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Make Lenders Love Your Construction Contract

Submitted by on July 12, 2017 – 7:58 amNo Comment

by Charles G. Loos (Lee Enterprises Consulting/Biofuels Digest)  By the time a developer seeks non-recourse financing for a biomass project, the contracts for construction and major equipment procurement have usually been pre-negotiated and are on hold awaiting notice to proceed.   Prospective lenders then scour these contracts for defects, paying particular attention to inconsistencies between the various contracts.  Clean contracts attract the best lenders and the best rates, but inconsistencies can drive lenders away.

This article describes common types of inconsistencies between equipment and construction contracts, and shows developers how to avoid them. The issues are similar whether a project employs a single wraparound turnkey contract, or separate contracts for major equipment (e.g. boilers, gasifiers, turbines), engineering and construction.

Thinly-staffed developers often negotiate the pre-purchase of key plant equipment to lock in cost and a delivery date, based on a preliminary design.     Months may pass before a companion installation and construction contract is negotiated.   Meanwhile the details of environmental permitting, site control, feedstock supply and plant design continue evolving.   Both contracts are often put on hold awaiting financing.   In some cases the construction contractor assumes the equipment contract and provides wraparound guarantees. Absent extreme diligence, contractual holes can develop and multiply throughout the development process.

The Lender’s Perspective

From the lender’s perspective, however, the suite of equipment procurement and construction contracts must seamlessly interlock.   Any inconsistencies introduce potential risk to the lender.   Lenders commonly handle risk by; 1) increasing the interest rate, 2) walking away or, 3) making the developer fix the problem.  In other words, developers with clean contracts get the best financing.

How to ensure contractual consistency? The first step is philosophical in nature and costs nothing to implement. That is to treat the project as a financial product, rather than a physical project, from the first day of development.   The overarching development goal must be crafting a seamless and interlocking contract package that minimize the lender’s risk. This article covers only the equipment and construction contracts, but the concept applies to all contracts including feedstock supply, site lease, product sales, power sales and the like.

Acceptance Tests

The first is a simple performance test which demonstrates that the system meets output and efficiency guarantees under design-point conditions, usually for a couple of hours.

The second type is a functional test to demonstrate that the plant can handle all operating transients including normal starts, normal stops, emergency stops and changes in load or output.

The third type is an endurance test, often lasting a week or two, during which the plant must run continuously, without tripping or malfunction, under a variety of real-world conditions.   If the plant trips, the is clock re-started.  READ MORE

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