Construction Gigaprojects: Alternative Contract Structures, Heightened Risks, Drafting Challenges

Description

The size and risk of "giga" construction projects--those entailing hundreds of millions (if not billions) of dollars, involving numerous parties and authorities having jurisdiction, and extending over large periods of time--make for distinctive contracting challenges. Ordinary project variables, such as quality and safety, can become extraordinary at this scale and duration, contributing to risks of cost overruns, delays, and disputes that should be accounted for at the contract negotiation level to manage the risk to the contractor and protect the owner's project goals.

Contractors have become more reluctant to sign on to lump-sum EPC agreements that have traditionally allocated substantial risk their way. On the other end of the spectrum are EPCM agreements that allocate more risk to the owner and may thus be less desirable to owners. Protecting the interests of financers can introduce misalignment with efficient risk allocations between the contractor and owner.

In response to these concerns, counsel and their clients have become creative in developing customized or hybrid contract structures combining elements of EPC and EPCM agreements. Examples include using different pricing regimes on different project phases or scopes of work; deferring transfer of certain risks to contractors until appropriate schedule times; dividing segments of work between different contractors or joint ventures; and developing incentive compensation systems that align the interests of contractors with the interests of owners.

When developing alternative structures and stepping away from more traditional agreements to create bespoke contracts, counsel must carefully draft the agreement to reflect the parties' intent and be sure that the parties clearly understand their obligations to mitigate the risk of disputes.

Listen as our expert panel discusses various contractual structures used in mega construction projects including EPC, EPCM, and hybrid agreements. The panel will examine owner and contractor risk allocation and obligations under the more traditional EPC and EPCM agreements and will examine the trend of creating hybrid agreements and alternative methods of risk allocation.