The document discusses contracting strategies for offshore wind projects. It notes the challenges with traditional turnkey and multi-party contracting approaches. It then discusses alternative contracting strategies like alliancing models used in other industries. Alliancing aims to better align partners' interests through risk and reward sharing to reduce costs, improve collaboration, and drive innovation. However, alliancing also presents challenges around accountability and cultural shifts. Lessons from other sectors emphasize getting commercial models and incentives right to achieve the benefits of alliancing.

1. Contract management
and dispute avoidance
Managing operational and financial risk to
keep your energy projects on track
Tuesday 25 September, 2012
Date here

2. Effective Delivery of the offshore wind
programme: Conclusions of the Task
Force
Chris Hill
Chief Operating Officer - Offshore
25th September 2012

3. Offshore Wind’s Potential
● 18 GW of capacity installed around our shores by 2020
● With yet more in the next decade
● Serving some 20% of the UK’s electricity needs from
clean green sources
● Employing thousands of people in manufacturing,
construction and operations for decades
● Improving security of supply, with less reliance on
imported fuels
● Making the UK a global leader in offshore wind power

4. Experience thus far
● Some 2 GW installed today
● With mixed success
● Many projects have over run on cost
● Delivery gaps in next few years, not good for supply chain
● Supply chain often constrained and hesitant to increase
capacity
● Construction risks unattractive to many financiers
● Regulatory processes sometimes inadvertently adding to risk
● Backdrop of economic & political climate

5. Our Challenge
• The DECC 2011 Renewables Roadmap stated:
“we are determined to drive down costs and are
establishing an industry Task Force to set out a path and
action plan to reduce the costs of offshore wind, from
development, construction and operations to
£100/MWh by 2020”.

6. Cost Reduction Task Force Industry
experts across the entire value chain
Developers Centrica, DONG Energy, Mainstream
Supply Chain Alstom UK, Gamesa, Siemens, Vestas
Installation & Construction Technip
Innovation Carbon Trust, Energy Technologies Institute
Cross Sector Eversheds, Garrad Hassan
Grid SKM
Finance Lloyds Banking
Oil & Gas Wood Group

7. Rising to the challenge
● Task Force has considered evidence and bench marked
best practice including
● The Crown Estate’s Pathways as it emerged
● Oil & Gas Sector
● Offshore Wind Sector
● Electricity sector and elsewhere
● We examined our ways of working
● And questioned were they optimal?
● We identified cost barriers
● And considered ways of removing them

8. Key Recommendations
1. Supply chain
● Identify key risks and tackle bottle necks (Industry and Gov’t)
● Give greater project clarity to supply chain to allow more informed
decision making (Industry)
2. Innovation
● Seek to standardise development and deployment (Industry)
● Deliver and make best use of Offshore Wind Test Centres for greater
confidence in new turbines and deployment (Industry and Gov’t)

9. Key Recommendations
3. Contracting Strategies
● Seek to adopt “Alliancing” model to contracting as used successfully by
the Oil and Gas Sector. Evidence taken from National Grid, SSE & DONG
● With more integrated collaboration vertically across supply chain and
horizontally working with competitors (Industry)
4. Planning and Consenting
● Ensure planning reforms are fully embedded and working for Offshore
Wind (Industry and Gov’t)
● Ensure appropriate flexibility in planning practices and guidance to
allow for offshore wind’s emerging technology issues (Industry and
Gov’t)
● Ensure appropriate resourcing of Statutory Advisors to meet project
needs (Gov’t and Industry)

10. Key Recommendations
5. Grid
● Increase and standardise sub sea cable voltages (Gov’t and
Industry)
● Review potential to standardise transmission and substation
design including via a central Design Authority (Industry)
6. Finance
● Simplify deal structures where possible (Industry)
● Deploy GIB to facilitate and leverage finance (Gov’t)
● Look to pool assets to help diversify risk to investors (Industry)
● Increase engagement with finance sector to educate and
inform (Industry)

11. Key Recommendations
7. Monitor and Manage Risk
● Create a new Programme Board comprising representatives of
development, supply chain, statutory consultees and various
Gov’t departments
● To assess and address offshore wind industry risks
● Demonstrating to 3rd parties the industry is making progress
● Improving delivery
● Reducing cost
● Improving investor confidence

12. Contracting Strategies: CRINE & PILOT
CRINE (Cost Reduction In the New Era)
• Was the first Oil & Gas initiative and was established in 1992/3
• It involved Oil Companies and Contractors/Suppliers
• Objective - to reduce the cost of new Oil & Gas Projects in the UKCS
PILOT
• Was set up in late 1999 in response to a very low oil price
• It involved Government (DoE, Treasury, HSE), Oil Companies,
Contractors/Suppliers and Trade Unions
• Objective – to maximise the recovery of hydrocarbons from the UKCS

13. CRINE
The initiative addressed a number of areas but the four main ones were:
• Contracting relationships and risk allocation
• Standard contracting terms
• Forward planning and visibility of activity
• Improving the efficiency of the prequalification and bidding process

14. CRINE Outcomes
• Contracting relationships and risk allocation. Industry had tended to be
adversarial which was viewed as wasteful. There was therefore a move to
collaborative “Alliancing” relationships where there is cost transparency,
pragmatic risk allocation, shared contingency and all parties are rewarded
based on the overall project outcome
• Standard contracting terms. A number of standard contracts were produced
covering specific topics such as Design, Construction, Offshore Services, Well
Services, etc
• Forward planning. To give the supply chain a better understanding of the
future activity levels, thereby enabling them to plan their resourcing and
investment accordingly, annual “Share Fares” were established where the Oil
Companies and Main Contractors would present their workload plans
• Improving the bid process. The primary outcome on this was the
establishment of First Point Assessment Ltd (FPAL), an industry registration
system which was intended to avoid contractors and suppliers doing multiple
submissions and proposals

15. Standard contracts
Amongst other things, these addressed the following issues;
 Back to back indemnities
 Limits of Liability
 Clauses on Variations, Force Majeure, Suspension, Dispute Resolution
 Third Party liability
In addition, the industry developed a “Mutual Hold Harmless Deed” whereby
different Contractors, working on the same facility, indemnify each other in
respect of personnel/property and consequential losses. In 2003, all of these
were re-badged as LOGIC (Leading Oil & Gas Industry Competitiveness)

16. PILOT
PILOT had a much broader remit than CRINE due to the wider stakeholder
participation, and assumed ownership of the ongoing work that had been
started by CRINE
Other topics addressed included such things as;
 Licensing and regulation
 Fiscal
 Technology
 Access to infrastructure
 Safety
 Training and development

17. Task Force: Conclusions
● We can make far reaching changes to practices across the offshore wind
sector
● We can reach £100 / MWh by 2020
● We need sufficient project momentum, supply chain capacity and
competition, and stronger intra-industry and stakeholder cooperation
● Barriers are surmountable, with both the industry and Gov’t willing to
address them
● The UK offshore sector can deliver vast quantities of low carbon
generation, in an affordable manner
● While providing thousands of jobs for decades to come

18. Managing international contracts
as a business asset
Tim Cummins, IACCM
25 September 2012

19. Contracts: Are We Wasting Our Energy?
Negotiation Disputes

20. What we negotiate … and dispute
Top negotiated terms Top disputed issues
1. Liabilities 1. Scope and goals
2. Indemnities 2. Change management
3. Price / charge 3. Delivery
4. IPR 4. Performance
5. Payment 5. Responsibilities
6. Liquidated damages 6. Pricing
7. Performance G’tees / SLA 7. Sub-contractors
8. Delivery/acceptance
9. Applicable law /
jurisdiction
10. Confidentiality /NDA

21. ‘Troubled relationships’ =
disappointing outcomes
Research shows that The likelihood of
commercial issues significant
are the primary cause in ~70% innovation or
incremental value
of ‘troubled relationships’ is reduced by
≥ 60%
So achieving improvement is important
Copyright © 2012 IACCM. All rights reserved.

22. Factors that reduce dispute probability
1. Risk allocation
2. Problem solving
3. No-blame culture
4. Joint working
5. Communication
6. Gain and pain sharing
7. Mutual objectives
8. Performance measurement
9. Continuous improvement

23. What is the scale of loss or potential for
gain?
the average impact to bottom-line
performance that results from
weaknesses in contract
management / commercial
assurance
Copyright © 2012 IACCM. All rights reserved.

24. Contracting and alliancing
Peter Scurlock, Eversheds LLP
Trevor Jones, National Grid
25 September 2012

25. Overview
• Current procurement strategies
– Turnkey and multi-party contracting
– the challenges of multi-party contracting
• Current contracting strategies
– forms of contract
– choosing the right forms
• Alternative contract structures
– the drivers for change
– alliancing
– different types of alliancing and partnering arrangements
– Pros and cons of alliancing
– Lessons learned from other sectors

26. Procurement strategies
• Turnkey approach
– Single point responsibility
– Majority of risks associated with time, cost
and quality “wrapped” under one contract
– Still used in certain biomass projects

27. Procurement strategies
Turnkey contracting
Developer
Turnkey Supplier
Sub-Contractor Sub-Contractor Sub-Contractor

28. Procurement strategies
• Multi-contracting approach
– No single point responsibility
– Developer enters into series of EPC contracts
with suppliers
– Developer retains the interface risk
– Used in on and offshore wind and large-scale
biomass projects

29. Procurement strategies
Multi-party contracting
Developer
Balance of Plant Turbine Supply

30. Procurement strategies
Multi-party contracting
Consultant Developer OFTO
Appointments
Site Transportation
investigation and installation
surveys contracts
Foundation Foundation Offshore Offshore Turbine
Supply Installation Cable Cable Supply
Supply Installation
Onshore Onshore Offshore Turbine
Cable Substation Substation Installation

31. Procurement strategies
• The challenges of multi-party contracting
– dealing with the interface risk
– multiple number of contracts that need to be negotiated
and administered
– need for a proactive approach to project management
• Dealing with the “known unknowns”
– weather downtime
– seabed conditions
– supply chain constraints
– claims
• Marginal project economics

32. Contracting strategies
• Different forms of contract currently in use
– FIDIC
– LOGIC
– BIMCO
– NEC
– Bespoke forms
• Hybrid approach

33. Contracting strategies
• Different contracts have different approaches
– to risk allocation
– to delay
– to additional costs
– to liability
– to indemnities (“knock for knock” v. conventional
approach)
– to project management and contract administration
– to dispute resolution

34. Contracting strategies
• Choosing the right forms of contract
– the need for consistency, flexibility and the right
approach to risk allocation and risk management
– the need to be bankable
• Ensuring a consistent approach
– standardised contracts for offshore wind and other
types of project?
– use of contract checklists

35. Alternative contract structures
• Drivers for change
– the need to reduce costs
– the drive for continuous improvement
– the need to align interests

36. Alternative contract structures
• Drivers for change
– the need to reduce costs
• visibility of programme
• long-term relationships
• avoiding duplication
• unlocking technology innovation and
efficiencies
• reducing the number of claims

37. Alternative contract structures
• Drivers for change
– the drive for continuous improvement
• incentivising and motivating good
performance
• inadequacy of damages
• encouraging teamwork and collaboration
• developing and sharing technology
innovation and efficient ways of working

38. Alternative contract structures
• Drivers for change
– the need to align interests
• incentivising collaborative working and
sharing of know-how
• ensuring all key suppliers have a stake in
the success of the whole project
• ensuring that the commercial
incentivisation drives the right behaviours
• sharing risk and reward
• moving towards a “no blame, no claim”
culture

39. Alternative contract structures
• Alliancing
– a formal relationship formed between two or
more parties to pursue a set of mutually
agreed upon goals
– a contracting strategy which aligns the goals
of the developer and supply chain with a view
to minimising cost, increasing profitability and
contributing to each others’ long term future

40. Alternative contract structures
• Different types of arrangement
– Incorporating partnering and collaborative
working provisions in existing contracts
– Target cost contracts
– Framework agreements
– Individual alliance agreements
– Project alliances
– Strategic alliances

41. Alternative contract structures
‘Pure’
Degree of Integration Traditional ‘EPC’ Contracting
Alliancing
Shared Cost Risk     
Shared Programme Risk     
Shared Quality Risk     
Pan Alliance Incentivisation     

42. Alternative contract structures
• Pros and cons of alliancing
– Pros
• Integrated delivery = best for task
• Minimises duplication
• Maximises purchasing power
• Secures supply chain and availability of resource
• Reduction in claims
• Alignment of interests encourages focus on mutual
goals
• Incentivises innovation and sharing of know-how
and IPR
• Improves health and safety performance
• Early contractor involvement improves “buildability”

43. Alternative contract structures
• Pros and cons of alliancing
– Cons
• Lack of accountability and clarity
• Potential blurring of responsibility in relation to key
issues such as health and safety
• Lack of competitive tension
• Heavy reliance on commercial model
• No single point responsibility for defects
• Requires total buy-in and a complete cultural shift
• Conflicting cultures
• Knowledge and skills leakage

44. Alternative contract structures
• Lessons learned from other sectors
– Make sure that you are comfortable with the extent of
integration and risk sharing
– Ensure sufficient competitive tension
– Get the commercial model right
– Agree meaningful incentives and adopt the right
performance measures
– Agree exit strategy and implement post-alliance
protections

45. Alternative contract structures
• Lessons learned from other sectors
– The need for consistent contracts
– Invest time in educating alliance members to ensure
that right behaviours are adopted from the outset
– Incentivise knowledge sharing
– Don’t hold back

46. www.eversheds.com
© EVERSHEDS LLP 2009. Eversheds LLP is a limited liability partnership.

47. National Grid
Eversheds – Energy Contracts & Disputes Conference
25th September 2012
Trevor Jones – Senior Project Manager,
Offshore Development
UK/EU Business Development

48. What were the Drivers for change?
 Stagnant Safety Performance
 Increasing/Uncommitted CAPEX Forecast
 Efficient Outage Management
 Optimise customer Relationships
 Project Processes/Interfaces
 Poor Supply Chain Performance & Management
 Subcontracting Relationships Complex, Costly & Risky
 Environmental Consents Getting More Difficult
 Shortages of Key Resources

49. Partnering Relationship Spectrum
Traditional Project Supply Chain Client Full Alliancing
Partnering Partnering Partnering
Competition Cooperation Collaboration Collaboration Coalescence
Project Based Project Based Long Term Long Term Long Term
Risk Transfer Risk Mitigation Risk Mitigation Risk Sharing Risk Embracing
Each side has Each side knows and Integrated supply chain One integrated team Integrated into whole
clearly established commits to the goals team focused on meeting consisting of both project lifecycle
responsibilities of the project and to program goals client and contractors Total alignment
Little or no trust each other’s goals Usually Design & Build personnel around driving mutual
Disputes often Requires a degree of Often create separate Early involvement in goal and sharing gains
resolved trust legal entity to contract design lifecycle and liabilities for
adversarially Disputes typically with client Requires a high failure
resolved in some Team has one set of degree of trust Both sides share their
degree of compromise goals for a successful Team has one set of goals and cost
and harmony program with some goals for a successful Requires extremely
shared risk/reward program with shared high trust
senior level‘ sponsors’ to risk/reward
remove barriers and
support the project

50. Alliance Efficiency Model
Improved SHES & Quality Performance
Right Model, Right Responsibilities &
Interfaces
Clear & Defined Scope Deliverables
Leveraging Value From Suppliers
Demonstrate Value For Money
Cost Certainty – No Surprises, Risk &
Cost Management
Robust & Deliverable Programmes
Earlier, Dedicated Resource Availability
& Allocation

51. Alliance Contracts – National Grid Principles ?
• Create the optimum construction vehicle to deliver a
programme of works
• Alliances comprise NG and partner as equals
• Mutual Objective
• Single management structure and culture
• Best person for the job, multi-discipline project teams
• Actual cost schedule/target based contract
• Shared common objectives
• Shared risk and reward
• Pan-Alliance incentive mechanism

52. Traditional Construction
Stakeholders
Client Designers Constructors Operators
COST OF
PUTTING IT
AREA OF RIGHT
WASTED
POTENTIAL
BUILDING IN WASTE MANAGING THE MESS LOSING THE LEARNING

53. Project Partnering
(INCEPTION) (IMPLEMENTATION) (OPERATION &
EVALUATION)
Client + Designers + Stakeholders + Constructors + Operators
POTENTIAL COST OF
FOR ALL
PARTIES AREA OF REALISED PUTTING
TO ADD
POTENTIAL WHAT RIGHT?
VALUE
ANOTHER INPUT FROM ALL RIGHT FIRST TIME CAPTURE THE
WAY BEST VALUE SOLUTIONS JOINT PROBLEM SOLVING LEARNING & USE IT

54. Alliances Create Value By Jointly Managing Risk
Reduction in Level
of “Hidden Risk”
NG Previous
Risk Operating
Cont’r Model
Risk
Hidden
Risk
NG Risk Alliance
Shared Shared
Risk
Risk
Model
Cont’r Risk

55. Focus on priority KPIs – introduce hurdles to
understand the best performers
3 “Golden” Safety VfM Customer service
KPIs are
derived from Non-negotiable Economic & Value for NG &
the hurdles Efficient customer
►There is no negotiation on safety, this ►A commercially focused team must ► Customer focused organisations ►The best will be recognised &
is a key aspect of all that NG do. achieve in these areas and will be are more likely to deliver value rewarded.
incentivised for doing so. Anyone and align with NG values ►Highlight& communicate
►Anyone failing to clear this hurdle will not clearing this hurdle will not be good, innovative and aligned
not be considered for KPI reward considered for KPI reward ► Itis important that some
demonstration of the customer behaviours in the alliances.
► On target costs, all members of the focus is clear although this is may ►Challenge under performers to
integrated supply team need to not be a crucial requirement in all raise their game.
know their individual costs, which cases
they are incentivised to keep to a ►Reward good performance
minimum with a bigger pipeline.
► The target price has to be set at a ►Reduce the number of
level that gives sufficient incentive alliances through “natural
and value for money for the type selection”?
and complexity of facility being ►Remove geographic
constructed. boundaries
Lower level •The business still requires some more detail in certain aspects and so these must by captured
KPIs are •More granular and specific KPIs are monitored as “SLAs” and are expected to be BAU for the alliances
treated as •If the alliances are not performing on these there is still potential for action
SLAs •If there is a continued poor performance on these they could be “promoted” to the “golden” KPIs
Page 55 25 September 2012 National Grid – VfM support

56. Conclusions
An Alliance does
not ‘run’ itself – it
THANK YOU Success –
is a contracted achieved
Delivery Vehicle objectives
Right / Wrong
Views / Opinions
Bureaucratic – Leadershi
product of T&C’s – Question
p – Tone
or failure of over
at the Top
relationship whether it
is the
right
vehicle for
everythin
g

57. Bankability
Rob McNabb, Eversheds LLP
Richard Simon-Lewis, Lloyds Banking Group
25 September 2012

58. Questions

59. Arbitration clauses
choice of forum and rules
Neil Newing, Eversheds LLP
25 September 2012

60. Coffee Break

61. Health and safety
Better HSE, Time, Cost & Quality through
Collaboration, Culture & Communication
(& contracts)
David Young, Eversheds LLP
Graeme Bellingham, EDF
25 September 2012

72. Questions

73. Best practice contract management
and dispute avoidance
Richard Ward, Eversheds LLP
Gary Carter, Centrica
25 September 2012

74. Our presentation
• Some general themes on disputes and contract
management
• Generic responses
• Specific clean energy issues
• Case studies

75. Disputes
• What are disputes?
• Any difference (broad)
• Any difference that has to be resolved by others
(formal)
• In broad sense will be inherent in projects
• In formal sense are avoidable/manageable
• Avoid broad disputes becoming formal

76. Why avoid formal disputes
• Risk of outcomes/third party determines
• Expense, external and internal
• Damage to project
• Collateral damage

77. Causes of formal disputes
• Root causes. Inherent in the project
• Inappropriate contract terms and risk allocation
• Unclear commercial objectives and wrong
expectation
• Poor teams/contractors
• Contract alignment across multi contract
projects

78. Responses to root causes
• Pre-contract reviews/joint workshops. Don’t
forget the detail
• Project specific analysis of expectations and
contract terms/do not rely on standard
responses
• Risk registers
• Align across all project contracts
• Clean energy projects tend to be sophisticated
and well understood
• Remote risks

79. Proximate causes
• Relate to the processes around project delivery
• Communications
• Relationships between project teams
• The design process
• Contract administration

80. Generic Responses to Proximate
Causes
• Live the contract. Don’t put it in the drawer!
• Understanding the contract workshops (with
supply chain)
• Communication protocols (especially design)
• Integration of project teams
• Early warning mechanisms

81. Avoiding and remedying defects
• Quality assessments and inspections. On-
shore/early
• Early identification/early remediation
• Self help remedies

82. Dispute resolution
• Tiered approach
• Continuity over all contracts
• ADR – project (or ad hoc) mediation
• Advisory opinions
• Experts
• Dispute review boards
• Arbitration – courts - adjudication

83. Summary
• Seek to eliminate/root causes
• Maximise proximate cause management
• Formal disputes significantly reduced and when
arise well managed

84. Best practice contract management
and dispute avoidance

85. Introduction
• Clean energy construction is essentially heavy
civil engineering with plant bolted on
• Common issues arise
• Good procurement/project management
– Eg CTRL King’s Cross

86. Clean energy specific
• New technology
• Limited providers
• Long lead procurement

87. Case studies
• Major design consultant
• EPC plant
• Variations

88. Summary
• Clear risk allocation and drafting
– include mechanisms that provide Employer
flexibility
• Uniform provision/contract alignment
• Right people with access to senior
management/legal
• Nip disputes early

89. Questions

90. www.eversheds.com
© EVERSHEDS LLP 2009. Eversheds LLP is a limited liability partnership.