Contract structuring for battery storage projects: managing risks and addressing gaps in split-contract structures

The contractual structuring of battery storage projects is undergoing a transformation: whereas in the past a general contractor would often assume comprehensive responsibility for planning, supply and construction under a traditional EPC contract, current projects increasingly involve the division of services across multiple contracts.

This so-called “split-contract model” is gaining particular significance in large and technologically demanding projects. A key feature is the separation between a supply contract with the battery manufacturer and a separate balance-of-plant (BoP) contract, which covers the remaining components and the integration of the system.

This structure opens up economic and technical scope for flexibility, particularly in terms of procurement advantages and technical flexibility, but at the same time leads to increased legal complexity. In particular, responsibility for overall coordination shifts from the contractor to the client, who must take on a significantly more active role in managing and coordinating the various trades.

Functional division and its legal implications

The separation of the contracts initially leads to a functional differentiation of the performance obligations. The battery manufacturer is primarily responsible for delivering a storage system in accordance with the agreed technical parameters, whilst the BoP contractor is responsible for integrating the components into a fully functional overall system, including the electrical infrastructure, the control systems and the structural implementation.

This differentiation presents the challenge that the functionality of the overall project does not automatically follow from the proper fulfilment of the individual contracts. Instead, an overarching system context arises which is not necessarily fully covered by the individual contracts. Without appropriate coordination, there is a risk that services or responsibilities will ‘fall through the cracks’ between the contracts and ultimately cannot be clearly assigned to any party. So-called ‘catch-all’ provisions can be helpful here, but they are no substitute for a careful and coherent description of the interfaces.

Proper contract drafting should therefore ensure that the individual contracts are not viewed in isolation, but function as parts of an overarching overall system. In particular, this requires a precise definition of the overall performance owed, a clear allocation of interfaces, and a precise definition of the parties’ obligations to cooperate and coordinate.

Interfaces as a key area of risk

In split-contract structures, the interfaces between the individual technical components and the respective works and supply contracts represent one of the key risk areas. The functionality of a battery storage system relies heavily on the smooth interaction of all components and services.
Unlike a traditional turnkey EPC model, in which a general contractor is responsible for the entire system, responsibility in a split-contract structure is shared among several contractual partners. Should deviations in performance values or operational disruptions occur, the causes may lie in different areas, such as the battery system, the design of the inverters, or the integration and commissioning. In practice, this often leads to battery manufacturers and BoP contractors assigning responsibility to one another, whilst the client faces the challenge of clearly identifying the cause. Delays in troubleshooting and the associated downtime, along with an increased potential for conflict, are typical consequences.

This structural conflict cannot be completely avoided, but it can be reduced through careful contract drafting. It is crucial to provide as precise a description as possible of the interfaces in the technical specifications and annexes. In addition, coordinated testing and acceptance procedures should be provided for, which check not only individual components but specifically the interaction within the overall system.

Furthermore, it is essential to oblige both the battery manufacturer and the BoP contractor to cooperate in identifying the cause. To support this, the involvement of an independent expert may be provided for, whose assessment – depending on the contractual arrangements – enables a provisional or final binding determination of the cause. The clearer the contractual provisions are, the lower the risk that the client will be left in a ‘vacuum of responsibility’ between several contracting parties.

Warranty structures for performance and long-term functionality

The interface risks described become particularly apparent when assessing performance deviations. Battery supply contracts typically contain commitments regarding the remaining usable capacity after a certain number of years or cycles, the maximum degradation rate, and efficiency metrics or availability under defined operating conditions.

The challenge lies in the fact that these warranties regularly relate to the battery components, whilst actual system performance depends on other factors, in particular integration, the design of the remaining components and operational management. Accordingly, the warranties are often linked to detailed operating parameters, such as temperature ranges, cycle profiles or specifications regarding state-of-charge management. Failure to comply with these can result in the loss of warranty cover.

In a multi-contract structure, it is therefore essential to ensure that the parties responsible for integration and operation are aware of the battery manufacturer’s warranty conditions, take them into account and, in the event of deviations, consult with the battery manufacturer at an early stage. Otherwise, there is a risk that warranty claims cannot be enforced in the event of a dispute.

Furthermore, economically relevant targets are regularly defined at system level, such as overall availability, whilst the contractual warranties remain fragmented. In the event of a breakdown, the question then arises as to whether a deviation is attributable to a breach of the battery manufacturer’s warranty, to integration defects or to operational management.

To avoid these inconsistencies, the warranty systems of the individual contracts should be coordinated. This applies in particular to the establishment of procedures for performance verification, the definition of uniform data and measurement standards, and clear rules governing cooperation between the parties in the event of deviations. 

Risk distribution across project phases

The division into multiple contracts also affects the temporal distribution of risks. Unlike in the EPC model, split-contract structures regularly give rise to transitional phases in which the allocation of risk can lead to disputes in the absence of clear contractual provisions.

This is particularly evident after the batteries have been delivered, when they have been delivered to the construction site but have not yet been installed. At this stage, the question arises as to who bears the risk of loss or damage, who is responsible for storage, and who ensures insurance cover. Similar uncertainties can also arise during the installation and commissioning phase, when delays on the part of one contractor affect other trades.

Against this background, it is necessary to clearly regulate the transfer of risk for the individual components and to integrate this with provisions on transport, storage and insurance. Similarly, schedules and milestones should be designed consistently across all contracts to avoid conflicting requirements. Finally, provisions regarding delay must also be drafted in such a way that the client is not, as far as possible, confronted with unhedged interim risks. 

The following should be noted regarding typical clauses on limitation of liability and exclusion of liability: Whilst in turnkey projects, for example, damage to the overall work caused by a defect is to be classified as direct damage and is therefore generally not covered by the exclusion of liability, the situation must be assessed differently in split-contract arrangements. In such cases, damage to one work caused by a defect in another work may be regarded as consequential damage (which is often excluded by contract) – this must be borne in mind when drafting liability clauses in order to avoid unintended gaps in liability on the part of the client. 

Increased responsibility of the client

It is also important that the client is required to play an active role in project management and to resolve existing interface conflicts in order to ensure the project’s success. This can be achieved either through the client’s own in-house expertise or by engaging technical consultants (Owner’s Engineers), whose role is particularly significant where investors or funds act as clients and do not have their own project and asset management unit. When engaging an Owner’s Engineer, the relevant contract must also be tailored to the specific project and the chosen structure, so that roles and responsibilities are clearly and unambiguously defined.

Dispute resolution in multi-party arrangements

The involvement of multiple contracting parties is inevitably reflected in the dispute resolution framework. Different jurisdictions or arbitration rules in the individual contracts can lead to parallel proceedings, thereby increasing the risk of divergent findings of fact and conflicting decisions. Particularly in the case of interface conflicts, it is hardly practicable from a project perspective to resolve these issues in separate forums.

It is therefore particularly important in split-contract structures to harmonise the dispute resolution mechanisms across all project contracts, for example through standardised arbitration clauses with a coordinated place of arbitration, a single language of proceedings, and provisions for the inclusion of multi-party and multi-contract scenarios, as well as for the consolidation of proceedings, in order to create a platform in the event of a dispute where all relevant parties are involved and a consistent, project-wide decision can be reached.

Concluding Remarks

The use of split-contract structures in battery storage projects opens up opportunities for project design and procurement advantages, as supply chains are diversified, but is accompanied by an increase in legal complexity. The absence of a centrally responsible main contractor means that coordination, risk allocation and dispute resolution must be more rigorously defined in the contracts.

A robust contractual structure is characterised by the fact that it does not view the individual contracts in isolation, but rather as an interlinked system. This requires careful coordination of the scope of work, clear regulation of interfaces, consistent structuring of warranty and guarantee claims, and a harmonised dispute resolution mechanism ( ). At the same time, increased project management by the client or the owner’s engineer is required. Such an integrated approach allows risks to be effectively managed whilst simultaneously leveraging the benefits of the split-contract structure.