Proven technical capability of the EPC contractor is important, as is its financial capability. Financial
capability analysis includes review of key financial ratios as well as the contractor's order book and avail- able
liquidity. Technically capable contractors can be victims of their own success, so to speak, if liquidity cannot
match order book volume created by successful winning of mandates. In certain cases, higher working
capital requirements from rapid growth may stress contractor bank covenants and trigger delays for
construction-in-progress.
evaluates the construction contractor's size, reputation and track record in completing similar projects on
time and on budget, as well as the construction contractor's ability to perform the construction tasks. Where
a contractor lacks experience in a specific sector or region, Origin examines the strategies proposed to fulfill
all obligations, including the use of experienced subcontractors and the timing of their engagement,
planning for labour and materials acquisition, and the securing of permits necessary to complete the
project.
ProjectCo with limited protection from substantial cost overruns should a non-performing contractor
need to be replaced. Instead, construction enhancements provided by the EPC contractor can be used to
support its performance. These enhancements are designed to increase the likelihood of successfully
replacing a defaulted contractor and achieving completion, allowing the construction period rating to
exceed that of the EPC contractor. When assessing quality and the degree of ratings uplift provided by
construction enhancements, Origin considers the size, timeliness and certainty of the enhancements, which
may include a parent guarantee, letters of credit (LCs) and/or cash reserves, performance bonds, labour and
materials bonds or other types of insurance, and/or trapping mechanisms, as explained below.
upon a default of the contractor; (2) upon non-renewal of the LC before maturity; or (3) if the LC provider
is downgraded below a certain threshold and the LC is not replaced within a suitable time period. The
LC should be issued by an institution of acceptable credit quality (i.e., notably higher than the project debt
rating see the section below entitled "Credit Quality of Financing Parties").
be able to be drawn on demand. Origin generally expects a component of liquidity in every project financing.
For low to moderate-complexity power, oil and gas, pipelines and infrastructure projects, Origin views an
LC or cash reserve of 5% of the construction price as providing one notch of uplift to the rating of the
construction phase. Some construction contracts may also trap progress payments to prefund expected
liquidated damages if the project falls behind schedule and is no longer likely to achieve substantial
completion by the target date. Triggers are typically linked to missed milestones or the accumulation of
delays exceeding a prescribed threshold. As the trapping mechanism does not bring additional resources to the
project (it only reserves payments otherwise made to the contractor).
whereby the surety commits to completing the work upon a default of the contractor on its obligations.
The surety will typically have several options: perform a defaulting contractor's obligations, re-tender the
obligations to another contractor or pay out the maximum amount specified under the performance bond
to ProjectCo. For low- to moderate-complexity projects, the presence of a performance bond from an
appropriately rated surety will typically result in better assessement by Origin, reflecting the financial
backing, expertise and project management capabilities contributed by the surety company.