Cost Overrun Guarantee Agreement

Since the proponent is the joint venture member responsible for creating the development budget, selecting the contractor, and managing the overall development of the project, the investor will look to the proponent in the same way to fund cost overruns in case a project goes over budget. While it is unusual for a developer to obtain a capital deposit loan for its overpayments, it is not uncommon for such payments to be treated as a subordinated loan to the business. Work contracts can be priced in different ways. For most contracts, even those that are “fixed-price contracts,” there are usually cost-price fluctuations. Four cases starting in December 2020 highlight some of the difficulties that can arise if the parties agree that payment should be cost-based. The above approaches to warranties and cost overruns are exemplary and by no means exhaustive. But in the context of a negotiation where each party tries to minimize its exposure to risk to the detriment of others, an understanding of common and opposing approaches is helpful. At the very least, negotiating a strong position in the joint venture agreement can play a crucial role in providing the leverage needed to negotiate an “out-of-agreement” solution if a project slips. Depending on the specifics of the agreement and the applicable joint venture members, developers may sometimes negotiate to limit their obligations to fund overruns to a certain fixed amount or percentage of the development budget, after which the investor is responsible for financing additional cost overruns, either alone or on a common basis with the developer. If investors accept this approach, in many cases they will limit their own maximum exposure to cost overruns to a certain amount. With respect to credit guarantees, the Developer Member or its subsidiary will invariably be designated to sign the Non-Recourse Exclusion Guarantee.

That makes sense; Since the developer is usually the member responsible for managing the day-to-day operations of the joint venture and ownership, he is able to commit intentional, grossly negligent or criminal acts that could potentially trigger the guarantee. Unless an investor member specifically requests the developer member to also sign the guarantees for payment and completion of the construction loan, it will usually add language confirming that it, the investing member, will not act as such guarantor under any circumstances, which will effectively result in the signing of such guarantees by the developer. The tribunal found that the employer`s adoption of the contractor`s “budget estimate” for the work had led to a flat-rate pricing structure and that the employer had wrongly claimed that the agreement provided for a “cost plus” approach. The case was somewhat unusual, as the Court noted, as employers rarely seek “cost plus” contracts due to their inherent uncertainty about costs. Examples include change orders approved by both members of the joint venture, tenant improvement costs and rental commissions incurred under leases approved by both members, and costs caused by changes in legal requirements or force majeure events – those that cannot reasonably be foreseen and are therefore beyond the control of the members. Savvy developers also make it clear in the joint venture agreement that their obligation to fund cost overruns is subject to their rights under the agreement to first claim all conditionals and reallocate savings in the development budget. Investors will often accept this agreement as long as the reason for triggering the guarantee is not due to the failure of the developer under the joint venture agreement. In addition, investors will most likely need language confirming that such a repayment will be repaid solely from the Company`s cash flow and that none of the members will need to contribute additional capital to fund such repayment. Although the estimate did not offer a “fixed in all respects” price, this was mainly because it referred to certain elements that could have been provided by the employer and suggested that there could be savings. There was no reference to terms such as “estimated costs” or a premium for overheads and profits.

The General Court held that those characteristics were compatible with a flat-rate offer. ABC Electrification Ltd v Network Rail Infrastructure Ltd [2020] EWCA Civ 1645 included a contract to carry out power upgrades for the West Coast Main Line Railway in England. There is no doubt that payment under the contract should be made on a cost basis. As a general rule, banks require that the remuneration for construction contracts be set in the form of a lump sum remuneration (“key fixed-price contract”). If the costs on the part of the entrepreneur increase, the investor must negotiate and modify the terms of the documents. Changes to the construction contract, especially those that change the general contractor`s remuneration, usually require the consent of the bank. The risk of volatility in commodity prices and labour costs is attributed to the general contractor. .