July 26, 2021
This instalment in LPC’s What’s Up in Water? will highlight different contracting models being used in water infrastructure projects across Australia, and also identifies contract clauses of particular importance when drafting (or amending) construction contracts in the water industry.
When selecting a contract model (and type of contract – bespoke or standard form), it is important to consider the practicality and clarity of water-specific contractual obligations and requirements, and the risk allocation of each different type of contract. As a general guide, the more uncertain the scope, the greater the risk for the contractor, and the higher its tender price will be.
Contracting Models
As the contract forms the foundation of any project, careful consideration in the contracting process should be given to the risk allocation and the responsibilities each party is accepting. Generally, parties simply seek to allocate risk to the other – this is harmful in circumstances where the risk-accepting party has not considered its options or sought legal advice, as parties to a commercial construction contract are generally considered to be “sophisticated”, meaning the Courts may be unsympathetic to a party that “didn’t understand” its risk allocation.
Therefore, it is important to ensure your legal team are engaged early in the contract procurement process to ensure the contract is appropriate for your interests and the completion of the project as a whole. Seeking advice on the risk allocation in consideration of the various types of risks (construction / design risk, operations risks, financial risks, political risks, and force majeure risks), is crucial in understanding and protecting your interests.
Whilst the risk allocation may be amended in the specific contract form being used, the initial risk allocation is generally pre-established in common types of construction contracts. Listed in order of high to low contractor-risk, general types of contracts include:
- Engineering, Procurement & Construction – contractor is responsible for the engineering, procurement and construction of the project;
- Turnkey – contractor is responsible for providing a complete and fully equipped project (ready for operation / use);
- Design & Construct – contractor is responsible for the design that satisfies the project-specific requirements and the construction of said design. The Design & Construct contracting model is commonly used for water infrastructure projects, as it allows the principal to mandate the design specification, whilst not being at risk for the design;
- Construct Only – contractor is responsible for the design provided to it (by the principal or a separate contractor). This contracting model is less commonly used in large scale water infrastructure projects due to the increased risk and uncertainties associated with site conditions, underground works, and required interface between design and construction; and
- Engineering, Procurement & Construction Management – contractor is responsible for the design and procurement, and acts as agent of the principal to manage the construction.
A second key consideration is the pricing method, which may entail:
- Lump Sum / Fixed Price contracts – contractor is paid a set price upon completion. Most (if not all) of the risk in this regard is that of the contractors, and may result in the parties doing the minimum required, to maximise profit margins;
- Schedule of Rates – the total price of the project is based on the actual price of each item. The principal’s risk in a Schedule of Rates contract is generally higher as the total cost of the project is uncertain at the outset; and
- Cost-Based – contractor is paid based on the actual cost of the project, plus a specified fee. In the event of increased project costs, the Principal bares all risk in this regard.
Whilst conventional contracting approaches have traditionally been preferred by principals due to its simplicity, price certainty, and transfer of risk to the contractor (which usually comes at a financial price to the principal), the contractor’s commercial interests are generally not aligned. This misalignment of interests encourages a “blame game” when issues arise, and in major infrastructure contracts may lead to a delayed, expensive, and disputed project delivery.
As such, there has been a recent shift towards collaborative contracting, which is a flexible approach to contracting with a balanced allocation of risk (and the incentive to achieve the project’s objectives due to the mutual benefits of the parties), and the management of the relationship between the principal and contractor.
Collaborative contracting generally requires the parties to cooperate and act in good faith, includes processes for the early resolution of emerging issues (before the issue escalates) and the facilitation of collective problem solving and decision-making; promotes collaboration through early involvement of the contractor and subcontractors in the tender design phase; incudes payment arrangements that motivate participants to act in the best interests of the project (i.e. pain/gain mechanisms, which was discussed in LPC’s Railway Series); and may include a waiver of claims associated with mistakes, breaches or negligence (except where wilful).
There are various types of collaborative contracts, but there is no “one-size-fits-all” option. If considering a collaborative contracting model, the most appropriate form will depend on the principal’s objectives, the type and characteristics of the project, and the competitiveness of the market.
Collaborative-style contracting may be the future contracting model of choice. In July 2020, Sydney Water adopted the NEC4 contract for its $4bn, 10-year infrastructure and delivery model with three regional delivery consortia which is aimed at delivering end-to-end design, construction, maintenance and facilities management services. The commitment to the NEC4 contract was due to its international status, “plain English” drafting and collaborative focus, and likelihood of reducing disputes, which facilitates fairness and transparency in the delivery of the project.
Lamont Project & Construction Lawyers
Our Team have the industry knowledge and experience to assist both Principals and Contractors in all major projects, including water. If you would like to discuss any matters raised in the above article or the forthcoming series as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.
The contents of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.
Contact: Peter Lamont or Lili Hoelscher
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