Supply-Chain Delays—Tactics for Recovering From an Out-of-Control Project

Michael F. McKenna and Jennifer R. Budd | Construction Law Now Blog

For contractors trying to navigate the construction industry’s current supply-chain battles, President Dwight D. Eisenhower once articulated advice that, although not about the industry’s problem, is still right on point: “In preparing for battle I have always found that plans are useless, but planning is indispensable.” Due to unprecedented supply-chain disruptions, many highway and transportation contractors are finding that they must quickly abandon any plan developed for subcontracting work or delivering material and the time to complete such tasks. Without such plans, however, projects can quickly go underwater.

Supply-chain disruptions are causing both materials shortages and significantly longer lead times, meaning that materials are not onsite when needed for construction to continue. Additionally, some subcontractors and suppliers are unwilling to hold prices for more than a few days. These conditions impact not only the construction schedule but also project finances. Yet, many owners, especially public owners, may be willing to grant time extensions but are not keen to compensate for such costs.

In a moment like this, the second part of President Eisenhower’s quote is key: planning. There are steps and strategies that contractors can implement to help weather these conditions and put them in the best position to prevent and recover cost overruns caused by supply chain woes.

Ask Questions Pre-Bid

Before bid opening, contractors should take advantage of the pre-bid opportunity to ask the owner questions focusing on the supply-chain challenges facing the industry:

  • Will the owner consider alternate or substitution requests on an expedited basis?
  • Will the owner also accept a substitute manufacturer in lieu of the agreed-upon manufacturer?
  • Will the owner consider copper or cast-iron pipes instead of PVC (or whichever reasonable substitute exists for the impacted material)?
  • Will the owner pay expediting charges for material?

The most important questions that a contractor should ask pre-bid may be along the lines of:

  • Will the owner add a price escalation clause for material?
  • Will the owner issue a lump sum line item or an allowance to compensate the contractor for cost increases due to supply-chain delays and impacts?

By contractors asking these questions, all bidders will better understand the owner’s view and the potential risks when entering into a contract with that owner. If the owner’s answers reveal that it is operating in a “business as usual” manner, then contractors will need to increase their prices to account for the added risk.

Ask for Alternates or Substitutions Early and Often

As soon as a project manager learns of a longer-than-usual lead time for a material, or a significant cost increase, the contract or project manager should promptly request a substitution, if possible. If the cost has increased, the substitution should document the cost increase of the originally specified item. If the alternate is denied, the contractor will be in a much better position to make a claim based on the unavailability.

Further, if a contract includes a price escalation clause, a contractor should submit change order requests for all price increases and provide documentation of the price on which the bid was based. Even if the contract does not, submitting change order requests will be necessary so that the contractor has a chance for recovery, including ensuring compliance with notice requirements.

Review Time Extension and Force Majeure Clauses

Many highway and transportation contracts expressly identify supply-chain disruptions as excusable time impact events, but not necessarily compensable. While contractors should request a time extension to avoid liquidated damages being assessed, how can they recover cost impacts from extended performance due to supply-chain hurdles?  While these conditions are too recent to have generated relevant legal cases, more courts and arbitration panels will look to determine who bears the risk for the current supply-chain problems.  If the specifications include a clause that provides for change orders when there is a “change in the character” of the work, this type of clause may provide a good argument for additional payment. Indeed, the supply-chain issues have completely altered the character of the work.

Crucial to recovering supply-chain costs, contractors must document all impacts and their consequences and submit change order requests to the owner. If supply-chain issues are delaying progress, contractors should show the time impact in schedule updates submitted upstream with the time impacts described in the narratives. And, as always, give the contractually-required notice of any potential time or cost increase.

There may also be the rare instance when time impacts push a contractor into a period of time where these issues become more likely.

Possible Avenues for Recovery of Extreme Cost Increase

Faced with such an unprecedented situation, contractors have several legal theories they may use to recover extreme costs increases that plague many parts of the project.

  • Breach of the Covenant of Good Faith and Fair Dealing: Implied in all contracts, this covenant prevents parties from acting in “bad faith,” which typically involves dishonesty or bad motives. This doctrine will not relieve a party from performing contractual obligations because the contract is no longer profitable. A higher showing is required, and this type of claim is highly fact-sensitive.
  • Commercial Impracticability: A contractor can use this theory when “a contract is commercially impracticable [because] performance would cause extreme and unreasonable difficulty, expense, injury, or loss to one of the parties.” (Raytheon Co. v. White)). If a contractor proves that it was commercially impracticable to perform the work, the contractor is relieved of performance. If the contractor was compelled to perform despite the impracticability, it can recover the costs incurred in attempting to perform the contract.
  • Frustration of Purpose: Using this theory, a court can excuse an obligation to perform under a contract if the contractor can no longer achieve its purpose for the transaction, both parties knew of the purpose, and the contractor did not cause the frustration. Essentially, the frustration must be so severe that completing the transaction makes little sense. If the contractor was compelled to perform in the face of frustration, it can recover the costs incurred in attempting to perform the contract.

These doctrines will only provide relief for monumental cost increases, and a contractor will face a high burden. Contractors can help improve their likelihood of success with such claims by taking these measures:

  • To ensure the significant documentation needed to show the unavailability or cost increase of the material, the causes, and other cost impacts, contractors should begin tracking and compiling all documentation as soon as they encounter an impact.
  • Contractors should pursue all alternatives (substitutions for material or manufacturers).
  • To support a commercial impracticability argument, contractors should submit any and all change order requests for any increased costs.
  • For denied change order requests, contractors should request to be relieved of performance by asking that an item be removed from the contractor’s scope, or if the cost impacts are project-wide, asking for a negotiated termination for convenience.

If one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance dispute – please call Advise & Consult, Inc. at 888.684.8305.

The Case for an Owner’s Representative

Patrick Johnson and Richard Reizen | Gould & Ratner

The Need for Owners to React in Real Time to Project Changes Caused by Supply Chain Interruptions, Skyrocketing Material Increases and Labor Shortages

A construction project is a marathon and not a sprint. Rushing through the project without preparation and a plan for the long game, will ultimately lead to errors, cost overruns and delays.  For that reason, we counsel our clients about the importance of assembling the right team for success, engaging in active project management, and planning for and knowing how to adapt to project pitfalls.  Both anecdotal evidence and industry studies have confirmed, there is usually a positive financial return realized in cost and time savings from assembling the correct project team and engaging in early project planning.  

The need to make such an investment is even more critical in the current construction climate of unprecedented supply chain interruptions, rising material costs and labor shortages. In this new normal, owners are often compelled to make real time decisions of how to proceed when the selected materials are unavailable, substantially delayed or prohibitively expensive. They also need to implement those decisions with a contractor who may be working with a depleted workforce.  Accordingly, any additional support and advice available to the owner can help place them in the best position possible.

While we have previously addressed the need for pre-construction planning, this update will focus on the benefits of engaging an owner’s representative during the construction process.

The Role of the Owner’s Representative

For projects where the owner does not have an internal construction department, the professional skills, or time to manage the owner’s role, an owner’s representative can assume that role.  Simply put, the owner’s representative is the eyes, ears and voice of the owner on the project to ensure the owner’s interests are protected at all times. The owner’s representative monitors, rather than manages the job, and the responsibilities should be well detailed in the agreement between the parties. The general responsibilities can include assisting the owner in selecting a project team, managing the bidding process, reviewing scope documents, reviewing project costs, monitoring schedules, and assisting with close-out and general advice to the Owner throughout the project.

Services the Owner’s Representative Can Provide to the Owner

As with any party providing services to the owner on a construction project, detailing the scope and roles of each party involved is key. Likewise, the contract between the owner and the owner’s representative should contain a very specific listing of all services that the owner’s representative will perform as well as those which are excluded. Below is a sample of some ways in which the owner’s representative can assist the owner.

Project Team Assembly and Administration

At the onset of the project, the owner’s representative can make recommendations of architects and general contractors for the owner to consider, assist in the interview process by asking questions an owner might not contemplate, review competing bids to make sure the owner is comparing to apples-to-apples, provide insight on past experiences with the team and their reputations, suggest specific team members from the architect or contractor who should be requested, prepare a directory with the contact information for all team members, and even assist in setting initial milestones and preliminary scheduling.  

Pre-Construction Planning

The owner’s representative, through their vast knowledge and construction-related expertise, can also identify potential issues for the owner which will be faced in the project, including but not limited to, anticipated material shortages or pricing escalations, so that these issues and other problems can be adequately discussed and planned for early in the process to avoid further disruption down the road. 

Review of Design Drawings

During the design process, an owner can rely on the owner’s representative to convey to the architect the owner’s general design goals. Likewise, they can help explain the drawings to the owner and point out features as the drawings are generated.  The owner’s representative can also evaluate design alternatives or value engineering concepts as they are suggested during the process and assist the owner with analyzing corresponding cost impacts to the overall budget. Finally, the owner’s representative can assist with attending public meetings on behalf of the owner as governmental and HOA approvals are sought.

Monitoring of RFI Responses

While the owner’s representative will not generally have responsibility for reviewing RFIs on the project, they can monitor them to make sure they are timely and adequate and the owner’s representative can bring any significant ones to the attention of the owner. Smooth lines of communications lead to fewer delays in responding to such requests and help to keep the project on schedule.

Active Project Participation

Typically, owners have full time obligations outside of managing the construction project on a day-to-day basis. An owner’s representative has the bandwidth to monitor various areas of the project itself to ensure that deadlines are being met, information is being relayed to the owners, and the overall project is being built in accordance with the applicable specifications. This active participation also includes attendance at OAC meetings on the owner’s behalf. Again, this provides real-time input, on behalf of the owner, to issues being discussed to ensure appropriate owner involvement and even documentation of correspondence through meeting minutes if questions arise in the future regarding decisions made in such meetings. Similarly, the owner’s representative can make sure certificates of insurance are being collected from the GC and all of its subcontractors.

Adherence to Construction Schedule

In the event an owner does not have the time, or the requisite knowledge, to properly review construction schedules or corresponding delays, an owner’s representative can step in to ensure deadlines are being met. An owner’s representative can monitor personnel on a regular basis, foresee future scheduling bottlenecks or labor conflicts on the project and actively work with trades to suggest solutions to either minimize such delays or offset future delays.  

Budget Issues

Keeping a project on budget can be a time consuming and difficult process. An owner’s representative will continually monitor budgets and review costs as they are submitted all in conjunction with the overall project budget. Additionally, having an individual who continually tracks schedules and promptly responds to construction inquiries in turn reduces the possibility of delays which, almost always, increase project costs. 

Disputed Issues During Construction

In addition, an owner’s representative can act as an intermediary between ownership and project personnel. This can be especially helpful when disputes arise or difficult topics need to be addressed with the team depending on the owner’s comfort level and experience with such issues.  The owner’s representative can also work with the owner to suggest possible solutions to promptly resolve any further disruption. 

Project Close-Out

Last, but certainly not least, is having someone who can assist with effectively wrapping up the project and get the owner across the finish line. Project close-out involves ensuring the project has been completed in accordance with the contract documents, preparing and ensuring compliance with punch lists, ensuring all costs are proper and paid and ensuring the owner has the proper paperwork (i.e. warranties, manuals, drawings, etc.) The ongoing involvement of the owner’s representative can help facilitate the coordination of all necessary documentation throughout the project so that it can be easily assembled when the time comes and help ensure the owner has the necessary paperwork and training it needs to use the project and related components.  

Though an owner’s representative adds to project costs (they may be partially or fully recouped in project savings) and may not be necessary on every construction project, especially smaller, narrow scope projects, it is an important consideration for an owner given the recent rise in supply chain interruptions, material and labor shortages and pricing escalations. An owner’s representative can act as a liaison between the personnel and the owner keeping a close eye on each and every aspect of the project in order to keep your project on budget and on schedule. In today’s climate, that can be the difference between success and failure.

Price Escalation in Construction Projects: How to Protect Your Interests

Samantha Carmickle | Winthrop & Weinstine

The COVID-19 pandemic has had implications that no one ever expected (toilet paper shortage anyone?). Added to the ever growing list of unanticipated consequences: price escalation in construction projects.

In April 2021, supply chain disruptions started leading to increased costs associated with construction projects, and those increased costs have remained in place with very little light at the end of the tunnel.  Between April 2020 and April 2021, input costs (e.g. materials, labor, etc.) for construction projects increased 26.1%.[1] In that same time period, bid prices (i.e. how much a contractor charges for the project) increased only 5.2%.[2] In other words, prices are going up for both contractors and buyers, but contractors are bearing the burden of approximately 21% of the price increases.

So, what can contractors and owners do to protect themselves in a time when price escalation is so unpredictable? In the past, force majeure clauses seemed to be the only option. However, these clauses generally provide only additional time for contractors to complete a construction project if an event which is out of its control occurs. This, on its own, is an impractical solution for the problems faced by contractors and owners in 2021 and that will likely continue into 2022. While supply chain disruptions may result in delays, the biggest issue facing both contractors and owners at this point is increased costs, which force majeure clauses do not address.

If a force majeure clause isn’t the solution, what is? For both contractors and owners, the answer is the same: when negotiating over a new construction contract, request that a price escalation clause be included. To be effective, a price escalation clause should set a baseline price, the bid price of the contract, a ceiling price, and a floor price. It should also be reciprocal and include language that protects both contractors, increasing the baseline price in the event of cost increases, and owners, decreasing the baseline price in the event of cost decreases. Moreover, the price escalation clause should state that any changes, increases or decreases, to the baseline price are based on an objective index, such as a consumer or producer price index, which the parties agree to during the contract formation stage. Both contractors and owners should work with their legal team to ensure that the price escalation clause is enforceable and [fair] to all parties.

If drafted well, a price escalation clause will protect both the contractor’s interest and the owner’s interest during this unprecedented time of supply chain issues and construction cost increases. If you have questions about adding a price escalation clause to your construction contract, please feel free to reach out to the Winthrop team.

[1] Paul Emrath, Nat. Assoc. of Home Builders, Record Numbers of Buildings Report Material Shortages (May 27, 2021), https://www.bls.gov/news.release/ppi.nr0.htm.

[2] Associated Gen. Contractors of Am., Prices for Constr. Materials Continue to Outstrip Bid Prices Over 12 Months, Despite Dip in Sept., Amid Increasing Supply-Chain Problems (Oct. 14, 2021), https://www.agc.org/news/2021/10/14/prices-construction-materials-continue-outstrip-bid-prices-over-12-months-despite

A General Introduction to Projects and Construction in USA

Henry Scott, Karen B. Wong and Miguel Duran | Milbank

An extract from The Projects and Construction Review, 11th Edition

Introduction

The project finance market in the United States benefits from a well-developed legal framework and sophisticated financial markets. The US legal system is generally viewed as clearly codified, stable and efficient, as well as one that is enforced in a regular and open manner.2 Contractual agreements between parties are recognised by law with few exceptions related to public policy concerns. The project finance sector has strong access to both the public and the private financial markets and is in some limited areas even supported – directly or indirectly – by government policies.

This combination of a strong legal framework and financial markets has facilitated the development of a robust project finance sector in the United States. Project finance is premised on the ability of the parties to contractually allocate risks among themselves and to enforce those contractual obligations in a reliable manner. A successful project finance regime is also dependent on commercial laws that allow developers to protect themselves through special purpose entities that benefit from non-recourse financing and that, similarly, allow lenders and investors to obtain security in the project assets and to enforce their claims against the project. Likewise, a sophisticated private financial market has the flexibility to allow the developer and the financing providers to create complex financing structures and to tailor those structures to the specific needs of a particular project.

This chapter discusses various transactional structures available to projects and the legal documentation frequently used to implement them. It reviews the various risks associated with project finance transactions and how parties allocate these risks. It also examines how the US legal framework supports the ability of lenders and investors to protect their interests, including obtaining, perfecting and enforcing security interests in a manner that permits lenders to enforce their rights in the event that a project encounters financial problems. This chapter also considers how the legal framework is influenced and affected by social and environmental considerations. The role of a complex legal framework and sophisticated private financing providers and the public sector is also addressed, followed by a summary of the impact of taxes on investment, which may be of particular interest to foreign lenders and investors. The framework for how dispute resolution is processed in the United States is discussed in the final section.

The year in review

The nature and complexion of project finance in the United States has been shifting, mostly as a result of the expiry of certain government incentives, regulatory changes relating to power plant emissions, declining prices of distributed generation technologies, including battery storage, and lower natural gas prices as a result of increased domestic production. More recently, the sector has been shaped by the enactment of a package of amendments to the tax code at the end of 2017, 3 by the imposition of tariffs on imported solar cells and modules in January 2018 and the covid-19 pandemic. The issuance on 1 May 2020 of an executive order addressing national security threats facing the US bulk-power system, in particular by restricting the acquisition, installation and use of certain imported equipment essential to the power grid,4 could potentially be significant for the sector as the result of the regulatory uncertainty created by the new ban given that clarification on the scope and impact of that executive order on the development and operations of energy projects using equipment from countries deemed to be ‘foreign adversaries’ will depend on the US Department of Energy’s rulemaking process. Furthermore, while the long-term impact of the covid-19 pandemic remains to be seen, the pandemic has already impacted a number of projects with force majeure claims and construction delays, and introduced uncertainty given the turbulence in financial markets and economic recession.

Despite fears that the approval of the US tax reform (particularly the reduction in the corporate tax rate from 35 per cent to 21 per cent and the implications of the base erosion anti-abuse tax to certain international financial institutions active in the market) would curtail the availability of tax equity financing in the market in 2018 and beyond, tax equity investors have maintained a substantial presence as financing sources and renewable energy projects continue to remain a significant component of the market. In 2019, approximately 30 per cent of the total value of project finance transactions in the country was invested in the renewable energy sector.5 For example, 9,143MW of wind energy (a 20 per cent increase from the 2018 level)6 and 13.3GW of solar energy (a 23 per cent increase from the 2018 level, and including approximately 8.4GW of utility-scale installations, which represents a 37 per cent increase from the 2018 level) were installed in 2019.7 Approximately 24,690MW of wind capacity (the highest amount on record) was still under construction at the end of March 20208 and nearly 20GW of solar capacity is expected to be completed in 2020.9 Additionally, hydroelectric capacity could increase from 101GW to approximately 150GW by 2050, not only through the construction of new power plants but also through the upgrade and optimisation of existing plants and by the increase of the pumped storage hydropower capacity.10

Throughout 2019, much of the project financing activity in the United States involved energy projects that were able to qualify for a production tax credit (PTC)11 or the 30 per cent investment tax credit (ITC)12 by meeting certain requirements. Additionally, developers of clean energy projects employing new or innovative technology that was not in general use were able in 2019 to request loan guarantees pursuant to Section 1703 of the Department of Energy’s loan guarantee programme,13 including for advanced fossil energy projects that avoid, reduce or sequester greenhouse gases14 and for renewable or efficient energy technologies.15 In December 2016, the Department of Energy announced a conditional commitment to guarantee up to US$2 billion of loans to construct a methanol production facility employing carbon capture technology in Lake Charles, Louisiana, which would represent the first loan guarantee made under those solicitation programmes.16 In February 2018, Congress enacted the Bipartisan Budget Act of 2018,17 which substantially increased the value of the Section 45Q tax credit available for carbon capture, utilisation and storage projects, and significantly expanded the universe of companies that would be eligible for this federal subsidy (which was originally made available in 2008) by increasing the eligible uses, decreasing the carbon capture threshold and eliminating the prior programme’s limitation to the first 75 million tons of carbon captures. The Section 45Q tax credit will be available for eligible projects placed in service after 9 February 2018 and for which construction begun prior to 1 January 2024 and can be claimed over a 12-year period.18 In February 2020, the Internal Revenue Service (IRS) issued guidance with respect to the determination of the beginning of construction for purposes of the Section 45Q tax credit19 and the allocation of the Section 45Q tax credit by partnerships,20 which is expected to increase the development of carbon capture and sequestration projects.

Furthermore, the Protecting Americans from Tax Hikes Act of 201521 and the Further Consolidated Appropriations Act of 202022 extended the PTC programme for certain eligible facilities for which construction began before 1 January 2017 and for otherwise qualifying wind facilities for which construction began before 1 January 2021 (with a progressive phase-out reduction if construction begins after 31 December 2016) and the ITC programme for qualified solar facilities for which construction began before 1 January 2022. Current IRS guidance provides for certain safe harbour provisions with respect to the beginning of construction requirement, requiring the performance of certain specified actions (based on either physical work or the incurrence of costs) prior to the applicable qualification deadline and placement in service of the facility within four years of the qualification deadline. On 27 May 2020, the IRS modified its prior guidance and extended the four-year safe harbour requirement by one additional year to address the unforeseen interruptions experienced by developers because of the covid-19 pandemic.23

Propelled by extended federal incentives, advances in green technology that decrease investment costs, state incentives and regulatory policies implementing renewable energy portfolio standards (RPS) on utilities, and the positioning of renewable energy as a key component for strategic energy independence for the nation, the development of renewable projects is expected to continue moving forward. As at June 2019, 29 states, the District of Columbia and three US territories have enacted RPS programmes, and eight additional states and one US territory now have voluntary goals for generation of renewable energy.24 For example, California’s RPS programme, one of the most ambitious in the United States, requires that utilities derive 33 per cent of their energy from renewable sources by the end of 2020, 44 per cent by the end of 2024, 52 per cent by the end of 2027 and 60 per cent by the end of 2030 (with the ultimate goal of obtaining 100 per cent of the retail sales of electricity to end-use customers and the electricity to serve all state agencies from renewable energy resources and zero-carbon resources by the end of 2045).25 While all three of the largest California utilities have enough renewable energy capacity under contract to meet the 2020 threshold, the generation forecasts that those utilities prepared in 2019 (risk adjusted to account for a certain degree of project failure) show that, in the aggregate, there will be a deficit beginning in 2026.26 Other states, such as New Mexico and Washington, have similar 100 per cent carbon-free goals in the next few decades and Hawaii has gone further by requiring 100 per cent renewable energy generation by 2045.27 As a result, there is a need for additional renewable energy generation in California and the rest of the United States. As the existing fleets of wind generation projects developed before 2000 approach the end of their useful lives, it is also expected that repowering investment will significantly increase during the next decade.

While still in its early stages, the US offshore wind energy sector recently experienced noteworthy developments. In 2018, Vineyard Wind LLC’s 800MW offshore wind project was awarded six long-term power purchase agreements with Massachusetts utilities through a competitive process,28 which represents the largest single procurement of offshore wind in the United States.29 Besides the mere size of the award, the most significant feature of those power purchase agreements is perhaps the energy purchase price, which is substantially lower than the price in prior reported transactions and confirms the increased competitiveness of offshore wind energy. The first offshore project to be constructed and achieve commercial operations is the 30MW Block Island Wind Farm, which has a power purchase agreement with a starting price of US$244/MWh and the reported price in other subsequent offshore power purchase agreements ranged between US$132/MWh and US$160/MWh.30 In contrast, the starting price under the Vineyard Wind power purchase agreements is US$74/MWh for the first 400MW phase and US$65/MWh for the second phase.31 While the Vineyard Wind project experienced an unexpected permitting delay in the summer of 2019, the US Bureau of Ocean Energy Management anticipates its final decision by 18 December 2020.32

Fuelled in part by improvements in technology (lowering costs and reducing risk) and government support, particularly on the north-east coast of the United States,33 offshore wind is becoming widely seen as a notable opportunity;34 it was brought to the industry’s attention with Ørsted’s acquisition of Deepwater Wind (the owner of the Block Island Wind Farm) in November 2018.35

In recent years, the US Environmental Protection Agency (EPA) has attempted to implement regulations aimed at limiting greenhouse gas emissions from existing fossil fuel-fired electric generating units in part by setting state-specific goals for reducing emissions from the power sector. The final rules were released in August 2015 (the clean power plan) but were confronted by immediate legal challenges from a large number of affected states and state agencies, utility companies and energy industry trade groups. After a protracted legal process (including actions before the US Supreme Court), the EPA’s final repeal rule became effective on 6 September 2019.36 Numerous affected parties (including 22 states, multiple cities, power companies and non-profit organisations) immediately filed petitions for review before the US Court of Appeals for the DC Circuit. The petitioners’ opening briefs were filed on 17 April 2020 and the briefing is expected to continue until 13 August 2020.37

Going forward, most renewable energy projects will increasingly rely upon commercial banks and capital markets to satisfy capital demands. For larger projects, mixed bank–private placement transactions with two or more tranches of funds may provide a preferred financing structure. In the past couple of years, the market has seen an increase in the amount of available capital for project financings combined with a reduction in the number of projects seeking funding, as a result of which financiers have been driven to offer almost unprecedented conditions (including a significant downward trend in pricing for capital) to remain competitive. This environment has allowed sponsors to refinance existing facilities with inexpensive long-term capital sources and has fostered an increased interest in the acquisition of operating assets.

New financing tools have also become increasingly important for renewable energy projects, particularly in the field of structured finance. For instance, approximately US$1,600 million was raised in 2019 as part of the securitisation of thousands of residential and commercial solar energy contracts.38 As other solar developers increase their portfolios, they may choose to follow this lead to secure financing.

After several years of uncertainty and doubt about its staying power, the ‘yieldco’ model has started to gain stability and remains a prominent feature of the US market. A yieldco is a publicly traded corporation similar to a publicly traded master limited partnership (MLP) vehicle except that its assets do not qualify for MLP status. In the renewable energy sector, a yieldco is expected to obtain stable cash flows from ownership of operating projects that have entered into long-term power purchase agreements and minimise corporate-level income tax by combining recently built projects that are still producing tax benefits with older projects. Yieldcos started achieving prominence in 2013 for energy companies and increased their presence exponentially until the downfall of prominent sponsors of yieldcos, such as SunEdison (TerraForm Power Inc and TerraForm Global Inc) and Abengoa (Atlantica Yield, formerly known as Abengoa Yield), turned investors’ attention to, and increased investors’ concerns about, yieldcos. After years of sharp declines in the value of shares of yieldcos and a flurry of dispositions by sponsors that led to the conversion of some yieldcos to private entities,39 some of the remaining yieldcos have shown improved health.40

Outside the renewable energy space, the retirement of coal and nuclear facilities generated renewed interest by sponsors in the development of new gas-fired power plants. Since 2016, natural gas-fired generation in the United States has surpassed coal generation every year and the gap keeps increasing.41 Natural gas-fired electric generation is expected to grow to a forecast level equal to over 36 per cent of the total generation by 2050 while coal-fired electric generation is expected to decrease to less than 14 per cent of total generation by 2050.42 The introduction of new capacity markets may further spur investment in gas-fired projects, which have been challenged by lower wholesale electricity prices in some markets, such as Texas. Additionally, project developers have devoted more attention on gasification facilities, which convert feedstock into a synthetic gas that is used as fuel or further converted into a variety of products, including hydrogen, methanol, carbon monoxide and carbon dioxide. These projects have commonly used fossil materials such as coal and petroleum coke as feedstock, although there are several gas-to-liquid projects in development and there is an intensified interest in the use of biodegradable materials, including municipal solid waste and forestry, lumber mill and crop wastes. The bankruptcy filings of Westinghouse Electric Company in March 2017 43 and FirstEnergy Solutions Corp in April 201844 may be a harbinger of further headwinds in the nuclear sector.45

Although still in its infancy from a technological and economic perspective, the nascent sector of electro-chemical energy storage (batteries that store electrical energy in the form of chemical energy) is beginning to attract the attention of a broad range of project finance participants.46 Reliable and cost-efficient battery energy storage systems have the potential to shake up the energy sector. Significantly, this type of storage system could become an ideal complement for intermittent resources such as wind and solar energy power plants and facilitate power grid balancing efforts. As a consequence, natural gas ‘peaker’ plants (those that are used when there is high demand for electricity) may become less significant and the electricity generation mix could be reshaped further.

Another development in the energy sector involves an ongoing transformation in the identity of the power purchasers in the market. As electricity prices have been declining, it has become more difficult for developers to secure long-term offtake agreements with investment grade utilities, and businesses, universities and other non-traditional offtakers gradually have been taking their place. Additionally, in some states, communities have started forming Community Choice Aggregations (CCAs) to source electricity.47 CCAs purchase electricity from a utility and sell it to their residents and businesses. While only eight states have legislation governing CCAs,48 these entities may become more significant in the near future. Utilities, especially those in western states, face increasing difficulty in maintaining their credit standing, as they confront a declining customer base due to the emergence of CCAs and distributed generation technologies, legacy pension liabilities, and the implications of climate change, including liability for utility-caused wildfires.

In addition, constrained state and local fiscal budgets, limited federal transportation funding, decreased tax revenue and the considerable need for new infrastructure assets and the refurbishment, repair and replacement of existing assets may hasten the further use of the public-private partnership (PPP) project finance structure (further described in Section IX). While most large infrastructure projects in the United States, at least since the introduction of the interstate system in the 1950s, have been completed using public funds rather than through the participation of private entities, a confluence of factors may be creating a fertile ground for the development of increased government and public acceptance of PPPs. According to the latest report card by the American Society of Civil Engineers, the infrastructure of the United States has a D+ grade point average49 and an estimated investment of approximately US$5.1 trillion (in addition to the approximately US$5.6 trillion currently contemplated to be funded) will be required by 2040 to maintain a state of good repair.50 The Trump administration’s infrastructure plan, published in February 2018, is intended to stimulate at least US$1.5 trillion in new infrastructure investment over the next 10 years 51 and 12 federal agencies agreed on a framework to expedite the environmental review and approval of infrastructure projects.52 Given that existing legislation has been insufficient to satisfy the country’s needs for infrastructure funding, state and local governments started to turn to the private sector to fill the gap. Recent significant PPP projects include the up to US$4.9 billion Automated People Mover project and US$2 billion Consolidated Rent-A-Car facility at the Los Angeles International Airport,53 the approximately US$3.7 billion I-66 Outside the Beltway project in Virginia,54 and the approximately US$5.7 billion Gordie Howe International Bridge connecting Detroit (United States) and Windsor (Canada).55 While in some jurisdictions developers will need to navigate uncharted legislative and regulatory waters, and may also have to overcome negative public perception regarding the private management of public infrastructure, the opportunities for growth may be unprecedented.

Outlook and conclusions

In the long term, project finance is expected to continue to be a popular vehicle to finance the necessary energy and infrastructure assets in the United States, particularly to replace the ageing fleet of coal-fired plants, nuclear plants and other public infrastructure, given the support of the strong legal framework and a strong, sophisticated private financing market (in addition to political support and other factors).

The US Energy Information Administration (EIA) estimates that energy consumption, across all sectors, will increase by 0.3 per cent per year between 2019 and 2050.95 While additions to power plant capacity are expected to slow from the construction boom years in the early 2000s, it is expected that there will be more long-term growth in certain sectors, such as projects from renewable sources and natural gas. For example, the EIA projects that electricity generation from renewable sources will grow so that its share of total US energy generation will increase from approximately 19 per cent in 2019 to approximately 38 per cent in 2050 in the reference case, or as high as 40 per cent based on a high oil price case.96 Additionally, projections from industry sources foresee that the United States may need close to US$5.1 trillion in additional funding to support its standard infrastructure needs in the coming years.97 With the enduring need for energy and infrastructure, the United States will look to project finance structures as one of the tools for satisfying this need.

Replevin Actions: What You Should Know

Craig H. O’Neill | White and Williams

A contractor client of White and Williams recently found itself in a prickly situation. They had default terminated a subcontractor on a major commercial project and withheld payment to that subcontractor on an outstanding invoice as permitted under the terms of the subcontract until the project was completed. Clearly irate over being terminated, the subcontractor walked-off of the project with thousands of dollars’ worth of project materials and equipment that had been paid for by the owner. While on some projects this may amount to nothing more than an annoyance or inconvenience, in this case it was a significant problem because some of the wrongfully removed materials were custom manufactured overseas and not easily replaceable. The client therefore needed to take immediate action to retrieve the stolen materials so that the project would not be delayed. Specifically, it needed to file a replevin action against the subcontractor.

A replevin action is a little known but powerful area of the law. In its simplest terms, replevin is a procedure whereby seized goods may be provisionally restored to their owner pending the outcome of an action to determine the rights of the parties concerned. The requirements of a replevin action differ by jurisdiction. For example, in Pennsylvania, the Rules of Civil Procedure devote an entire section to replevin actions and spell out in precise detail the steps that must be taken. While you should be sure to strictly comply with the rules in your jurisdiction, here are a few general points to keep in mind:

  • Where to File: A replevin action is typically commenced by filing a complaint in the appropriate jurisdiction. Generally speaking, it is best to file the action in the jurisdiction where the improperly seized materials are being held. If that location is unknown, you can also typically file the action in the jurisdiction where the project is located.
  • The Complaint: The complaint in replevin typically must include: (i) a description of the property to be replevied; (ii) its value; (iii) its location if known; and (iv) the material facts upon which the claim is based – in other words, why the filing party is entitled to seize the property that has been taken. The complaint generally must be verified by the filing party upon personal knowledge or information and belief.
  • Writs of Seizure: When time is of the essence or there is a concern that the removed materials will be harmed or destroyed by the holding party, most jurisdictions allow for the sheriff to seize the property pursuant to a writ of seizure. In general, a writ of seizure is issued upon an order of court entered upon notice and a hearing during which the moving party must establish through the complaint, affidavits, testimony, admissions or other evidence, that it has a high probability of successfully demonstrating its claim to possession of the subject materials.
  • Posting of a Bond: The plaintiff typically will be required to post a bond with a penal sum that is at least the value of the materials at issue (in Pennsylvania, the bond must be double the value of the materials). In some instances, a counterbond may be filed with the court by a defendant or intervenor claiming the right to possession of the property.
  • Final Judgment: Following service of the complaint, a judgment may be entered by the court either before or after a trial. The judgment will determine which party has the right to retain possession of the property and any special damages to be awarded to the plaintiff or the defendant resulting from an improper claim to possession of the property. Typically, if a trial is necessary to determine the amount of special damages, if any, the trial will be a bench trial rather than a jury trial.

In the case of our contractor client, the replevin action was a complete success. Following an evidentiary hearing, the judge entered an order granting our Emergency Motion for the Issuance of a Writ of Seizure and directing the prothonotary (Pennsylvania’s name for the court clerk) to issue a Writ of Seizure to the sheriff’s office commanding him to take possession of the project materials upon the posting of a bond. After complying with the necessary procedural requirements, we were accompanied by several uniformed police officers to retrieve the wrongfully removed project materials from the subcontractor’s warehouse. The materials were then transported to the project and immediately put into use. The whole process took weeks rather than the months (or more) it may have taken for the client to obtain suitable replacement materials.

If you ever find yourself in the unfortunate position of needing to retrieve wrongfully removed project materials or equipment from a terminated contractor or subcontractor, the replevin action is a very useful tool to keep in mind. Be sure to strictly follow the procedural requirements in your jurisdiction and you may end up retrieving your wrongfully removed items in relatively short order.