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Procurement for London 2012

Graeme Bradley, Head of Engineering & Construction at DLA Piper, looks at London 2012 and the NEC contract suite

This article looks at the procurement process envisaged in relation to the 2012 Olympics and in particular the competitive dialogue procedure and some of its highs and lows. It also considers possible movement away from standardised, well known construction contracts in the UK Construction Industry into potentially new forms of contract and/or bespoke drafting.

It is an unusual day in my career when, after years of developing well known precedents for construction projects ranging between £5 million and £500 million that ‘the baby might be thrown out with the bath water’ so in primary and possibly lower tier contracts, let by the Olympic Delivery Authority (ODA), relatively new contracts such as the New Engineering Contract version three are introduced into the equation.

I should say at the outset I am neither a proponent of the Joint Contracts Tribunal (JCT) nor the New Engineering Contract (NEC) and work with all contracts on a daily basis, tailoring them for the job in hand. However, the history of standard procurement has left a jaundiced colour on the construction industry in the belief that a typical English contract leads to typically Anglo Saxon behaviour which is adversarial in nature. The English love to fight and the contracts promote this.

Over the last ten years the construction and real estate market has been largely benign. The market is moving into a stronger phase with public sector procurement raging on, private sector commercial development very strong and now the largest regeneration project in Europe with potentially in excess of a £4 billion spend on the East End of London and the facilities for the Olympics.

Put this all together and a recipe for distress comes to mind. It reminds me of many years ago when I practised in Hong Kong and on a daily basis labour rates for skilled labour fluctuated phenomenally on the principle that the average Chinese skilled labourer could obtain work at three times the profit on a given day by changing site. And they did!

At face value, the Olympics present a distortion in the marketplace with a draw for labour towards the London market and the prospect of some serious profit. None of the key bidder contractors will carry a supply chain which is theirs any longer and they are utterly dependent upon the good will and long term relationships that exist with supply chains on a subcontracting level.

Add to this the immovable end date for the Olympics, and the first thing that occurs to me is that the one area which will dominate the Olympics from a contractor’s perspective, (in that I include the sub-contractors trades), will be how to maximise increased cost claims.

It follows, like day follows night, that acceleration provisions will need to be built into the contracts although the temptation by the procuring authority may be to introduce severe penalties for non performance into the contract, operating on the principle that the stick may be better than the carrot to ensure the end game.

If I know anything about human nature in the construction industry, sticks can be used on an infrequent basis where there is just cause. However, with the pressures I mention above, incentivisation and bonus schemes are critical to the success of the delivery.

Over the last 20 years I can honestly say that deliverables occur when bonuses and performance compensation is written into the deal. My next observation in relation to this procurement is the temptation to look for specialised contractors - and therefore specialised contracts - in relation to stadium development, etc.

Discussions with my partners on the last three stadiums which we undertook at DLA Piper, which were Liverpool Football Club, Bolton Wanderers and Newcastle’s magnificent new stand, revealed that on each of those jobs the JCT 98 Design and Build form was used. Indeed, complexity of stadium construction from a laymans point of view (other than the steel and concrete quantities involved in such a construction) might not seem obvious to the untrained eye. Stadium construction depends upon high level programming and planning of the interface of many trades when the complex roofing structures are built.

These issues are the key issues to be built into the contract (and by that I mean any contract) so that the most difficult phase of the construction work is managed throughout the contract. Otherwise many standard contracts could do the job. So what about the contracts? The NEC has been around for ten years and the recently published version three has erased a number of the obvious pitfalls that were prevalent in the last edition.

The suite is quite impressive now. It includes a new Framework Contract where work is intended to be let to a key supplier or suppliers, with work packages let underneath that contract from any of the NEC family of contracts at some future date. There remain turnkey and target contract options among others.

Happily, some of the problems with the earlier contract have been erased so that now, for example, in clause 11.2 (18) the definition of ‘working areas’ is only those areas from which work is to be provided rather than including head office and similar premises.

This was a neat device in the earlier editions for a contractor to expand the basis of the work area and therefore his compensation - by including offsite premises as being a basis for charging for the work.

Another development to the early warning system is the introduction of a risk register in clause 16. Clause 25 and 11 mean that key dates can be identified for specific items of work and if the key date is missed, then the employer can recover additional costs in carrying out work or paying for the third party to do it.

Clause 33 deals with access rather than legal possession so that there is no exclusivity in the possession of the site for one single contractor. Clause 45 deals with defects where the project manager can assess how much an uncorrected defect would cost and the contractor repays the relevant cost to the employer.

The contract has vamped up clause 61 so that there are now time constraints for notifying compensation events within eight weeks of becoming aware of them. If that does not happen then there will be no change in the price or the completion date. If the project manager does not decide upon the issue within one week of the notice and then fails to respond to any further contractor’s notification, after two weeks he is deemed to have accepted it as a compensation event.

Option X7 now contains provision in relation to delayed damages being reduced where a partial possession has taken place. Option X20 makes provision for ‘key performance indicators’ which can be used on their own now, as opposed to as part of Option X12 the partnering option. Why do these editions to the NEC contract core conditions make a difference? The reason from a lawyer’s perspective is straightforward.

The temptation among lawyers in drafting contracts for what seem to be very very large projects, is to create bespoke contracts or massively amend existing standards out of recognition.

The one attractive feature of the NEC contract suite and its core conditions, in my view, is that the contract contains virtually all of the drafting and key mechanisms which seem to have been over egged in most of the unnecessarily complex PFI deals of the last ten years.

Therefore, bonus mechanisms, claw back mechanisms, key performance indicators, and partnering provisions are contained in the contract.

All of the drafting in the world will not solve a problematic environment for construction, such as the climate in which the Olympics will be constructed. The best that can be said is that the contracts will accommodate difficult projects and the NEC suite does not need huge scale amendment to make it do what it is intended, namely to be used for any engineering or construction project. The temptation to amend the NEC by English lawyers also gives rise to an additional problem. The language and phrasing used in the NEC contract is quite unlike any other contract around.

Therefore, all the ‘shalls’, ‘wherebys’ and ‘maybes’ fall by the wayside. This contract is unique in its style of drafting and care must be taken in changing the general ethos of the contract as well as the clear and careful drafting that went into the original.

If anything, notwithstanding its untried nature in the courts of England, this should not make the procuring authority shy away from using the contract and the authority should be careful not to allow over zealous lawyers the opportunity to create complexity which no contractor or supply chain member could understand.

That itself will give rise to suspicion and inevitably, could lead to an overburdened contractual regime, which itself attacks the ability to achieve the one thing that is sacrosanct - the start date for the 2012 Olympic Games!