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That four-letter word: Risk and major projects

With a huge pipeline of major projects, which contractual routes will best help to manage risk?

The government has grand plans, all sorts of plans.

Just look, for example, at its visions for the Northern Powerhouse, the Midlands Engine and its industrial strategy.

It all sounds very ambitious. But where these visions require heavyweight construction projects, what contractual route might they follow?

It all depends (as lawyers say) on where you place the most important four-letter word in the construction industry: risk.

The project should be on time, on budget and up to specification, but there is a tension between those objectives and the parties need to address the risks involved in trying to achieve them. The contract arrangements depend on what they agree.

Which contractual route is best?

There is no magic contract solution, although the contract wordsmiths and the standard form factories keep on looking.

In the public sector there was, of course, the PFI model, with private consortia providing finance, design, build and operation of public projects, and the government or relevant organisation paying the bill in instalments over decades.

But following concerns, particularly about value for money and transparency, its successor PF2 emerged, with reforms including removal of soft services and the government becoming a minority co-investor.

In its search for costs savings the government also embarked on trials of three new construction procurement models: cost-led procurement; two-stage open book; and integrated project insurance.

Interestingly, in the trial at Dudley College, the integrated project insurance policy is said to cover costs overrun on a ‘no-blame’ basis and to include measures to minimise the risks of delay and cost increases.

“The project should be on time, on budget and up to specification but there is a tension between those objectives and the parties need to address the risks involved in trying to achieve them”

There are also plenty of contract options in the private sector. Design and build has the attraction of single-point responsibility but, according to the 2015 NBS survey, the traditional procurement route was more popular.

The Joint Contracts Tribunal does in fact have the Major Project Construction Contract for large-scale construction work, for the suitably experienced employer and contractor, with the latter taking more risk under its design-and-build model.

And rival NEC3 offers target cost ‘pain/gain’ contract options, with NEC4 and the new design, build and operate contract arriving in June.

All of that is not to mention offerings from others such as ACA, ICC and FIDIC, as well as customised contracts devised by ingenious lawyers.

What could possibly go wrong

Despite all the contract possibilities, there will always be issues that can spill over into disputes.

Top of the NBS survey list were the obvious suspects: extensions of time, closely followed by final account and variation valuations, loss and expense and defects and, at a distance, by payment issues.

And don’t forget another less obvious cause of problems: ‘optimism bias’, described by the Treasury’s Green Book supplementary guidance as “a demonstrated, systematic, tendency for project appraisers to be overly optimistic”.

The guidance explains how corrective adjustments to a project’s estimated costs, benefits and duration might be made, based on data from past or similar projects and adjusted for the project in hand. It also lists, for project appraisers to review, contributory factors leading to time and costs overruns.

And if there are disputes?

Litigation, usually in the Technology and Construction Court, or arbitration used to be the traditional options for construction disputes, but quick-fire adjudication is now the established usual – and often final – arena.

Not forgetting, of course, negotiation and mediation as less combative possibilities.

Whether the contracting parties need to resort to any of these depends, however, on just how successfully they manage to deal with that crucial four-letter ingredient.

Michael Regan is the senior partner in the construction and engineering group at Mayer Brown International

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