Construction contracts—key issues for project finance lenders
Construction contracts—key issues for project finance lenders

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Construction contracts—key issues for project finance lenders
  • What is a construction contract?
  • What type of construction contract?
  • Pricing structures for construction contracts
  • Key provisions in a construction contract
  • Key issues in construction contracts for project finance lenders

Most projects are underpinned by a complex web of contractual relationships between all the parties involved in the project (eg the project company, equity investors, contractors, sub-contractors, off-takers and suppliers). These documents are generally referred to as the 'project documents'.

In many projects, the construction contract is one of the principal project documents.

What is a construction contract?

In a typical project finance transaction, the project company is a special purpose vehicle (SPV) set up specifically for the purposes of the project (see Practice Note: Project finance—key project parties).

Projects involving the construction of a new asset (ie 'greenfield' projects) will invariably necessitate significant construction work. If the project company is an SPV, it is unlikely to have the expertise to design and/or construct the project itself so it will enter into a construction contract with an appropriately-skilled contractor (the Construction Contractor) to provide those services.

The purpose of a construction contract is to:

  1. allocate construction risk to the party best placed to bear it, ie the Construction Contractor (for more information about construction risk, see Project risks and risk allocation—Construction risk in a project finance transaction)

  2. agree a timetable for construction of the project, and

  3. manage construction costs

What type of construction contract?

The form of construction contract that the parties involved in the construction of a