Page 258 - Sustainable On-Site CHP Systems Design, Construction, and Operations

CHP Construction 231

levels required. This is typically done by specifying detailed testing and commissioning
procedures. Among the items that should be addressed are the protocol for tests (which
the owner should have the right to approve), acceptable tolerances in the test results,
the duration of the tests and the remedies available in the event the test is not success-
fully completed. Commissioning should be by an independent third party hired by the
owner. Hiring the commissioning agent as early as possible during the CHP develop-
ment process helps reduce project risks.
Secondly, owners should recognize that the performance guarantee will be no
broader than that specified in the contract. For example, an issue often arises as to
whether the contractor will guarantee the performance of systems and subsystems in
the facility, since a system may not be working properly (e.g., running in excess of
capacity and subject to premature burnout) with the overall CHP plant producing out-
put as required. Unless specifically addressed there will likely be no guarantee for a
malfunctioning system other than typical warranty requirements.
A third risk is the level of guarantee versus cost of the guarantee. Contractors will charge
a price for the guarantee being requested by the owner. Therefore, an owner should estab-
lish guarantees that are consistent with the overall operational objectives of the plant.
One method to achieve objectives is to use a “buy-down.” Buy-down amounts are
similar to traditional liquidated damages in that they attempt to compensate the owner
for failures by the contractor to achieve output performance guarantees. In the event
that performance guarantees are not met, by paying the buy-down, the contractor is
typically relieved of further responsibility for schedule liquidated damages and for
continuing efforts to successfully complete the performance tests. Owners should find
this to be an acceptable alternative if the amount of the buy-down bears a reasonable
relation to the diminished capacity.

Performance Bonds and Guarantees
One of the risks that an owner-operator faces is with the inability of the contractor to meet
its obligations under the contract. A way to deal with this risk is to require that the con-
tractor furnish payment or performance bonds. Performance bonds secure satisfactory per-
formance of the contract and completion of the construction project. The surety is bound to
the owner, to the extent of the amount of the bond, for the contractor’s obligation to finish
the project on time and in a workmanlike manner. Payment bonds are written for the ben-
efit of subcontractors, and ensure that the subcontractors will be paid for their services on
the project. This is especially helpful in states with liberal mechanic’s lien statutes.
Some owner-operators are willing to waive bonds in favor of a guarantee from a
third-party that the contract will be completed in accordance with its terms. From an
owner-operator perspective, this guarantee should be sufficient to protect it from the
financial consequences of a contractor default.

Effective Project Management
Many risks that an owner faces can be avoided if those responsible for contract admin-
istration on behalf of the owner follow some basic rules of sound project management.
Scheduling
The owner-operator of a CHP plant should have a strong understanding of the
scheduling methods that will be used by the contractor to undertake the program for