We now know Hinkley Point C will be hugely over budget, is likely to be late, and that the contractor will have to bear the costs. But on other projects the allocation of risk is an area of fierce debate
Hinkley Point C nuclear power station, which has taken four years to negotiate, will be hugely over budget, it has been reported these past weeks. The first permanent pour of concrete for the power station was only poured in March of this year. In the case of Hinkley Point C it is NNB Generation Co (HPC) Ltd which will bear any increased costs as the contract price was fixed when key commercial terms were agreed in 2013. There are many particular factors that apply to Hinkley Point and the contract reported above is the build and operate contract rather than one of those let to tier one contractors. However, parallels can be drawn because as we know, construction projects are regularly reported as being over budget without necessarily any analysis of the causes of or who is to bear that cost overrun.
Which party bears what share of any cost overrun depends first and foremost on the risk allocation within the contract. What does the contract provide as to who will bear the cost consequences of an event or occurrence, regardless of how much?
The employer may try to allocate risk of foreseeable changes in the law to the contractor. This will be a significant contract provision in the years ahead, while Brexit is being negotiated
It is this risk allocation that is at the heart of any construction contract negotiation. This applies particularly in major infrastructure projects where a standard form contract, with its pre-set risk allocation, is inappropriate or needs to be heavily amended to meet the particular, often unique, requirements of parties as well as shareholders, funders and end users.
The following are some examples of the contract provisions where there is the fiercest debate when negotiating risk allocation.
On a project of any significant length the circumstances in which the contract price can be adjusted for inflationary pressures is all important. A contractor is often required to bear the risk of price increases for the original duration of the contract. This may change for any period when the contract period goes beyond the original duration, depending on the wording in the contract.
The employer may try to allocate risk and financial consequences of foreseeable changes in the law to the contractor. This will be a very significant contract provision in the years ahead, while Brexit is being negotiated. Then, with major infrastructure projects there are issues of access to land; the need to acquire additional land and permits generally. Which party should bear these risks? It is not always the case that the contract allocates risk to the party most able to control that risk. Any such obligations may be alleviated by the other party being required to exercise reasonable (or greater) endeavours to assist the other in acquiring whatever consents, permits, and so on, that are necessary.
The employer may seek to transfer all ground condition risk to the contractor. Normally this will be accompanied by a requirement that the contractor has access to whatever ground investigations it needs, including additional investigations it may require the employer to undertake.
It is not always the case that the contract allocates risk to the party most able to control that risk
Extension of time clauses will always be heavily negotiated in major projects and seldom follow the standard form. A common provision insisted on by the employer is in circumstances of concurrent delay where one of the delays has been caused by an employer risk event and one by a contractor risk event. The generally accepted wisdom is that where the contract is silent on this, an extension of time will be granted to a contractor where there are such concurrent delays. So, it gets relief for a period where it is in culpable delay but it is being delayed anyway by an employer risk event.
A clause regularly insisted upon by employers reverses that implication and states that, in the event of two causes of delay running concurrently on the critical path, one which is contractor risk and one, employer, the contractor will not be entitled to an extension of time. The aim of this amendment is to preserve the employer’s right to liquidated damages for that period and, should there be any risk of site overheads being recoverable during that delay period, to remove that prospect. Whether it succeeds or not will depend on the wording of the clause and the nature of the employer risk event.
Output specifications are increasingly common where the employer’s requirements are described with reference to the outputs to be achieved. Identification or definition of what is actually a variation or change is much harder in these circumstances. As a result, clauses that deal with sufficiency of the contract price, and it being deemed to include all that is needed to achieve such outputs, have become much more sophisticated.
The above only outlines some examples of risk allocation in a contract. It is obvious to all involved in the industry that contractual risk allocation is only the beginning. As the National Audit Office said, with reference to Hinkley Point, despite the private sector (in this case, NNB Generation) bearing the risk of the project being on time and on budget, there remain risks for the public sector during construction, as well as beyond. That applies to all construction projects, and is not particular to Hinkley Point.
Lindy Patterson QC is an arbitrator and adjudicator at 39 Essex Chambers
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