dozens of critically important project finance documents, but Offtake Agreements are often the most important in terms of securing approval of your project finance loan. We depend on well-written, well-presented project documents because they are essential for creating an in toto tenor of favorability. Offtake Agreements, however, are given much more weight than most of the project documents because they provide the financial assurances lenders need to validate your cash flow forecasts and every project finance lender in the world relies on Offtake Agreements for that reason.

Because we are attempting to place a loan for a project that is not yet built or operating, there is no revenue stream with which to pay debt service. Instead, we present project lenders with financial models which are far less certain. Offtake Agreements provide documentary evidence that validates the financial models upon which the ability to repay is based. Quite simply, Offtake Agreements make many projects bankable. Learn more about Offtake Agreements in project finance documents.

Supply Agreement

Supply Agreement in project financings is a contract that is created by and between the project company and significant suppliers of raw materials, feedstock or fuel. A Supply Agreement contractually ensures the volume of supplies to the project can be increased or decreased. as necessary, depending on the output being produced by the project and sold to an Offtaker.

Supply Agreements essentially serve as a counterbalance to an Offtake Agreement, ensuring that they maintain a balance, because the project production and sales are largely dictated by the Offtake Agreement. A Supply Agreement is a critical project finance document for projects that produce, refine or distribute fuel, electricity, natural gas, and other like commodities or utilities, and as such it is usually required by the project finance company.

A Supply Agreement can be a fixed supply agreement, where the supplier agrees to provide a fixed quantity of supplies to the project on an agreed schedule, or a variable supply agreement with a range between an agreed maximum and minimum. Supply Agreements can also be take-or-pay contracts or a take-and-pay contracts. Supply Agreements may also provide for an interruptible supply, where some supplies are offered at a lower-cost but are interruptible or they may be uninterruptible. Learn more about the Supply Agreement in project finance documents.

Project Finance Documents Envision New Project Designs

Project Finance Learning Center

Project finance was first used in 1299 when an Italian merchant bank provided the project financing to finance the development of English silver mines. England repaid the Italian merchant bank who funded the project with the output from the mines. Project financing has been used to finance thousands of projects since those silver mines, including such notable projects as the Panama Canal and North Sea oil platforms. Our Project Finance Learning Center includes information we hope will improve understanding of this type of finance.

Key Takeaways

Savvy sponsors of project financings are adept at managing the stakeholders in the deal along with their attorneys to keep everyone on task and heading for the closing. The truly savvy project sponsors go a step further and engage Global Trade Funding to prepare and manage the drafting and negotiating of project documents, usually from inception all the way through closing.

Having us prepare and negotiate the project finance documents is a smart solution to a great many problems that will then never occur. This arrangement usually produces the best possible results for everyone involved for a great many reasons.

We are the only ‘principal’ involved in project financings who is not an actual participant in the deal, so the stakeholders generally allow us some leeway because we are an impartial arbiter of project finance documents and are only beholden to a successful project.

With only one team responsible for drafting project documents, they are far more congruous with far fewer inherent conflicts resulting in project finance documents with fewer overlapping provisions, fewer gaps in provisions, and significantly reduced legal fees.

We also lend tremendous experience to the preparation of project documents because our project team has significantly more experience with project financings than any of the other stakeholders in the deal. If something has been documented in a project financing, we have likely seen it, understand it and understand its effect on the project.

Project finance documents created early in the deal lifecycle are part of the pitch to arrange project financing and must support our efforts to place project finance loans.

Without exception, the first look that prospective project lenders get at the project is the presentation of project documents. Best we orchestrate project finance documents so that they leave every lender with a desire to participate.

Project finance documents created early in the deal lifecycle are part of the pitch to arrange project financing and must support our efforts to place project finance loans. Without exception, the first look that prospective project lenders get at the project is the presentation of project documents. Best we orchestrate project finance documents so that they leave every lender with a desire to participate.

Our Project Finance Services provide clients with advantages that aren’t possible with other financings. We are able to raise tremendous amounts of long-term equity and non-recourse or limited recourse debt, enabling us to fund large projects while at the same time protecting our client’s balance sheet.

The key to shielding project sponsors from recourse liability are well developed Project Finance Documents. To protect our clients we negotiate Project Finance Documents on their behalf to ensure they are well conceived and well written.

We use the Project Finance Documents to allocate risk among the participants, thus enabling project sponsors to undertake larger, higher-risk projects than would otherwise be possible.

Project Finance Documents apply strong discipline to the contracting and operations phases of Project Finance. The documents also mandate the participation of several key private sector participants in the deal which enables us to further allocate risk.

They can also be used to require host country participation which has the effect of limiting a great deal of the political risk typical of projects in emerging markets. One disadvantage of Project Finance Documents is that they typically require supervision of the project management and operations that are considered intrusive.

However, on balance, well-conceived Project Finance Documents are one of the keys to successfully delivering project funding and should be embraced by the project sponsors and project participants alike. Project Finance Documents are summarized below.

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