October 11, 2021
Tunnelling projects rarely meet the anticipated time and cost performance criteria established at project commencement. Due to their complex nature, these projects commonly suffer from substantial cost overruns and extensive delays to practical completion. This article explores the main drivers for time and cost overruns in tunnel projects and what measures can be taken to avoid or mitigate such situations.
Tunnelling projects are a unique category of infrastructure development when compared to other projects due to the risk derived from excavating in unknown ground conditions and the numerous cost-related parameters contributing to final cost (e.g. tunnel type, project purpose, locality, construction method etc.). Some of the main factors which influence the propensity for time and cost exceedances on tunnelling projects include:
- latent conditions and unsuccessful ground investigation (geological and hydrogeological conditions);
- scope changes;
- design development delays;
- externally driven changes (e.g. cost growth factors such as external financial changes, inflation, economic and market conditions);
- incorrect procurement approach and delivery;
- inappropriate estimates and contingencies;
- delay in approvals;
- delay in the delivery of specialty plant and equipment/labour;
- delay caused by COVID-19; and
- conflicts among the contractual parties and misunderstandings or inconsistencies in contract documents.
What lies beneath can become the Contractor’s worst nightmare. The geotechnical investigation of the ground prior to construction can only partially reveal the entire range of subsurface conditions and hence conditions remain significantly unknown until construction commences. These unforeseen conditions make it necessary to deviate from the original design or even develop a new design, resulting in different budgetary requirements and causes time delays for the new design or works to be implemented.
Various current major tunnel infrastructure projects in Australia have attracted media attention due to the size of the expected cost overruns and project delays. These include:
- WestConnex – City & Southwest
Stage 2 of Sydney’s WestConnex project was a $4.3 billion project and is reportedly expected to now cost at least 15% more as a result of ongoing cost overruns experienced during this stage of the project.
- West Gate Tunnel
The cost of building the West Gate Tunnel has blown out by $3.3 billion and is now 2 years behind schedule. Disruption to the work on the tunnel has been caused by the unforeseen existing (contaminated) ground conditions, a dispute over the disposal of contaminated soil and cost overruns linked to problems moving underground pipes.
Contract termination by way of a ‘Force Majeure Termination Event’ was sought by the Contractor based on the discovery of a dangerous chemical, however, was rejected by the Principal and the Contract is still on foot.
This dispute meant tunnelling on the project was inactive for over a year and completion has since been pushed back to 2024.
- Metro Tunnel Project
The Metro Tunnel Project had an initial price of $11 billion. Following additional financial contributions from the Federal Government, the project received an additional $2.74 billion, though is currently understood to still be approximately $4 billion over budget. This has been caused by construction program errors which have fluctuated the project schedule from being months ahead to several months behind. Scope changes, unforeseen challenges due to existing ground conditions, and rising costs of labour and materials are all contributing factors to the cost blowout. In addition, COVID-19 has further contributed to cost and time delays for this project.
Legal Support
The issues identified above highlight the importance of seeking legal advice if you believe your project may be subject to delays and cost overruns.
The ability of a Contractor to recover funds for claims against either a Principal or Subcontractor need to be made in accordance with applicable contractual documents and may be subject to various submission requirements or time bars. For example, when project risks are actually encountered during construction such as the discovery of an unknown contaminate, it is common for the Contractor to be required to provide notice within a certain period of time, with a bar to claim costs incurred in respect to the latent condition prior to the notification. Further, risk-based contingency amounts built into the contract price and float in the contract programme are typically eroded, allocated and used quickly where events arise that result in extensive delays or additional costs to the project. It is to neither parties’ benefit for a project to descend into a lengthy dispute process as it will often result in increased expenditure on legal and expert support, without increasing the prospects of completing the project in a timely manner.
Contract Negotiation and Formation
Notably, some contract procurement methods seek to limit the Principal’s risk by allocating various risks to the Contractor. Therefore, it is imperative to select the correct contracting procurement method and maintain a robust risk management process for all tunnel projects due to their propensity to incur time related delays and cost overruns. The parties should carefully select and negotiate a risk allocation and contract model which is tailored to the requirements of both the parties and the projects. This may necessitate significant departures from standard form agreements to develop a contractual framework which both parties are happy with, and which correctly addresses the unique requirements of tunnelling projects.
LPC Lawyers
The LPC Lawyers team have a wealth of experience to assist across contractual drafting and dispute process. Through providing clients support across the duration of a project’s lifecycle, we can assist in ensuring a tunnel project’s successful and efficient delivery.
If you have any questions or concerns about your current or future projects, please do not hesitate to contact LPC Lawyers for a discussion on how we can assist.
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 Stephanie Purser
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