Sharing the burden of contractual responsibility

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.