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HS2 contracts: Legal risks and considerations

High Speed 2’s major construction procurement begins in earnest this month, but what should contractors consider from a legal standpoint when bidding for work?

This month, High Speed 2 will begin the tender process for £7bn-worth of construction projects.

The bulk of this work will involve creating and improving tunnels and viaducts for the new high-speed rail link.

The prequalification process will involve seven contracts worth between £700,000 and £1.1bn each.

Work is expected to start in 2017, with a targeted completion date of 2026.

This has raised eyebrows.

As the budget has increased, there remains fierce opposition and several questions as to the commercial viability and necessity of the project.

Furthermore, Royal Assent for the main piece of legislation – The High Speed Rail (London to West Midlands) Bill – is not expected until the tail end of 2016, and is subject to continued debate.

Things to consider

From a legal standpoint there are several factors that need to be taken into account.

Many construction projects still overrun their original contract timeframe.

A delay by contractors could mean the new rail link may not be up and running by the scheduled date, leading to lost revenues on an already hugely expensive project.

“A long list of high-profile industry names will vie with each other to take a share of the kitty”

A contractor may also face penalties for failing to meet deadlines.

And considering the project has already revised its original budget upwards, should construction firms be concerned if the total budget faces downward pressures?

However, comfort could be at hand.

A professional services contract will be used for the consultancy services and an engineering and construction contract will be used for all works contracts.

Both of these contracts contain provisions for termination or variation of the contract, the terms of which will allow for the contract price to be adjusted should the budget be curtailed.

Careful pricing

Another crucial consideration is that of the pricing of the bids.

In the wake of the downturn, many construction firms continue to feel the pinch and a project as large and potentially lucrative as HS2 has naturally attracted considerable attention.

A long list of high-profile industry names will vie with each other to take a share of the kitty.

Some commentators continue to say that construction firms are still under-pricing their bids to secure work at all costs.

Unfortunately, this of course has repercussions for both the employer and the contractor.

If a project is priced too low and the costs rise above the quotation, then the contractor will either have to cover the shortfall or try to renegotiate with the employer.

“Failure to apportion risk correctly from the outset could lead to litigation, arbitration or adjudication”

One way of managing the risk of rising costs is by adopting a collaborative approach, something the government is actively encouraging.

HS2 will be procured using the early contractor involvement strategy which promotes a collaborative approach to the delivery of large infrastructure projects.

Contractors, designers and the supply chain are all involved from the early stages of the project to ensure the contractual programme is in place for the start of the construction stage.

Sharing risk

The proportionate sharing of risk is also an important consideration.

The five established risks in a construction project are: political, economic, social, force majour and contract.

It is essential that portions of these are divided between the employer and the contractor according to their role in the overall project.

Failure to apportion risk correctly from the outset could lead to litigation, arbitration or adjudication when an event or occurrence materialises.

Another factor to consider is that of unforeseen setbacks and accidents.

High Speed 1, Britain’s only other high-speed railway, suffered a degree of flooding on section one in Kent and complications during the tunnelling phase, leading to insurance claims.

Finally, in the unlikely event that the project were to be terminated, it is likely that compensation would be payable to the contractors.

Given that there is still some uncertainty as to whether the project will go ahead, it would be prudent for contractors to include necessary provisions in their contracts.

Michael Salau is partner and head of construction and environmental at insurance law firm BLM

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