lev-os Modeling Construction Period Risk
When To Use
- Modeling construction-phase cash flows and risk exposure for infrastructure or energy projects
- Evaluating EPC/turnkey contract terms for bankability and risk allocation
- Stress-testing project timelines against delay and cost overrun scenarios
- Assessing completion guarantee structures (parent guarantees, surety bonds, LC-backed facilities)
- Underwriting construction-period debt sizing and draw schedules
- Reviewing PPP/concession projects where construction risk drives financial close conditions
Inputs To Gather
- EPC contract — fixed-price vs. cost-plus structure, GMP caps, scope of work, change order provisions, LD schedule (delay LDs and performance LDs), force majeure definition, termination triggers
- Construction budget — total EPC price, owner's costs, development fees, contingency allocation (typically 5-15% for greenfield), IDC assumptions
- Construction schedule — milestone timeline, critical path items, long-lead equipment delivery dates, commissioning/testing period, target COD
- Funding plan — equity/debt split, draw schedule, construction facility terms (commitment fees, margin during construction), equity contribution agreement timing
- Contractor profile — EPC contractor credit rating, track record on comparable projects, bonding capacity, subcontractor reliance
- Insurance program — builder's risk, delay-in-startup (DSU/ALOP) coverage, deductibles, sub-limits
- Site/permitting status — land acquisition status, environmental permits, interconnection agreements, offtake contract conditions precedent [VERIFY: jurisdiction-specific permitting requirements]
Workflow
Map the EPC risk allocation — Extract key risk provisions from the EPC contract: price structure (lump-sum turnkey vs. open-book), LD caps (typical range: 15-20% of contract price for aggregate LDs), warranty scope, defect liability period, and carve-outs from contractor liability (force majeure, owner-caused delays, change-in-law)
Build the construction cost model — Structure total project cost as: EPC price + owner's costs + development fees + financing costs (IDC + fees) + contingency. Model contingency drawdown assumptions. Separate hard costs from soft costs. Flag any cost items outside the EPC wrap [VERIFY: treatment of sales tax/VAT on construction costs by jurisdiction]
Model the draw schedule — Create monthly or quarterly construction draw curves. Standard S-curve or milestone-based draws tied to EPC payment schedule. Layer in equity-first vs. pro-rata vs. debt-first contribution mechanics. Calculate IDC based on drawn balances and construction facility pricing
Run delay scenarios — Model 3-6-12 month delay cases:
- Revenue impact: lost operating cash flow during delay period
- Cost impact: additional IDC, extended owner's costs, standby charges
- LD recovery: delay LD accrual ($/day) capped at contract maximum
- Funding gap: does contingency cover the shortfall? Is there a cost overrun facility?
- Debt service: impact on first principal payment date, tail ratios, sculpted repayment profile
Run cost overrun scenarios — Model 10-20-30% cost overrun cases:
- Within EPC wrap: contractor absorbs (verify LD and liability caps)
- Outside EPC wrap: owner's cost escalation, scope changes, unforeseen conditions
- Funding response: contingency drawdown → cost overrun facility → equity cure → lender step-in rights
- Assess whether completion guarantee or sponsor support agreement covers the gap
Evaluate completion guarantee structures — Assess the enforceability and credit backing of:
- Sponsor completion guarantees (cost and date certain)
- Surety bonds / performance bonds (typically 10-30% of EPC price)
- Standby letters of credit
- Contingent equity commitments
- DSU insurance as partial backstop for delay risk
Stress-test debt metrics during construction — Calculate construction-period covenant compliance: maximum loan-to-cost ratio, minimum equity contribution percentage, conditions precedent to each draw (independent engineer certification, budget-to-complete test). Model whether delay/overrun scenarios trigger draw-stop events or covenant breaches
Output
- Construction risk matrix — tabular mapping of risk category → contractual allocation → residual exposure → mitigation mechanism
- Base case construction budget and draw schedule — monthly/quarterly with IDC, contingency, and funding source breakdown
- Delay scenario dashboard — 3/6/12-month delay impact on total cost, funding gap, LD recovery, and debt metrics
- Cost overrun waterfall — sequential funding response (contingency → overrun facility → equity cure → guarantee call) with breakpoints
- Completion guarantee assessment — credit quality of guarantor, cap adequacy, trigger conditions, gap analysis
- Key risk flags — items requiring lender/investor attention (uncapped risks, thin contingency, weak contractor credit, permit gaps)
Quality Checks
- Verify EPC LD caps are correctly applied as % of contract price — not total project cost
- Confirm IDC calculation uses actual draw schedule timing, not a flat average
- Check that contingency is sized relative to identified risks, not just a blanket percentage
- Ensure delay scenarios capture cascading effects (IDC + lost revenue + extended owner's costs simultaneously)
- Validate that completion guarantee coverage matches or exceeds modeled worst-case funding gap
- Cross-check construction facility commitment amount against peak draw requirement plus headroom
- Confirm all cost and schedule assumptions are sourced (independent engineer report, EPC contract, or sponsor estimate) — mark unsourced items with [VERIFY]
- Flag any scenario where the project cannot reach financial completion under stress without additional uncommitted support