Words by Michael Salau, partner at insurance and risk law firm BLM
HS2 is about to launch begin the tender process for £7bn worth of construction projects. The majority of this work will involve creating and improving tunnels and viaducts for the new high-speed rail link.
The pre-qualification process alone will involve seven contracts worth between £700,000 and £1.1bn each. Work is expected to start in 2017, with a targeted completion date of 2026.
As the budget keeps soaring, there remains fierce opposition and several questions as to the commercial viability and necessity of the project. Furthermore, Royal Assent for the main piece of legislation – The High Speed Rail (London to West Midlands) Bill – is not expected until the tail end of 2016, and is subject to continued debate.
From a legal standpoint there are several factors that need to be taken into account.
Many construction projects still overrun their original contract timeframe. A delay by contractors could mean that the new rail link may not be up and running by the scheduled date, leading to lost revenues on an already hugely expensive project. A contractor may also face penalties for failing to meet deadlines.
Also, considering that the project is already hugely over budget, construction firms could be well advised to err on the side of caution if the total budget faces downward pressure. On the other hand, a Professional Services Contract will be used for the consultancy services and an Engineering and Construction Contract will be used for all works contracts. Both of these contracts contain provisions for termination or variation of the contract, the terms of which will allow for the contract price to be adjusted should the budget be curtailed.
Another key consideration is that of the pricing of the bids. In the wake of the financial turmoil many construction firms continue to feel the pinch and a project as large and potentially lucrative as HS2 has naturally attracted considerable attention. It is believed that as many as a dozen high-profile names in the industry will compete with each other to take a share of the kitty.
Some commentators continue to say that construction firms are still under-pricing their bids, in order to secure the work at all costs, sometimes in order to recoup lost income in the recent difficult climate. Unfortunately, this has repercussions for both the employer and the contractor. If a project is priced too low and the costs rise above the quotation, then the contractor will either have to cover the shortfall or try to renegotiate with the employer.
One way of managing the risk of rising costs is by adopting a collaborative approach, something that the Government is actively encouraging. HS2 will be procured using the Early Contractor Involvement (ECI) strategy that promotes a collaborative approach to the delivery of large infrastructure projects. Contractors, designers and the supply chain are all involved from the early stages of the project to ensure that the contractual programme is in place for the start of the construction stage. This approach should reduce the cost and complications arising from the project.
The proportionate sharing of risk is also an important consideration. The five established risks in a construction project are political, economic, social, force majeure and contract. It is essential that portions of these are divided between the employer and the contractor according to their role in the overall project. Failure to apportion risk correctly from the outset could lead to litigation, arbitration or adjudication when an event or occurrence materialises.
Another factor to consider is that of unforeseen setbacks and accidents. HS1, Britain’s only other high-speed railway, suffered a degree of flooding on section one in Kent and complications during the tunnelling phase in addition to a total of ten fatalities, leading to insurance claims.
What must also be taken into consideration is the resourcing element of the project. Whereas a construction firm may be enticed to bid for an alluring contract, it must seriously consider whether it has the human capital available to deliver on the deal. Failure to hold up your end of the bargain can incur hefty pecuniary penalties.
Finally, in the unlikely event that the project is terminated, it is probable that compensation would be payable to the contractors. Given that there is some uncertainty as to whether the project will go ahead then it would be prudent for contractors to include necessary provisions in their contracts.