Construction and Completion Risk
Definition
Construction and completion risk is the risk that a project is not finished on time, on budget or to the performance it was designed for. It covers cost overruns, schedule delays, equipment and contractor failures, and interconnection or permitting holdups. Investors are protected, to the extent they are, by contracts that move these risks to contractors, suppliers or sponsors, and by reserves and contingencies built into the budget.
Why it matters
Most of the capital in an energy project is spent before it earns anything. Delays push back revenue while interest accrues, and overruns can wipe out equity returns. Investors in projects under construction should identify who bears each risk, how large the caps and contingencies are, and whether the parties standing behind the guarantees can pay.
Common misconceptions
- •A fixed-price EPC contract does not cover every overrun; change orders, owner-caused delays and excluded scope remain.
- •Liquidated damages are capped; they are not insurance for all losses.
- •A sponsor guarantee is only as strong as the sponsor.
- •The label is only a starting point. Investor outcomes usually depend on the governing documents, cash-flow priority, valuation policy, disclosure quality, and manager discretion surrounding the term, not just the shorthand definition used in marketing materials.
Technical details
Risk-transfer tools
Fixed-price, date-certain EPC contract.
Schedule and performance liquidated damages.
Letters of credit, payment and performance bonds.
Equipment warranties.
Contingency budget and sponsor completion guarantees.
Independent engineer review and certification.
Worked example (illustrative): a damages cap
Ameresco's contract charges up to 0.4% of the EPC price per day for later delays, with total schedule damages capped at 10% of the EPC price (rates for the first band are redacted).
On a $100 million contract, 30 days in the 0.4% band would be $12 million, but the cap limits it to $10 million.
Any revenue lost beyond that falls on the owner and its investors.
How investors apply the term
Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.
The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.
Frequently asked questions
- What protects investors if a project is delayed or over budget?
- A stack of contract terms. SCE's battery contract with Ameresco sets a turnkey 'EPC Price' as 'the maximum sum payable,' schedule liquidated damages for delay, performance guarantees, and a letter of credit or payment and performance bonds. Lenders add their own layer: Pelican's Jaw's financing requires liquidated damages and warranty payments received before term conversion to be deposited in a lender-controlled Liquidated Damages Account.
- Are those protections complete?
- No. Damages are capped and may not match the lost revenue, and they depend on the contractor's ability to pay. Ameresco's schedule damages aggregate to at most 10% of the EPC price. SB Energy discloses that it is subject to completion and performance guarantees, 'certain of which are recourse to the parent company.'
- How do development funds describe the risk?
- Plainly. Shasta Power Fund II warns that delays, 'cost overruns, unsatisfactory completion of construction, revenue shortfalls, shortfalls of anticipated capacity factor, or adverse weather' could result in 'the total loss of the Capital Contributions of Investors.'
- Do budgets include a cushion?
- Usually a contingency. SB Energy says its capital estimates include 'contingencies for scope refinements, schedule changes and other reasonably foreseeable cost increases,' but that its backlog capex figures do not reflect 'cost overruns, timing delays, customer defaults or other costs.'