14 November 2019

COD Wars: Defining a project’s commercial operation date

BY: Steven Horne | IN: Articles


Measuring delay under DSU policies can be full of difficulties. Away from dealing with conflicting contractual priorities, legal precedents that may not be applicable to a DSU policy (float, concurrency etc) and discussing appropriate delay analysis methodologies; there is one issue above all others that really can be the proverbial ‘thorn in the side’ of avoiding disputes.

What does Commercial Operation really mean?

Very few policies distinctly define the point at which a business commences Commercial Operations, yet it is almost always the point from which delay is to be measured.

Not having a common understanding of the point at which a project achieves Commercial Operation can create significant differences between each party’s position and unnecessarily lead to contentious negotiations. This is particularly relevant for Power and Energy projects where a ramp-up period or phased/staggered handover of the plant precedes the final handover milestone.

So, what is Commercial Operation? Is it the start of a ramp-up period when product/generation first commences? Is it an arbitrary point during ramp-up, say 25%, 50% or 75%?

Is it the point at which the plant first achieves 100% operation or is it the final handover of the plant from Contractor to Owner after the performance test?

Each of the above will lead to different delay periods and consequently loss figures under the DSU policy. Further, what is the correct point to ensure indemnification of the “actual loss sustained”?

If, let’s say, Commercial Operation is deemed to have been achieved after the completion of the ramp-up period, at 100% production, indemnification under the DSU policy can only commence at the date for completion of the ramp-up period ‘but for the damage’ (aka the Scheduled Commercial Operation Date or SCOD).

Agreeing a joint understanding of commercial operation should be one of the adjustment team’s first tasks on any DSU claim.

Even where it is agreed that the entire commissioning schedule has been delayed as a result of damage, the insured will not receive indemnification for any ‘losses’ to the left of the SCOD (as the oversimplified diagram below shows, with the red shading area representing the production not being indemnified), with no indication from the policy as to whether this is what was actually intended.

Subjectively defining Commercial Operation creates very protracted negotiations which can, and do, take years to resolve. Inserting a brief definition as to what Commercial Operation actually means, on a project specific basis, would solve this wholly avoidable issue and where not defined, agreeing a joint understanding of Commercial Operation should be one of the adjustment team’s first tasks on any DSU claim.