BLM23070 - Defining long funding leases: commencement and transition: pre-existing heads of agreement: under construction

FA06/SCH8/PARA24 provides that an asset is ‘under construction’ at any time in the period which begins when construction of the asset begins and ends when construction is completed.

The term ‘construction’ is not defined and so takes its ordinary meaning, that is, in essence, ‘to put together the parts of’ or ‘to make’. Therefore the concept of ‘under construction’ does not extend to cover the design phase.

An asset consisting of two or more component parts it is to be taken to be under construction at any time after the start of construction of any component part that was identified as a component part before construction of that part began (paragraph 24 (3)). This means that the start of construction of a component destined for a particular asset might constitute construction of the asset although the start of construction of a component that could fit into a number of different assets would not.

It follows that the construction of a large component (such as the wing of an aircraft) is more likely to be viewed as the start of construction of ‘the asset’, than is the construction of a minor component such as seats or instrumentation. The facts should be examined to see whether in a particular case the asset was under construction or not.

In constructing a ship, for example, it may be necessary to begin construction of the propulsion system well before beginning to construct the hull. This may be because it takes a long time to construct the propulsion system, and it has to be ready to install in the hull by a particular date.

As long as the propulsion system is identified with a particular ship, the start of the construction of the propulsion system is the start of construction of the ship. This assumes, of course, that the propulsion system is the first component to be constructed. This contrasts with the situation where construction of (say) a marine turbine is started which is suitable for use in a number of vessels and has not been designated for use in a particular ship.