4.2 The Role of the Independent Engineer in Project Finance Deals
4.2.2 Monitoring Realization of the Project (Engineering and Construction)
This is a particularly delicate phase in a project finance deal. In fact, the SPV has been financed based on the conditions laid out in the credit agreement and has started to draw funds made available by the financing banks.
78 C H A P T E R u 4 The Role of Advisors in a Project Finance Deal
The start of the project works requires careful progress monitoring. Conse- quently, periodic reports should be produced for lenders certifying that the venture is going ahead as planned. Thus independent engineers both monitor and certify the works.
In brief, these are the activities they perform:
. Monitor construction of the works
. Issue certified progress reports
. Validate mechanical completion (certify completion of works) 4.2.2.1 Monitoring Construction of the Works
The aim of monitoring construction by means of on-site inspections and assessments is to check that works are proceeding in accordance with specifications established at the time of initial planning. The check is all-inclusive and covers the construction site, works associated with it, and also procurement of materials. The independent engi- neer checks that everything is proceeding satisfactorily in terms of timing and cost.
A summary of the activities and documentation produced in this phase is shown in Table 4-3.
Furthermore, this monitoring activity means assumptions concerning timing and cost to finish can be evaluated and, therefore, so can the effects of possible delays on the SPV’s business plan. This last point is essential information for lenders. As a result of monitoring works periodically, they receive an updated picture of progress and can, if necessary, take timely corrective action as indicated in the credit
TABLE 4-3 Summary of the Engineering and Construction Phase—Monitoring Project Realization
Phase
Independent
Engineer’s Activities Documents Required
Documentation Produced Monitoring
realization of the structure
Check that prog- ress for works corresponds to initial plans Check procure-
ment activities
1. Contracts (EPC contract, civil works and relevant subcontracts)
2. Detailed plans (data sheets, technical
specifications, plans and diagrams, construction standards)
3. Progress reports issued by the principal or the general contractor, together with:
Progress moni- toring reports
Schedule baseline and definition of project milestones
Detailed construction schedules Any recovery plans
Progress curves
Site organization and relevant organization chart, plus subcontractor organization with S-curve for resources employed
Safety plan and quality control
Procurement plan with main item purchasing list List of lifting and handling equipment List of changes during course of works Permitting plan
The Role of the Independent Engineer in Project Finance Deals 79
agreement to keep risk factors under control and limit the impact on the project’s operating cash flow.
Documents Required to Monitor Works: The process of monitoring works is based on a wide range of very technical documents. While a detailed description of each of these falls outside the scope of this book, a list of them is given here for reference purposes.
1. Supply contracts (EPC contract, civil works and related subcontracts)
2. Detailed plans (data sheets, technical specifications, plans and drawings, con- struction standards)
3. Progress report issued by the SPV or the general contractor, accompanied by:
. General plans for works (schedule baseline) and definition of project milestones
. Detailed construction schedules
. Recovery plans, if applicable
. Progress curves for works
. Construction site organization and relevant organization chart and, in addi- tion, the organization of subcontractors with the S-curve for resources employed3
. Safety plan and quality control system
. Main item purchasing list
. List of lifting and moving machinery and equipment
. List of changes while work is in progress
. Permitting plan
Accessory Services: In addition to monitoring works and construction sites, the independent engineer may be asked to provide support to prepare some of the documents mentioned previously:
. Preparation of the overall works plan using project management techniques (CPM—critical path method, PERT—program evaluation and review tech- nique, grid analysis, and WBS—work breakdown structure) and assistance for defining organizations responsible for safety and quality control (prep- aration of production, monitoring, and testing plans)
. Study and preparation of recovery plans as a response to changes in oper- ating conditions included in the works baseline, the aim of which is to bring the project back on track to achieve initial objectives and at the same time to limit potential damage
. Assistance in the testing and acceptances phases for major equipment
. As regards projects that have not yet reached the executive phase, a critical evaluation of choices made during the development phase and check for consistency with contractual terms
Documents Produced During the Construction of Works Phase: The independent engineer effectively acts as the project manager on behalf of lenders, and so the
3. S-curves represent the cumulative figures for resources employed on a project at a given time. They are obtained by adding up costs incurred to realize activities necessary to achieve an objective. Usually these activities are defined in detail at the start of works using what in project management are referred to as WBS (work breakdown structure) techniques, whereby tasks are listed alongside the resources required for their completion. The S-curve, in other words, indicates cumulative costs for resources over time and based on the concatenation in time of activities established by applying grid analysis (CPM, critical path method, and PERT, project evaluation and review technique). For detailed information on this subject, see Harrison (1985).
80 C H A P T E R u 4 The Role of Advisors in a Project Finance Deal
tasks performed in no way differ from those performed by the project manager appointed by the general contractor.
During the construction stage, various periodic monitoring reports are prepared that summarize analyses and valuations made:
. Physical progress made, evaluated using work breakdown structure techniques
. Time required to complete the works
. Actual and potential causes that have led or may lead to partial delays
. Forecast variances from the works baseline plan by evaluating time necessary for completion
. Changes while works are in progress and risks arising from these changes
. Status of authorizations and permits required to start or complete works
. Efficiency and effectiveness of the organizational and productive structures assigned to carry out the works
. Validity of business assumptions based on expected developments in the market 4.2.2.2 Issuing Progress Reports
From Chapter 3 we know that constructors are often paid based on the progress of works. So when predefined stages in the construction process are reached, the SPV pays a percentage of the total value of the works. Before such payments are made, a condition precedent (to be discussed in Chapter 7) is the issue of a specific certificate by the independent engineer. This is based on a check of effective execution of works and confirms that costs indicated in the construction contract correspond, also taking into account any changes during work in progress. A summary of the activities and documentation produced in this phase is shown in Table 4-4.
The works progress certificate is essential for lender banks inasmuch as it repre- sents a guarantee that financing used by the SPV for works carried out by the general contractor to a given date is in line with contractual commitments.
Documents Required to Issue Works Progress Certificates: The independent engineer must have at least the following documents before issuing the works progress certificate:
. Supply contracts
. Plans, plus relevant size and volume calculations
. General ledger
TABLE 4-4 Summary of the Engineering and Construction Phase—Issue of Certified Progress Reports
Phase
Independent Engineer’s
Activities Documents Required
Documentation Produced Issue of
certified progress reports
Check that a tranche of the works has been executed
Check that costs are in line with the EPC con- tract and with changes during the course of works
1. Contracts
2. Plans together with relevant survey calcu- lations and measurements
3. General ledger 4. Works accounts
5. Progress report signed by the site manager 6. Statement that works have been executed
as planned, signed by the engineer and the site manager
Certificate stat- ing that works have been exe- cuted in con- formity with contractual conditions The Role of the Independent Engineer in Project Finance Deals 81
. Works accounting records
. Progress of works status, countersigned by the site manager
. Declaration that works have been executed as prescribed, countersigned by the design engineer and site manager
Documents Produced: The independent engineer’s certificate takes the form of a report attesting that the progress of works status signed by the site manager corresponds to works effectively realized.
4.2.2.3 Validation of Mechanical Completion (Works Completion Certificate)
Validation of mechanical completion represents the final review of all progress of works status; it includes a check, performed on a sample basis, that works have been executed and realized in a satisfactory manner. So the works completion certificate attests to the correctness of declarations made by the site manager and the sponsors’
technical advisor. A summary of the activities and documentation produced in this phase is shown in Table 4-5.
Banks rely heavily on this certificate, which represents a guarantee given by the independent engineer as to the completeness and accuracy of certified data and in particular that the latter correspond to what was established contractually and included in the financial plan.
Documents Required to Issue the Mechanical Completion Certificate: The inde- pendent engineer can issue the mechanical completion certificate based on the same documentation indicated in the previous section. In effect, mechanical completion is a summary of all the works progress reports:
. Supply contracts with list of prices
. Construction plans with relevant size and volume calculations
. General ledger
. Works accounting records
. All progress of works status reports, countersigned by the site manager
. All declarations that works have been executed as prescribed, countersigned by the design engineer and the site manager
. Authorizations, permits, and concessions (as required for the case in point)
TABLE 4-5 Summary of the Engineering and Construction Phase—Validation of Mechanical Completion
Phase
Independent Engineer’s
Activities Documents Required
Documentation Produced Validation of
mechanical completion
Sample check that works have been completed Check correctness of site
manager’s certifications
Contracts, with list of prices
Construction plans, with relevant survey calcula- tions and measurements
General ledger Works accounts
Allprogress reports signed by the site manager Allstatements that works have been executed as
planned, signed by the engineer and the site manager
Certificate attest- ing to mechan- ical completion
Authorizations, permits, and concessions (required for the purpose)
82 C H A P T E R u 4 The Role of Advisors in a Project Finance Deal
Documents Produced: The site manager and sponsors’ technical advisor together with the independent engineer check completion of the works and prepare the punch list (a document listing construction details not yet completed) to check that any problems that might have arisen during construction have been resolved. This activity leads to production of a certificate stating that everything covered by the contract as regards realization of the works has indeed been completed.