Sharing the burden of contractual responsibility

Lis Stedman describes how water industry contracts are set out, from partnering agreements and PFI deals in the UK, to turnkey contracts for overseas projects.

There are many ways of setting out contracts, and the number only ever seems to increase.

But although these often remain at the heart of contracts, clients, consultants and contractors have in recent years sought added value by widening the scope of the contract to introduce various useful ideas. Partnering is one of the key innovations. The basic idea of partnering is to have a Œsingle office, open book' approach which sees all of the partners working as a team to produce a claim-free, cost-effective result on or ahead of schedule.

And one of the first partnering contracts in the UK was for the water industry ­ for the construction of Southern Water's Pennington WTW. The partners in Southern's experimental contract were Southern (before it was bought by Scottish Power), design consultant McDowells, main contractor Birse and project manager Montgomery Watson.

Birse contracts manager Ken Mackenzie described the contract as a Œbig leap in the dark, but it was widely regarded as a successful first use on a site where speed was all-important.

The contract had a strong framework ­ it was based on a standard Green Book contract - but above this level it was very different, involving a striking change in the style of management, starting with the top company directors and permeating down to the site staff.

Essential to this type of contract is a commercial arrangement which ensures that all parties benefit from the agreement. Traditional contracts are notorious for claims ­ cut-throat pricing has become the norm for contractors desperate to maintain turnover during lean times, sometimes even at the expense of profits.

But when contracts are won at little or no profit margin, the need to glean extra money from claims becomes pressing and confrontation and secrecy can become endemic.

To take these potential disagreements out of partnering, the contracts are undertaken on a Œpain-share, gain-share' basis. This sees the various partners agreeing to split the costs if a contract goes over budget and, likewise, share the profits if it comes in under budget.

Pennington was unusual in that there was no Œpain-share' element ­ any amount over budget would have been borne entirely by Southern. Later contracts, when Southern was owned by ScottishPower, included the Œpain-share¹ element as standard.

The Pennington contract also used a Œlump-sum¹ agreement - the contract was let for a single total figure, so all of the partners were anxious to control their budgets and make cost savings. The partnering approach also allowed the partners to eliminate the duplication of posts which commonly occurs on site. The consultant and main contractor often have staff with exactly equivalent jobs, basically to keep an eye on each other.

In an open office, single team partnering contract, the best person is chosen for a particular post regardless of who they work for. The openness of this approach also ensures that the design process is more dynamic ­ partners can be frank about problems, and work together to solve them.

Several other water companies, including Welsh Water, have now set up partnering arrangements with several favoured contractors, who have been chosen to undertake work in dedicated regions. Another type of contract which offers security for service providers and contractors is the framework agreement ­ also becoming increasingly popular, for instance at Thames Water.

Thames has set up a series of framework agreements with approved contractors which guarantee a set amount of work (leakage detection; pipe supply and so on) over a specific period of time ­ the benefit to Thames is favourable pricing; while the benefit to the contractor is security. Specific advantages for Thames Water include:

- pre-agreed service levels that can be measured

- mutual understanding of the requirements of both parties throughout the agreement

- speedy purchase ­ customer knows which supplier to use and price that will be charged

- reduction in supplier base and consolidation of payment orders

- standardisation of project specifications for both Thames and its contractors

- central point of contact for both Thames and supplier

- reduced spares holdings

- improved planning process through working with supplier to establish future supply requirements

- benefit of volume discounts as spend is distributed among fewer suppliers.

Another, highly complicated form of contract is that found in PFI schemes. These are, under other financing systems, known as BOO (build-own-operate) or BOOT (build-own-operate-transfer) contracts, but in this country they have come into their own under the PFI system.

In the water industry, these contracts have been set up almost exclusively in Scotland, although the Northern Ireland Water Service is also examining ways of introducing PFIs to solve its need for major improvements to wastewater systems in particular.

Water companies in the south have also successfully bid to undertake contracts on this basis abroad, where their operational expertise has proved invaluable in winning such work.

PFIs were regarded with some caution north of the border, and the water authorities still vary in their enthusiasm about the approach. The vital difference between other types of contracts, such as turnkey ones, and PFIs is the operational element. Consortia of operators, consultants and contractors bid to undertake the design and construction of the project and its subsequent operation, frequently for 25-30 year periods. At the end of this time the contract is either re-let, to the original consortium or under a bidding system, or reverts to the original client (the ŒT¹ element in BOOT).

Given the tight regulatory constraints under which the water industry has to work, these contracts are necessarily multilayered, complex documents. They assign individual risks and set out very carefully the effluent stream parameters and payment procedures.

It has been estimated that the cost of bidding for a PFI contract approaches or even exceeds £250,000, so consortia do not enter this lengthy process lightly. The number of potential PFIs is also limited by the size of the projects ­ under a certain cost (estimated at around £30M) it is not economical to bid for smaller, individual contracts and this is why some PFIs have been set up as multi-contract deals.

The first PFI awarded in Scotland, the Fort William/Inverness sewerage construction contract, was set up in this way and the approach is also under consideration in Northern Ireland, where many small contracts are anticipated.

Another popular form of civils contract is the so-called Œturnkey' contract, in which a lead contractor assumes responsibility for the entire project in a Œcradle to grave' approach. One contractor which commonly uses this approach is Weir Westgarth, which recently finished a 125Ml/d multi-stage flash desalination plant at Ras Abu Fontas in Qatar, under a $120M turnkey contract for the ministry of electricity and water. Lead contractor was ABB. Weir Westgarth's finance director, Bill Currie, says most of the company¹s contracts are now undertaken on a turnkey basis. "This means not just supplying kit, but design, supply, erection, installation, commission and handover. More and more, as all manner of functions are outsourced, clients are particularly keen for a single point of contact and a single point of responsibility."

This is the norm in the Middle East, he says, where many of the company's desalination contracts are located. But some of the company¹s turnkey contracts are much closer to home - Weir Westgarth has just finished installing a membrane desalination plant on Jersey to replace the island's existing 30 year old desalination system. In all of these cases, the driving force leading to the development of a new contract type has been a need for increased cost-effectiveness and contract security.


Tags



Topics


Click a keyword to see more stories on that topic, view related news, or find more related items.

Comments

You need to be logged in to make a comment. Don't have an account? Set one up right now in seconds!


© Faversham House Group Ltd 1999. edie news articles may be copied or forwarded for individual use only. No other reproduction or distribution is permitted without prior written consent.