No time to lose

Contractors are used to being required to complete their works within a specified period and, if late, to pay liquidated damages. But under a PFI contract, the project company will not receive revenue until the facility is up and running. Delay means the concession period during which the project company earns revenue will be shortened by the length of construction overrun. Therefore, the project company and its funders will look to the contractor to bear all the delay risk that the project company is expected to take.

The extent of delay risk depends on the grounds for an extension of time. Generally, there are three categories of events that give the project company time and/or money during the construction period. Compensation events give time and money, and relief events give time (in the form of relief from termination or other contractual sanctions). Force majeure events also give time, but if they continue for long, then either party has the right to terminate.

Compensation events tend to be the most hotly contested between the private and public sector. It is accepted that any changes from the public sector should result in time and money for the contractor, as should default by public-sector bodies (including default by parties for which the public sector is responsible) and archaeological finds. But there will be reluctance to give money as well as time for events that can be insured by the project company and its contractor.

However, insurance is not always a complete solution. Policies are subject to excesses, may be triggered only after a specified number of days (leaving the project company and the contractor at risk in the meantime) and may cover only replacement or re-execution costs but not business interruption (leaving uninsured the project company's loss of revenue).

Relief events listed by the Treasury's PFI taskforce include fire, explosion, failure by statutory authorities, utilities or local authorities, accidental loss or damage, power, fuel or transport failures and any blockade, embargo or strike. In practice, the public sector may try to qualify this generous list, particularly in relation to power, fuel or transport shortages (on the basis that alternatives should be available or that such risk should be priced). Strikes will often be subject to a minimum time and limited to key industries.

Contractors must bear greater delay risk on PFI schemes

They should ensure that the price reflects this

Extra insurance may be needed on top of their usual all-risks policy

Applicable force majeure events will be the familiar candidates of exceptionally adverse weather, natural disasters, war, conflict, radiation and supersonic pressure. Whereas contractors would normally recover time and money, on PFI projects they will probably get just time.

The contractor will be able to claim for certain delay events in addition to those benefiting the project company. These will cover default by the project company itself, any project company changes (for, say, operating efficiency reasons), any demand risk and also hindrance by the operator – particularly where there are commissioning tests that the operator is carrying out under the contractor's direction.

The most contentious area is likely to be unforeseen ground conditions. Contractors are used to receiving time and money compensation for conditions that could not have been foreseen by an experienced contractor at tender. Under the PFI, the public sector's starting point is full transfer of risk to the project company, but exceptions to this general rule may be negotiated. An example is contaminated land, where it is better for the public sector to accept the risk rather than expect the private sector to attempt to price remediation costs, which cannot be done accurately in the time available.