August 23, 2021
The increasing complexity and scope of infrastructure projects in Australian can present challenges to the underpinning contractual agreements. Further, those involved in road projects in Australia increasingly face competing implementation methods. This article looks to explore approaches commonly utilised within Australian road projects, noting key considerations to keep in mind.
Risk Allocations
Importantly, regardless of the contractual approach adopted, the terms of a contract can be drafted or amended to provide a particular risk allocation. Hence, even where a specific approach is adopted for the purposes of contracting, parties must diligently review the contract to ensure the risk allocation is agreeable. Relevantly, parties should consider matters such as:
- entitlements to compensable events (either through time, cost or both) for various matters which might arise throughout the duration of a project;
- an ability to claim for latent conditions or other matters related to site conditions differing from those reasonably expected by the parties;
- whether the contract provides for force majeure and the associated requirements surrounding this;
- if COVID-19 (or more generally pandemics and epidemics) is covered by the force majeure provisions, and where it is not, if it is addressed separately under the contract. This may include events such as limited supply of critical resources required for the project and government restrictions which suspend works or otherwise limit the number of individuals who can be on site;
- how weather events and delays are treated, including if they are compensable events or if one party is expected to bear the risks of these events;
- provisions regarding the requisite quality of the works or services;
- requirements to act, or perform duties, in good faith;
- where time bars act to limit or prevent claims where they are not provided within specified timeframes;
- how use and access to third party land will be negotiated, managed and administered;
- indemnity regimes including limitations of liability, exclusions to any limitations, and consequential loss;
- a party’s entitlement to liquidated damages or delay damages, as the case may be; and
- dispute resolution mechanisms and requirements.
Where these matters can be effectively addressed through contractual drafting, it can ensure a properly apportioned risk matrix for a contractual suite tailored to the needs and requirements of both a project, and the parties.
Design and Construct
Design and construct contracts are commonly used within road construction projects where the principal looks to engage one party to provide both the design and construct services. Key benefits of this contracting approach include:
- an ability to speed up the progress of a project by allowing the early and preliminary works to commence before detailed design documentation is finalised. This is contrast against an approach separating design and construct obligations, which require waiting for design works to come to an end and commencing a new tender process for the construction works. Instead, a single entity can manage this process, and the progression of the project as a whole;
- for a principal, the elimination of risk from a project. A design and construct project provide the contracting entity will assume the risk for the whole of the project, warranting both that the design is fit for purpose, and that the construction will be guaranteed for the design life. Alternatively, under a construct only contract for example, the principal is responsible for design errors or omissions by designers;
- increased innovation through the collective use of specialists to provide a holistic project approach from design through to practical completion. Through combining the skills of architects, engineers and builders, it ensures an entity can leverage their collective knowledge base to deliver the project.
A significant drawback of the design and construct approach, as compared to utilising separate design only and construct only agreements, is the increased price to the principal, or risk to the contracting entity. As risk transfers from the principal to the contractor, the contractor is likely to request a cost premium for this in an attempt to cover themselves in circumstances where such risks arise.
Design Only or Construct Only
The traditional approach to a project typically involves the use of separate design only and construct only contracts.
However, it should be noted that these classifications can be in name only. There is nothing to prevent a construct only contract from containing elements of design, just as nothing prevents a design only contract from having construction requirements. It is therefore important contractors comprehensively review the requirements of a contract to ensure a complete understanding of their requirements and obligations.
Principals should also be aware that where they engage separate designers and builders, they are likely to be liable for the design under the construct only contract. This creates additional risks for the principal, as where a design error or omission is present, they may find themself liable to the construction contractor for the issue, and separately be forced to claim against the designer themself.
Another consideration is that of pricing. A principal utilising a design only and construct only contract suite is likely able to reduce the cost of a project, as a contractor is not required to price both design and construction risk.
Contractor should also be mindful that under a construct only contract, the contract might provide warranties with respect to the design. Contractors should look to avoid these, as where the design is that of the principal, to accept such a risk may create issues where subsequent issues are discovered with the design.
Furthermore, where circumstances arise that a reasonable contractor should have been aware of an issue with the design, even if they are not the designer, there may exist a duty to warn the principal of this issue. Contractors should therefore ensure they comprehensively review design documents provided under the contract to ensure it is adequate and suitable for the project, or that they are otherwise protected through relevant contractual drafting.
Alliance and Collaborative Contracting
While conventional procurement contracts have long been preferred within the construction industry given their simplicity, certainty, and risk allocation, they have increasingly faced criticism. Importantly, these contracting models can be viewed as adversarial in nature, where the interests of the participants do not align, creating friction across the duration of the project.
Alliance and collaborative contracting approaches look to alleviate these issues. These contracting models recognise the mutual benefits which participants can derive through the alignment of goals across the project documents. Typically these models include some form of commitment from the principal to share the benefits received from outstanding performance by a contractor, and a commitment from the contractor to share in the costs where poor performance increases a principal’s costs.
These contracting approaches can include models such as target-cost contracts which incentivise the contractor’s performance. Importantly, they serve to create a win-win scenario for both principal and owner.
Oddly, many alliancing and/or collaborative models are subject to the agreed ‘principles’ decided by the participants. These ‘principles’ are sometimes uncertain and the concept of “thou shalt not litigate” whilst a noble intent, may become more certain given the illusory nature of the language in such agreements.
The LPC Lawyers Team
LPC Lawyers have extensive experience across a wealth of project implementation processes. With an ability to draft agreements to meet the unique requirements of a project and the demands of the participants, or amend and negotiate a contract to achieve an optimal outcome for our clients, LPC Lawyers have the resources to support you on your next project.
If you have any questions about your current or future projects, please do not hesitate to contact LPC Lawyers for a discussion on how we can assist you.
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 Ryan Bryett
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