August 21, 2023
The federal government is committed to rolling out its 10-year $120 billion infrastructure pipeline with a focus on productivity, supply chains, and economic growth in the nation’s cities and regions. The ‘pipeline’ refers to the federal government’s Infrastructure Investment Program (IIP) which predominantly funds road and rail infrastructure via payments to states and territories. In 2023-24 alone, the IIP will provide $8.2 billion in funding for key strategic road projects and $3.8 billion for nationally significant rail projects (Australian Government, Budget Paper No. 3, 2023).
Given the above, it is important that parties involved in transport infrastructure projects, specifically those that include road or rail works, are aware of the common delivery models and the relevant considerations which should be taken into account.
Traditional Contracting Approaches
For road and rail projects, more traditional contracting models are often adopted for smaller scale projects, such as Construct Only (CO), Design and Construct (D&C) and Design, Construct and Maintain (DCM). However, large scale projects are increasingly seeing a shift towards more collaborative based contracting approaches.
Hence, it is crucial that parties understand these contracting models, as they are likely to have a significant impact on project delivery concerns, and risk allocations.
CO and D&C
Part 1 of this series explored in depth the relevant considerations arising in connection with CO and D&C contracting models. Importantly, parties should be aware of the specific risk allocations which may be included in these contracts and give consideration to the potential consequences arising from project specific factors, including site conditions, third-party interests, and wider market trends.
DCM
Under a DCM model, a Contractor is responsible not just for the design and construction of a project (as is the also the case under a D&C model), but also the maintenance of the works (or certain aspects of the works) after practical completion has occurred. The advantages presented by such an approach include:
- single point of responsibility for design and construction;
- increased project efficiencies and integration between design and construction phases, promoted by a combined responsibility with post-construction maintenance obligations; and
- cost control and value for money.
Parties should be aware that, practically speaking, CO, D&C, and DCM contracts traditionally result in a significant transfer of risk to the Contractor. Whilst this may present discernible benefits for the Principal, it is likely to impact the Contractor’s pricing considerations and present issues during delivery in the event parties have not adequately accounted for risks.
Collaborative Contracting
Whilst traditional forms of project delivery models have been the dominant method to procure road and rail infrastructure projects, there has a been an increasing shift towards collaborative contracting options.
A common collaborative contracting approach on transport infrastructure projects is the adoption of a Target Cost contract. Target Cost contracts allow parties to align their respective interests through the use of a model which incentivise collaboration and effective project delivery.
This is done through developing a “Target Cost” as part of the early stages of a project, and where the parties agree to share in the savings if the project is delivered for less, or share the additional costs if the project costs more than the “Target Cost”.
As such, this allows the parties to depart from the traditionally combative approach to contract negotiations (and project delivery), by shifting the win-lose approach that may be commonly seen in a CO or D&C contract, to a win-win, or lose-lose, model.
In doing so, the parties are able to foster a collaborative atmosphere that allows the parties to collectively work together to ensure the successful delivery of the project, or work together to address any issues which may arise.
When Things Go Wrong
While collaborative contracting may be good in theory, including the principle of “no litigation” often agreed to during initial project discussions, compliance with such may become challenging in the event of significant issues developing.
If significant issues do arise, mounting pressure and cost-overruns may increase the likelihood of “finger-pointing”, which is common under traditional contracting approaches. Once these relationships breakdown, and the parties begin allocating blame (instead of working collaboratively to address the issues), the “no litigation” principle agreed at the start of a project may become increasingly difficult to comply with.
To avoid these situations, it is important that issues are addressed proactively, and the collaborative atmosphere be developed from the top-down, so all project delivery personnel understand their obligations and what is expected of them.
However, if a project breaks down, the propensity for disputes often arises (as may “finger-pointing”), which can challenge even the best of collaborative intentions.
Lamont Project & Construction Lawyers
We have the industry knowledge and experience to assist both Principals and Contractors in all major infrastructure projects. If you would like to discuss any of the matters raised in the above article or the forthcoming series as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.
The content 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 Kristopher London
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