Understanding and managing legal risk in infrastructure procurement means understanding the life cycle of a project and the procurement model which best fits the desired outcomes; from initial project planning and structuring through to decommissioning and remediation – from ‘hands off’ lump sum design and construct arrangements to closely managed early contractor involvement and alliance based arrangements.
Overlay this complex set of circumstances with the needs and wants of different project stakeholders and the legal risk profile can inhibit effective project management and become a breeding ground for complex and costly disputes.
Using different contractual and commercial levers is significant to:
- achieving a well-balanced project profile;
- driving and managing risk allocation; and
- measuring, managing and reporting on risk and performance.
Priorities for which suitable contractual mechanisms should be considered include:
- preferred payment models and their implications for funding and financing arrangements;
- using owner securities/retentions to underwrite performance and as a defence mechanism against overreaching security of payment claims;
- effective risk sharing and allocation of risk pools;
- allowing for and addressing unanticipated and unknown risks such as regulatory approvals, design changes and site conditions;
- costing through life support and maintenance; and
- flexible dispute management and resolution.
Fixed price contracts suit a fixed scope of work where the design is fully documented and the risks known and understood. A strategy of identifying and sharing risks may be more appropriate where a project involves complexity and significant levels of risk and unknowns.
Selecting a delivery model – managing contractor?
Management and relationship contracting in an operational environment with special and complex risks can be effective. Managing contractor contracts suit principals seeking a flexible operational regime to manage difficult projects in a cost-effective way and would suit ‘bundling’ capital works from a recurring annual capital works program.
Significant risks for the principal are the complexity of the arrangement and the possibility of over-pricing. Pricing issues can be managed through an effective and controlled tender process.
Good faith negotiations are critical to agreeing the fundamentals of cost and program for individual packages of selected work. Final agreement is at the principal's absolute discretion and the principal may, if it wishes, re-tender any component of the work (with or without obtaining tenders). Benefits of competition with regard to pricing can be achieved by open book tendering.
The builder is required to assume full risk and responsibility for design and construction of the selected works carried out by approved subcontractors (including design consultants) and must indemnify the principal against claims by subcontractors.
Alliance arrangements vs traditional prime contractor engagement
A pure alliance procurement model is best suited to the early stages of complex infrastructure procurement, such as in defence, oil and gas projects and major transport infrastructure. The alliance model is effective for the early phases of ‘whole of life’ procurement. An alliance (established through a selective competitive process) can produce and develop a design and design requirements to a level of certainty suitable for an open competitive tender to prime contractors.
Procurement by early engagement of a prime contractor carries significant unmanageable risks for the prime contractor which means those risks are, in the end, borne by the principal. Unmanageable risks include matching costing projections with funding requirements, IP licensing and design; and in government projects sovereign risk and government to government issues arising from procurement policies/export controls. The principal risks being ‘locked in’ to a prime contractor with subsequent significant issues in managing both IP and the whole of life support cycle for the procurement. Other risks, such as cost and scheduling result from the uncertainties present at the early stages of procurement. Contractors tend to ‘shut down’ information flows once a contract is awarded in order to protect and maximise profit margins.
The current debate about whether lost opportunity cost resulting from early termination of government funded infrastructure projects should be recoverable by a contractor adds risk and therefore more cost to infrastructure projects. A more balanced approach might be to use alliance arrangements to better scope government projects before committing to significant resources and costs, and suffering the consequences if the project is derailed at an early stage.
In an alliance arrangement budgets and schedules are project management tools used to develop a more certain cost profile and programs to a stage where the procurement can be let on a competitive basis. Once the alliance has scoped the procurement, it can competitively tender the procurement with specified contractual pricing and scheduling. The cost and schedule are then contractually attainable and legally enforceable.
Whilst painful on the way through, better outcomes may be realised at an early stage meaning better risk management as projects progress to through life support. The prime contractor model generally shifts the pain to the end of the project which encourages massive financial settlements.
There are no reported legal challenges to alliance arrangements. ‘No disputes’ clauses are legally open to challenge as they oust the jurisdiction of the courts and are therefore against the public interest. However, alliance contracts have not been challenged in the courts. This may be due to participants supporting the alliance principles of information sharing and collaboration and investing in agreed outcomes.
Barriers to Improvement
Achievement of the key outcomes of time, cost, quality and functionality are subject to the nature and extent of barriers to successful implementation including:
- procurement strategies which focus heavily on achieving the lowest price;
- poor quality briefing and specifications with inadequate focus on user needs and functionality;
- limited awareness and understanding of design and planning imperatives and "late" design changes;
- lack of effective project management.
Possible solutions to performance improvements
Ways of addressing issues which affect the level of project delivery performance include:
- greater consideration of the needs of the end users;
- enhanced collaboration and co-operation in the early phases of procurement;
- better integration between consultants and contractors;
- better integration (and increased transparency) of the design and construction phases;
- longer term relationships;
- more accurate whole of life costing;
- flexible and non-binding dispute resolution processes which require facilitated senior level negotiations at an early stage of disputes.
The tension between the risk/price analysis and the risk/reward equation demonstrates the importance of rationality in project delivery. Increased risk will not always lead to increased price; ideally parties will adopt an approach that is consistent with the level of risk they and the project can readily embrace and manage.