Operation and maintenance contracts—key issues for project finance lenders

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

  • Operation and maintenance contracts—key issues for project finance lenders
  • What is an operation and maintenance contract?
  • Typical structures for an O&M Contract in a project finance transaction
  • Key provisions in an O&M Contract in a project finance transaction
  • Key issues for project finance lenders in connection with O&M Contracts
  • Payment provisions
  • Termination
  • Force majeure
  • Indemnities
  • Lender's security

Operation and maintenance contracts—key issues 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 operation and maintenance contract (O&M Contract) is one of the principal project documents.

What is an operation and maintenance 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: Key project finance parties).

If the project company is an SPV, it is unlikely to have the expertise to operate or maintain the project itself so it will enter into an O&M Contract with an appropriately-skilled contractor (the O&M Contractor) to provide those services.

The purpose of an O&M Contract is to:

  1. allocate operating risk to the party best placed to bear it, ie the O&M Contractor (for more information about operating risk, see Operating risk)

  2. ensure that there are clear criteria for assessing the performance of the project and that targets, if met, will generate adequate revenues for the project company, and

  3. manage operating and maintenance costs

The operating phase of a project is critical to project finance lenders because, typically, the project company does not start repaying

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