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European Pharmaceutical Contractor

Clean Room, Clean Contracts

One of the distinguishing features of the life sciences industry, in contrast to the wider process sector, is the robust, complex and rapidly evolving regulatory landscape to which it is subject.

What merits particular attention from a regulatory point-of-view is the concept of Good Manufacturing Practice (GMP). Directly connected with this – in addition to the more general considerations around product safety – are requirements concerning anti-contamination procedures and controls, and accordingly, the reliance that these place on cleanroom technologies.

The interface between cleanroom technologies, and the primary and secondary process infrastructure that they house, creates particular issues which must be taken into account when formulating contractual structures. It is only through careful planning that developers and investors in the life sciences industry may appropriately and effectively mitigate their exposure to time and cost overrun, plus the losses and liabilities associated with regulatory non-compliance and plant underperformance.

Good Manufacturing Practice

Failure to achieve and demonstrate compliance with the relevant GMPs will give rise to liabilities beyond those merely connected to construction cost overrun and delay. A rejected licence application or intervention by regulators against an existing licence can have a catastrophic effect on developers, impacting revenue and profit lines, with potential adverse media coverage, brand damage, market share loss and considerable liability costs.

Compliance must, therefore, be attentively managed through the procurement of new R&D or manufacturing capacity. Of course, GMPs represent minimum standards only; most life sciences companies seek to adhere to GMPs, but will also look to overreach these requirements with their own best practice standards.

Cleanroom Technology

The increase in regulatory interest in life sciences around the world is fuelling rapid growth in the cleanroom technology market. Projections suggest an expansion in the global market of 5.2% per annum, with a forecasted value of approximately $4.29 billion by 2020. This growth is also being driven by increased demand for sterilised pharmaceutical formulation and the development of new biologics (1).

A cleanroom is an area of the facility in which the concentration of airborne particles is prevented from reaching specific limits. The level of control will be dependent on the particular standards required. These specifications must be clearly defined from the outset to avoid quality failure, developer disappointment and disputes with parties within the supply chain.

Perceived risks for developers include:
  • Different stages procured by different suppliers can give rise to a ‘hand-off risk’. This refers to defects at one stage affecting production ‘handed off’ into all subsequent stages
  • Cleanroom technologies at every phase of the process
  • The process plant facility and the ancillary plant (waste water treatment and electricity substation, for example)
Where such risks are not allocated to, or absorbed by, the supply chain, they will tend to rest with the developer. Correspondingly, this will make the developer vulnerable to time and cost claims from the supply chain, should pertinent interface risks materialise.

It is surprising that few contractors operating in the sector offer full design and construction capabilities for both process and cleanroom technologies. This would be a big selling point for any contractor and likely lead to price advantages over competitors (1). Instead, a contractor offering a turnkey solution without full in-house capability is presumed to be a more expensive proposition, given that it will tend to price the risk it assumes through third-party subcontracts for components outside of its own competencies.

This attitude has tended to move the life sciences industry more towards a multi-contracting approach, since any single contractor may be unable or reluctant to assume full integration risk, or the different process technologies – particularly if they are novel – and cleanroom technology.

Contractual Components

Multi-Contracting
The multi-contracting model sees the developer identifying the individual works and supply packages, procuring the contractors and suppliers, entering into contracts with these parties, while also managing the interface – including design, running of programmes and integration strategies – between different packages itself, and striving to achieve the key project targets planned for.

There are number of reasons why the developer may choose a multicontracting solution. Given the high degree of interface risk, there may be a more limited number of contractors able (and willing) to assume full risk in delivery of the project on time, on budget, and to a required technical and performance specification. Contractors prepared to offer this total package may in return include significant risk contingencies in the pricing for their works. This may impact on the developer’s returns and even the economic viability of the project. In contrast, the multi-contracting option is seen to offer considerable cost benefits.

Where a single contractor solution is selected, the contractor will typically agree to fix its price for project delivery based on known developer requirements at the point of signature, and there will be little scope for influencing design direction or procurement choice going forward. A multi-contracting approach tends to provide the developer with a degree of flexibility, both in design development and in the procurement of works and supply packages.

Single Contractor EPC
The multi-contracting route can be contrasted with a single contractor turnkey engineering procurement and construction (EPC) contract.

While the multi-contracting solution may give rise to capital cost savings when compared with a single contractor EPC solution, it is likely that greater amounts of risk are retained, and thereby need to be managed by the developer. Full risk wrap seen under an EPC solution can be viewed as its decisive advantage. If a multi-contracting solution is selected, the availability of an experienced and well-resourced internal developer team or reputable project management consultancy to manage the procurement and the delivery of the works will go some way to assisting the developer in managing the risks attached to this type of approach.

EPC Management

Experience shows that the ability to manage retained risks can be enhanced significantly through the use of an engineer, procure and construction management (EPCM) contractor. The benefits of an EPCM solution can be observed through the realisation of plant infrastructure delivery across a number of sectors – particularly for developers operating on a multi-contracting basis.

An EPCM contract is essentially a professional services appointment; it is important to recognise that it is not a contract for the performance of construction works.

Although it is often confused with EPC, the contract solutions are very different in terms of the nature of the obligations undertaken and the risk allocation assumed by the respective contractors. In contrast to the EPC model, based on risk transfer and more limited client/contractor interaction, the EPCM ethos endorses collaboration, giving less consideration to risks. The EPCM contractor will not assume liability for project delivery risk and, importantly, the achievement of key project targets. The EPCM contractor will, however, be responsible for sharing the developer’s workload, but the levels of liability assumed by the contractor for failing in the performance of its obligations will generally be more limited (10-20% of the EPCM services fee). If there is significant failure in the achievement of key project targets, the buck will ultimately stop with the developer.

While reputation in securing project delivery will be an important factor for the EPCM contractor, the developer will need to consider and implement contractual mechanics to appropriately incentivise the EPCM contractor to effectively and proactively oversee the project’s goals.

The approach typically relies on an incentive structure which provides positive – and sometimes negative – incentives for the achievement of key project aims and other associated targets (for example, health and safety performance, and meeting the EPCM budgeted price).

Appropriate due diligence will need to be undertaken by the developer team to ascertain whether or not the established objectives are realistically attainable in view of the project’s context and the relevant incentive payments/penalties proposed.

Managing Retained Risk

Although the assistance and support of a highly experienced EPCM contractor is extremely valuable, it cannot provide an ultimate backstop for failure to achieve key project targets.

Since these risks may ultimately rest with the developer, it is necessary for this group to consider and plan for how these risks will be mitigated. They should also look to consider the following as preparation for risk avoidance:
  • Hands-on management and support by the developer team to assist and direct the EPCM contractor appropriately
  • Ensure the terms of the works and supply contracts are robust with all typical ‘on-market’ protections
  • The use of interface management contracts, which provide a contractual basis for cooperation and risk allocation between supply chain members
  • Insurance
  • Enhanced testing of process and product at key interfaces to mitigate hand-off risk and its consequences
  • Access to cash contingencies
Plant Testing

Given that process plant infrastructure employed in the life sciences industry will typically be performance-based and compliance of the facility with safety and regulatory requirements will be an absolute requirement, very close attention needs to be paid to the terms on which the works – or parts thereof – are tested both prior to and following handover of the facility.

The satisfaction of relevant regulatory requirements and the securing of a licence to manufacture should ideally be a condition of handover of the plant or section. Works delivery on a multi-contracting basis may present challenges in this regard, as no one contractor has the capacity to satisfy the relevant requirements for licensing alone.

A viable alternative, therefore, comes in the form of a multi-party interface agreement; the implementation of a fully integrated testing regime across all relevant works packages.

It is important to recognise that in making regulatory compliance for full commercial operation a condition of handover, the risk of delay to commercial operations is transferred to the contractors, typically through payment of delay damages. These damages will represent important leverage over the contractor, and will incentivise them to do all that is necessary to remediate the relevant failures promptly, in order to mitigate exposure.

While indefinite retention of security would not be appropriate in respect of the ongoing validation process, it makes sense for security, in such circumstances, to be held for a fixed period post-handover of the works, until the first round of regulatory inspections have been completed.

Outside of the absolute requirements arising from regulation, the developer will also want to assess the plants effectiveness against key performance indicators post-handover. Since contractors may seek to limit their performance damages exposure to a capped amount, in order to guarantee adequate compensation in the event of liquidated damages, the developer should either look to:
  • Agree minimum performance levels that must be achieved before the contractor can be considered to have discharged their responsibilities
  • Secure a position where the post-handover performance tests are performed conditionally in an abridged format to ensure that the developer will have a high level of confidence acceptable to the employer or, in the case of underperformance, can be compensated in full by the liquidated damages regime (notwithstanding any agreed cap on liability)
Regulatory compliance and the management of time and cost overrun risk should be high on the agenda for developers planning the design and construction of new R&D and/ or manufacturing facilities in the life sciences industry.

If a multi-contracting solution is to be adopted, planning the management of retained developer risks will be of paramount importance. There is, however, no ‘one-size-fits-all’ solution and each project must be assessed on its particular facts. A lack of attention in this regard can often mean the difference between delivery of process plant infrastructure on time, on budget and to a required technical specification, in compliance with regulatory requirements and expensive project failure.

Reference


1. Challenger J, Review of past and future design challenges, Cleanroom Technology, March 2015

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Matt Hardwick is an experienced Banking Partner at global legal practice, Norton Rose Fulbright. He has significant experience in construction and financing of major process plant projects, with a particular specialism in the pharmaceutical and life sciences industry. Matt is also a member of the Contracts Committee of the Institution of Chemical Engineers (IChemE), which is responsible for the preparation and updating of the IChemE suite of contracts for process plant projects.

Marcella Stokell is an Energy and Infrastructure Lawyer at Norton Rose Fulbright, where she focuses on transactional and advisory construction and major projects work in a wide range of industry sectors and jurisdictions. Her experience involves advising lenders, project sponsors and contractors in the development of large-scale infrastructure, mining, energy and healthcare projects.
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Marcella Stokell
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