Unforeseen problems with ground conditions are a major headache and it's crucial to be clear about where the risk lies in the contract. But this is debatable, especially on PFI projects …
Despite everyone's best efforts, it is impossible to cater for every contingency when planning a construction project. One of the most difficult areas to anticipate, no matter how diligent the preparation, is ground conditions.

To be more precise, what exactly will you find when you start digging that hole? Adverse or unforeseen ground conditions represent a major area of risk and, as usual, the construction contract either has to allocate it to a single party or distribute it between the parties.

Precisely how this risk is allocated is, of course, a matter for debate. The JCT standard forms choose not to deal explicitly with this particular issue. The ECC includes physical conditions as a compensation event in certain circumstances. The GC/Works series has a mechanism to deal with unforeseeable ground conditions.

The ICE conditions of contract deal with this area in clauses 11 and 12, two of its better-known provisions. Clause 12 in fact covers a wider area, dealing with adverse physical conditions and artificial obstructions. If the preconditions set out in clause 12 can be satisfied, the contractor may recover its costs in the event that an adverse physical condition or artificial obstruction is encountered and has to be addressed. Some say that this is too generous to the contractor, failing adequately to incentivise it to deal with the matter as swiftly and cost-effectively as possible. That, however, is a debate that can be left for another day.

Broadly, the traditional view seems to be that the risk of adverse ground conditions, once established as falling within the parameters of the particular contract test, lies with the client.

It is interesting to compare this position with the ongoing debate in the PFI sector.

This is a particularly important issue in PFI, not only for the reasons set out above but also because PFI relies on effective risk allocation to the private sector to enable, among other things, transfer of the asset off the public sector balance sheet. Design is a major risk and responsibility for site conditions is another.

So how do the standard PFI contracts tackle this issue? The NHS standard PFI form deals with site conditions in clause 15. This specifies that the condition of the site is the sole responsibility of the private sector. The private sector provider will therefore be deemed to have carried out ground, geophysical and physical investigations and to have inspected the site and its surroundings in detail, examining not only existing structures or works on, over or under the site but also the nature of the site conditions themselves above and below ground. The private sector also accepts full responsibility for all these matters and therefore also accepts that it will not be entitled to make any claim against the NHS trust (unless expressly provided for in the contract) on any grounds related to information about the site.

Interestingly, however, a footnote to this clause indicates that it is assumed that the site is a greenfield site and that the private sector is therefore able to carry out sufficient investigations to satisfy itself in this regard. To the extent that it is not practical for this to be carried out (if, for example, the trust occupies facilities on the site that are not capable of investigation) the approach should be modified.

This reflects the compromise position reached in a number of NHS PFI contracts of which I am aware, although I have no doubt that there are many variations on this basic theme currently in consideration or in existence on other projects.

It is instructive to compare the NHS approach with that taken in local authority PFI contracts, which are based on the guidance issued by the Treasury taskforce.

Although the taskforce guidance broadly reflects the sort of compromise position described above in relation to health sector contracts, in practice risk appears to be shifting in this area towards the private sector. The responsibility for dealing with ground conditions often forms part of a larger issue relating to latent defects. There may well be an express statement in the contract to the effect that the private sector is wholly responsible for both ground conditions and latent defects whether or not it is capable of carrying out physical investigations.

Clearly, this means that local authority contracts may apportion greater risk to the private sector than health sector contracts. As always, it is for the private sector to cost this risk and consider how, and to what extent, it can be met. It is interesting to see that the recently issued draft education PFI contract now adopts broadly the same position as the "modified" local authority contract.

The debate about responsibility for ground conditions highlights one of those areas where there is a significant difference between the traditional approach to risk allocation and the approach taken in PFI which, of course, has at its heart a much more significant transfer of risk to the private sector.

If you are considering entering into a PFI contract, look carefully at the way in which the site conditions are dealt with. It is perfectly understandable that in many cases the public sector may not have the resources available to it to carry out any further ground investigation or, having carried out a certain amount of ground investigation, is not prepared to carry out any more. But if this is the case, there may be instances where the private sector will have to consider whether it is willing or able to take the risk of ground conditions that it is not capable of investigating fully before commencement of the contract.

This is a calculated decision based upon risk for the private sector and obviously very much will depend on the nature of the site, prevailing site conditions, adjoining site conditions and so on. Given the importance of the risk allocation matrix in this particular area, this is likely to be the focus of considerable debate for some time to come.

How PFI handles ground conditions

  • NHS PFI contracts state that ground conditions are the sole responsibility of the private sector if the site is greenfield. If it isn’t, a compromise may be struck
  • Local authority PFI contracts link ground conditions with the broader area of latent defects, and may make the contractor responsible for them even if it is incapable of physical investigation
  • The recently issued draft education contract adopts broadly the same position as the local authority “modified” version
  • In general, it is vital to check your risk allocation