Complex infrastructure projects in the UK are generally procured using contracts based on standard forms, rather than by using entirely bespoke agreements. Given the technical and highly complex nature of these projects, and often the equally complex funding and payment structures, heavy amendment to these standard forms is not unusual.
For complex infrastructure projects in the UK arguably the most common standard form contracts are NEC3 and FIDIC (although IChemE is also often used for energy and other process plant projects).
Getting the procurement strategy right
The choice of procurement strategy is dictated by a number of factors: developer preference and sector trends are a major driver, as is the requirement to make a project “fundable”. Starting with the right contract form is also key in helping the parties accurately and efficiently capture their commercial agreement.
FIDIC produced its “new” suite of contracts in 1999 (and has subsequent published a number of new or revised contract forms since then). Originally seen as the contract of choice for international construction projects, FIDIC has become increasingly popular in the UK for complex energy projects, even where there is no international involvement. It is not difficult to see why:
the FIDIC contracts contain well-developed testing and commissioning regimes, giving the parties a good framework for specifying and measuring the performance of the works and penalising/rewarding performance;
- the FIDIC contracts are clearly drafted, easy to read and are broadly speaking employer-friendly, making them attractive to funders;
- European and international contractors (who will often be involved in significant elements of these projects) are used to operating under FIDIC contracts. Using FIDIC can, therefore, save significant time in negotiation.
- FIDIC terms (with appropriate amendments) are well suited to the multi-contracting procurement strategies that we are increasingly seeing on these types of project.
- FIDIC drafting is pervasive across the energy sector and a large number of bespoke contracts used by contractors and employers have their roots in FIDIC standard forms or borrow FIDIC concepts.
NEC3 has been gaining significant traction over the last few years, particularly in the realm of public sector infrastructure projects where the forms have received government endorsement. This has seen NEC3 become the contract of choice on landmark projects including the London Olympics, Crossrail and works commissioned by the Nuclear Decommissioning Authority.
The approach of NEC3 is significantly different to most other standard forms of contract, not least FIDIC. It endorses a collaborative approach and has detailed and prescriptive project management mechanisms to deal with project risks. The intention, to anticipate and manage risks as and when they arise, is laudable but it requires considerable buy in from both parties and a well-resourced project manager with experience of NEC3 to work effectively. If these are in place then the benefits of NEC3 include:
- Encouraging the appointment, and active participation, of an experienced project manager for the whole of the works.
- An early warning mechanism which encourages the parties to share information sufficiently early to allow them to agree effective solutions during the works.
- Deemed acceptance or loss of opportunity to make claims if certain procedural steps are not followed, encouraging both parties to adhere to the management protocols.
However, the administrative burden of the contract, from commencement date to completion, should not be underestimated. The unique language of NEC3 and its unconventional structure also makes it less attractive for projects that are likely to need significant input from contractors from outside the UK.
Nuclear – FIDIC vs NEC3
The popularity of NEC3 for major projects in the nuclear sector, which owed much to the support given by the Nuclear Decommissioning Authority, may be on the wane with the advent of UK’s nuclear new build programme. Whilst NEC3 will continue to be used for many elements of such extensive construction projects, we are seeing FIDIC based contracts selected for a growing proportion of nuclear works packages, and in particular those located on the nuclear site itself. The FIDIC terms will no doubt be mirrored in sub-contracts throughout the supply chain.
The domestic use of FIDIC is likely to increase in the coming years as the UK continues to increase investment in the next wave of infrastructure. This may start to eat into the share of the market established by NEC3 over the last decade or so, with the battle ground likely to focus on energy infrastructure projects. Both contracts are well suited for use on both conventional and non-conventional energy projects but which is most appropriate will need to be decided on a project by project basis. The domestic supply chain should become familiar with both to be able to make the most of imminent opportunities in the major projects and infrastructure sector.