Prime contracts promise much for contractors: better margins for a longer period, repeat work with a reliable client – and a significant increase in liability. Here’s why.

The contractual responsibilities are pretty clear in the private finance initiative. The provider has to make a building available for the typical 25-year term of the concession. Failure to do so means that availability charges stop being paid. The onus is therefore firmly on the provider to budget the operating cost accurately.

Prime contracting also requires the contractor to operate the building after completion of construction, but here the contractual position is not so certain – probably because few prime contracts have yet been delivered and problems have therefore not yet arisen.

Part of the core strategy of prime contracting is to focus on the whole-life cost and functional performance of the building in order to create a feedback loop that allows improvements in the design and construction processes. It does this in a number of ways:

  • The contract contains obligations for the prime contractor to design the building, taking into account whole-life cost and performance of components.

  • The contract encompasses not only the design and construction of the building in the period leading up to practical completion but also the running of the building for a proving period of three years or so, called the compliance period.

  • The client’s brief may set out requirements about the running costs in the compliance period, but it is more likely that during the bidding stage the prime contractor is required to provide a cost model for the whole-life operation of the building.

    Prepare your whole-life cost plan well – and remember that even when the project is complete and you think your liability has passed, you may still be 100% at risk

  • A mechanism is contained in the contract so that if the prime contractor does not comply with its obligations during the compliance period, compliance points are generated. When the points exceed certain levels, a calculation is made of an amount to be clawed back from money due to the prime contractor. This is much the same arrangement as can be seen in facilities management contracts.

So, where does the uncertainty come in? What is the prime contractor actually liable for and for how long?

The easy part to identify is that the prime contractor is responsible for running the building during the compliance period. During these years, costs must be within the target and the building must perform in accordance with the contract and the client’s strategic brief. If all goes well, at the end of this period there is a handover process where certificates are produced and maintenance plans and other documentation have to be given to the client. If there is any noncompliance – and this could include cost overruns on maintenance – then the client could presumably insist on an extension to the compliance period.

These obligations have to be looked at sensibly. Unless there is a real blunder forecasting the energy or FM costs – and these things will happen when new entrants to this market fail to do their homework properly – the amount of maintenance work required in the first three years of a new building’s life should not be high, so compliance should not be too difficult to achieve.

More critical is the position if a latent defect emerges after the compliance period. Under a non-prime contract the client would take the contractor (and designers) to court for breach of contract. Success or otherwise would depend on showing that the component had not performed in accordance with its contract specification or that it was not designed with the appropriate skill and care. In other words, it would be arguable on the facts of the case. Under a prime contract, the balance shifts towards the client as it can show that the whole-life cost plan accounted for replacement at a certain time. It should therefore be easier to show that a breach has occurred.

The lesson is clear. Prepare your whole-life cost plan well. Research the replacement periods and maintenance regimes of the building components. And remember that even when the project is complete and you think your liability has passed, you may still be 100% at risk.