Solar facility construction milestone and payment claim review

Large scale solar construction projects are typically made up of dozens of milestones, outlined in the contract, which need to be met before payments can be made to the contractor.  There are normally at least three parties involved in the processing of these payment claims, and they can cumbersome things to navigate.  This post looks at what the typical milestones in a solar project are and what documentation is important.

But first, a step back. To defining the milestones:

Prior to financial close (where the necessary contracts are executed, and financing is secured) there will likely be a bit of backwards and forwards on what the key project milestones will be, and how much of the overall lump sum contract price will be allocated to each.  The milestone schedule, payment schedule, project programme and financial model are all built and developed in parallel, and changing one may have an impact on the others.  The contractor is interested in making sure that they have healthy cashflow throughout the project.  Procurement activities in particular require a heavy outlay of cash, so they will want to get paid for completed procurement works, which typically take place towards the front end of the programme.  The owner, and lenders, will want to make sure that they are receiving value for these payments, so they will be interested in making sure that the payment amount is fair, given what works have been completed.

Some of the typical milestones (and therefore payment triggers) include the following:

Notice to proceed

This is a mobilisation payment, often made to the contractor upon the award of the contract.  For instance 10% of the contract price.  The evidence required from the contractor is typically a letter from the owner to the contractor confirming that they have permission to go ahead with the works under the contract and that any conditions precedent to them starting works have been met, or waived as required.  It may be accompanied by other documentation showing that the contractor has done all the necessary preparation works, such as securing insurance, accessing bank guarantees, appointing certain key personnel etc.  The level of complexity in assessing this milestone is very much dependent on the contract requirements, but it should not be overly complicated.

Equipment procurement

This shows that the contractor has place the orders for the equipment.  The evidence for these type of milestones is typically in an executed (and often redacted) contract with the equipment supplier.  Additional requirements may include the supplier’s quality management plan, factory acceptance test schedule, delivery plan, and transportation, storage and handling, and installation and operations & maintenance guidelines.  Reviewers should be checking that the specifications of what has been procured matches the contract employer’s requirements.  The product warranties should also match the contract.  Delivery schedules should be in line with the project schedule.  Key components and equipment in a solar facility included as milestones are typically PV modules, structures/trackers and inverters.

Equipment delivery

This is to demonstrate that the equipment procured has been successfully delivered.  These milestones should be accompanied by a lot of documentation.  This can be one of the most onerous milestone types and it’s very important that the contractor has good controls in place to make this easy to review.  For each equipment type, there should be a summary report which links actual equipment to containers or batches.  For instance, PV modules will likely be manufactured in batches.  Each PV module has a serial number, and these serial numbers are grouped together into pallets.  Which are grouped together into containers, which are grouped together into batches.  Which cumulatively make up the entire facility.

There should be documentation and reporting which allows someone to trace each module from the manufacturing line all the way to its delivery to site.  A summary report should be maintained, identifying the position of each container (ex-works, on a ship, at port, on site etc) and a reviewer should be able to identify which containers have been delivered to site.  This summary report should be supported by a myriad of documentation, including packing lists, waybills/bills of lading, serial number lists and delivery notes.  In addition, there should be factory acceptance test reports and any independent factory inspection reports provided, and any applicable certificates from the manufacturer.  The reviewer’s role here is not to go through everything in minute detail, but to carry out spot checks to verify that the contractor’s report is accurate, and that they are implementing proper logistical and document control throughout the whole process.  Site inspections are then often carried out to verify that the equipment is being delivered in good order and that the contractor is complying with the handling and storage guidelines.  It can be a big job, and messy and confusing paperwork makes it a whole lot bigger.

Keeping track of millions of components requires a lot of competent people doing competent people things
Keeping track of millions of components requires a lot of competent people doing competent people things
Construction completion

There are a lot of construction activities that can be considered for payment milestones: mobilisation to site, the completion of the boundary fence, access roads, O&M buildings and substations.  But it’s typically the repetitive activities that get most of the attention, which in the case of solar are largely piling, tracker installation, module installation and inverter (or MV power station) installation.

What’s important here is what is understood by both parties to be a completed construction activity?  On any project there will be some punch list activities that need to be closed out, but what is considered to be reasonable? Does everyone agree?  For electrical equipment, is it enough that the unit is physically in place or should it be connected, with cables plugged in?

How is the facility divided up into sections?  Is a milestone linked to an individual section of the facility?  Or can the contractor claim for a percentage of works completed, regardless of where the works are taking place.  Keep in mind that the first wave of construction activities can be fairly quick to do, but coming back and resolving quality issues, and closing off punch list items can take longer.

Quality documentation is the most important here, and what is inlcuded in the overall payment claim should match the contractor’s progress report, which, in turn, should align with the quality documentation.  Inspection and test plans (ITPs) should be followed, and there should be inspection and test checks that are provided.  Observations during walkarounds on site should align with the contractor’s quality documentation.

Mechanical Completion is often a key construction milestone.  For this, all construction activities should be completed, quality documentation should be available, the punchlist should be manageable, and not affect the facility’s performance or safety, the facility should be ready for commissioning, and all the little construction activities that may not have been included as individual milestones (such as the security system) should be in and ready to be commissioned.

Commissioning

Commissioning milestones may be separated into cold commissioning (commissioning activities that can be carried out before the facility is connected to the grid) and hot commissioning (after grid connection).  It is common that the owner, owner’s representative, independent or lender’s engineer may witness selected commissioning activities, to confirm that the data provided match the observations on site, and to verify that the contractor is following the commissioning plan.  But commissioning milestones are often overshadowed or substituted for major completion milestones, such as practical completion or even commercial operation.  These major milestones are influenced and informed by performance tests and grid compliance tests.

A portion of the contract price, such as 5%, is normally held for these milestones, and the contractor needs to demonstrate the facility’s performance and compliance with the network service provider/regulator/purchaser’s requirements.  The nature of tests to be conducted and paperwork to be provided is determined by the local regulatory requirements.

They will also need to show that the facility is able to perform, by applying the performance ratio (or equivalent) tests outlined in the contract.  Performance data should be provided for review, along with the application of calculations as defined in the contract, and any underperformance may be subject to performance liquidated damages.


I have worked on projects with nearly one hundred milestones, and others with only a few dozen.  What matters most is whether they are clearly defined, and whether the parties have agreed upfront what constitutes the completion of an activity and what information and documentation is required.  I couldn’t overstate the importance of having a session or two right at the beginning of the construction phase to clarify expectations as early as possible.

The complex world of Japanese waste management

I recently got back from a two week holiday in Japan.  The first week was spent snowboarding up north and the second week was in the madness that is Tokyo.  In both, I encountered confusing, and strangely strict, recycling rules that were difficult to follow and seemed to change from region to region.

Ueno_park

In the house that a big group of us had rented at the snow, we were asked to separate our recycling into cans, bottles, food waste and other.  Simple enough.  Around the ski resort bins were separated into ‘combustible’ and ‘other’.  And then when we got down to Tokyo, we had four pages of instructions in the AirBnB welcome pack about what needs to be separated and how to do it.  Rubbish was collected on our street every day, but I couldn’t see any difference in the trucks driving around and they all seemed to lump rubbish bags together without any apparent distinction between bags.  Other than crates of cans and bottles that were loaded up separately.  Who knows where those crates came from.  It was incredibly confusing.

There are a lot of articles out there which go into the complicated nature of recycling in Japan in much more depth than I would be able to having been there for just one week.  I found this one interesting.

But it’s an important topic.  Because there are vending machines dotted (spray-painted) all around the streets of Tokyo.  Everything comes in plastic.  Individually wrapped goodies are ubiquitous, and when you buy a single plasticked thing, it gets placed in a plastic bag.  And having seen what I’ve seen in the Philippines, this was naturally a bit distressing.

The Rockefeller Foundation has two Japanese cities within its 100 Resilient Cities programme; Kyoto and Toyama.  I didn’t visit either, but the Toyama Resilience Strategy is probably reflective of other Japanese city priorities.  They celebrate their existing waste management practices, and point out that individuals take ownership of their role in keeping the city clean.  But from a municipal level they also discuss grander plans and highlight the importance of the development of the city’s waste to energy industry.   “With city incentives, seven different companies now turn “waste” into usable products at the EcoTown Industrial Park, started in 2002. An extensive waste recycling education center increases citizen awareness of the methods and importance of waste recycling.” [Source] . They also point out the importance of incorporating waste reduction and recycling principles into education programmes and messaging.

Layout of Toyama Eco-Town [Source: Toyama Resilience Strategy]
Layout of Toyama Eco-Town [Source: Toyama Resilience Strategy]
What they don’t seem to do is look at reducing the amount of waste generated in the first place.  It all seems to focus on waste management, recycling, combustion, landfill.  There doesn’t seem to be any emphasis on rethinking packaging of products in Japan.  Talking to manufacturers.  Rethinking the need for wrapping up Pocky chocolate sticks (yum) into two separate packets within one single box.

We felt plastic sick by the time we got home.  And considering how much work each individual is expected to do in their day to day household recycling, and the social pressure that seems to be experienced at this domestic level, it’s not clear if any of that pressure is being directed upwards.  Both at the regulators and at the suppliers.

Asia has a lot to answer for with plastic consumption.  And Japan has enough resources to find a suitable response.

The tricky nature of design and construction overlap in solar projects

Design

Solar PV facilities have ever increasing pressure on construction timelines.  In theory they are fairly simple design and construct projects, and one of the major benefits of these facilities is that they can come online in a relatively short space of time, and start generating revenue quickly.

So standard processes and procedures used within the engineering sector may be put under increasing pressure, in order to realise an early commercial operation date.

In an ideal world, the facility design is carried out upfront.  Site investigations are conducted, studies are done, calculations are calculated and all of these feed into the design process.  Design docs are developed, and bundled up into neat and ordered packages, which are handed over to the owner for review and comment.  Once everyone has had their turn to check that the design is in good order, and fully compliant with standards and specs, equipment is procured, and construction management documentation, such as work method statements, are developed.  Controlled.  Organised.  And compliant.

The reality of these projects is vastly different.  Certain things are known from contract negotiation – which modules, mounting system and inverters will be used, what is the overall facility capacity, where are the roads going to be located.  Designs will also be nicked from previous projects, to save time and cost, altered and amended based on local conditions.  Everyone will be watching the procurement of long-lead items with a keen eye along with any other activity under the project’s critical path.

So it’s likely that the design will be put together in clumps and blobs.  Loosely bundled documents, with vague references to geotechnical reports and flood studies, will come through in a piecemeal fashion.  Often before it’s been reviewed internally by the contractor.  There is enormous pressure on the Owner to carry out their reviews and issue comments with no delay, as everyone’s watching the clock.  But this way of submitting documentation is onerous on an owner’s engineer.  It’s difficult to plan and allocate resources when you’re not sure when documents are going to come through.  It can be hard to keep the same people on the job, which means more time spent by your engineers getting up to speed with the contract specs.  And it can mean multiple iterations of your log of comments.  It chaotic, pressured and not a whole lot of fun.

So some things that are important:

  • When documents come through, the contractor should highlight any specific aspects of the design which may have an impact on the overall project schedule.  For instance, tracker system design, which needs to be reviewed against local standards may be important as equipment needs to be ordered.
  • The document register becomes an incredibly important tool.  It should be tracking what the latest version of the document is, what the changes were in this revision, when it was issued and what the current status is (issued for review, approval, construction etc)
  • Document control in general becomes incredibly important.
  • The document management system should be easy to use.  If you need to go into the system to download small bundles of documents frequently, then it needs to be easy to navigate and docs need to be easy to download.  Access should be easy to secure, so that people on the design review team can search for documents themselves.
  • Transmittals should include a list of documents included, along with the location of the document on the document management system, or direct links to the documents.
  • Construction documentation, such as inspection and test plans and work method statements, should be developed in parallel, so that when the design is agreed, the ITPs and WMSs are ready, and there is no delay to construction.
  • For very time constrained reviews, it may be appropriate to focus solely on the observations of non-compliance with either local standards or the contract specs.  Design preferences may need to be dropped.  This is for the owner to decide.  They are paying for the product and it is ultimately their decision as to whether they are going for a gold standard project, or a project that finishes on time.
  • The contract should transfer all design risk to the contractor.  If the owner comes across any non-compliance at any point, the contractor should be required to fix it.  Increased pressure on the design phase should not relieve the contractor of their obligations to deliver a compliant project.
  • The contractor should be fully in control of construction quality.  So that the owner can see that the facility is being built to spec, and that accelerated works have not resulted in a poor quality product.

It’s difficult.  There are competing pressures, multiple activities taking place at the same time, and all parties may have limited resources at their disposal.

Back in the business – the Australian energy business

GDay

I am coming up for air after a crazy and intense year of maternity leave.  Thanks to all who have kept in touch and apologies to those who were expecting the newsletters to continue.

My big news is that four months ago I started working for an engineering firm in Melbourne, in their renewable energy team.  I am back in the world of consulting, working as technical advisor on a number of solar projects around Australia.  It’s very similar to the work I was doing back in South Africa so it’s familiar ground.

This market is booming at the moment, and there are a lot of little interesting topics floating around that could use a bit of discussion.  What’s of clear interest to me is the number of South Africans moving over here with experience in renewables.  The slow down of the REIPPP programme in SA has had many people looking further afield for work.  Not including myself I can think of five people who were consulting in Cape Town while I was there, who are now based in Australia.  And that’s just within consulting.  There will be a whole heap more working for the other project players.

I’m slowly getting my head around the grid connection space.  It’s complicated, with uncertainties that seem to be driving developers around the bend.  Marginal and Distributed Loss Factors deserve their own youtube channel, and the Generator Performance Standards are tying people in knots.

Each state has its own planning rules.  The country is enormous with long tentacled electrical infrastructure.  The politics is political and the leaders love to leave.

It’s a big mish mash and a bit wishy washy.  And it’s a lot to get your head around.

So watch this space.  Perhaps all that I can promise is that you learn along the way with me.