Last month's news that the FA has switched the Cup Final to Cardiff shocked the industry - it should also prompt us to question the use of lump-sum contracts
Imagine the finest sports stadium in Europe: a retractable roof, fans across the country excited at the forthcoming sporting spectacular. But a nation holds its breath, would it be ready on time? The 75,000-seater stadium did open on time for the rugby World Cup, but only just.
That was 1999 and the ground in question was the Millennium stadium in Cardiff, but the scenario is familiar to those who still had hoped the FA Cup Final on 13 May would be played at the 90,000 capacity Wembley stadium. Of course now, after the Football Association's decision on 21 February, we know the FA Cup Final will be played at the Millennium stadium after all.
The common thread for both these stadiums is that the contractor took the risk under a design-and-construct contract with a fixed price. In Cardiff, Laing lost about £20m on the £121m stadium partly because of poor planning, a loss that contributed to its subsequent demise. Last month Multiplex announced that its interim results had been adversely affected by an additional £106m loss on Wembley.
So what provisions are made by the parties to these high-profile sporting projects, and what lessons can be learned for the 2012 Olympics?
The fixed price for delivering Wembley stadium is £445m with a total project cost of £757m. The public sector is providing £161m and the private sector and the banks are providing the balance.
The allocation of risk between the employer, Wembley National Stadium Ltd and the contractor, Multiplex Constructions (UK) Ltd, includes a typical carrot and stick approach. There were incentives for delivering on time and within budget. If Multiplex had built the stadium for less than £445m it could have pocketed the difference. But if it costs more, Multiplex bears the cost, except in certain situations. It was anticipated that most of the circumstances in which Multiplex would be able to claim extra cost lay within WNSL's control, such as design changes and late instructions - thus a "no change" culture was agreed.
Unfortunately for Multiplex it appears to have underpriced the risk it was taking on. The increase in the price of steel, subcontractor performance and high winds have all caused problems. We cannot yet tell whether Multiplex's relations with subcontractors could have been improved, but problems might have resulted from Multiplex contracting on a lump-sum basis and trying to minimise its losses in the supply chain.
Other typical methods of minimising risk to the employer were included in the contract. Multiplex has a performance bond of £60m in place. This, coupled with £40m in retentions, gives WNSL some £100m of cover in case of contractor failure or insolvency. Presumably this seemed ample when the contract was being negotiated but with Multiplex's expected losses being over £100m, this level of protection might not be sufficient. Similarly an agreed contingency of £30m to cover unexpected costs now appears inadequate.
As is usual, a liquidated damages clause means that Multiplex pays damages to WNSL for an overrun due to contractor "default". Such default generally includes subcontractor delay. Anticipated damages are running at £14m but the contract caps the amount payable to WNSL at a maximum of nine months' delay. Unless the contractor can establish an entitlement to an extension of time then the weekly damages are deducted from sums otherwise due.
Occasionally, it is feasible for the employer to take partial possession of the project, for example, if the seating and athletics track were finished but not the pitch, then it might be possible for the venue to host an athletics event. In theory taking partial possession reduces the damages payable but it is unlikely it could apply at Wembley. For Multiplex the outstanding sections include finishing the roof, removing temporary works, completing the seating, turfing the pitch and fitting the toilets. The Cardiff stadium was sufficiently ready to host the Wales vs South Africa game in June 1999 but it was not fully operational until the autumn.
Clearly, the FA would not have been satisfied with partial capacity. It will no doubt have dusted down its contract, deducted liquidated damages, served notice to withhold payment when possible and checked the performance bond in case Multiplex follows Laing into the history books.
Jane Ryland is a partner at law firm Cripps Harries Hall. Email: firstname.lastname@example.org