Three consultants are lining up to deliver the £5.2bn Olympic construction programme. But victory in this most prestigious of contests comes with potentially massive liability - enough to put many firms off entering the race altogether. Josh Brooks analyses the likely stumbling blocks
In August, three of the country's biggest project managers and quantity surveyors will be taking one of the greatest risks in their histories. It is then that the Olympic Delivery Authority will decide which of five shortlisted consortiums will be its development partner. It will work with the ODA from its Canary Wharf offices to run the estimated £5.2bn construction programme for the 2012 Games, which includes the Olympic stadium and Zaha Hadid's aquatic centre.
It is a prestigious, glamorous role, which will present the members of the private sector consortium with the fabulous PR opportunity of brandishing their letterheads with the advertising that they are building the Games. However, the contract is potentially onerous, it fails to make the transfer of risk clear, and its small print suggests that the consortium's professional indemnity insurance liability could be limitless (see Rachel Barnes' column, far right). The three project managers and QSs - Mace, EC Harris and Capita Symonds - that are partners in the five consortiums gunning for the contract might not have the financial muscle to come out of such an event without severe losses.
David Langdon, Franklin + Andrews, Faithful & Gould and Gleeds have all taken the hint and avoided signing up to a consortium directly. Rather they will act as advisers to consortiums, effectively making them subconsultants with limited roles - and limited liability. Others, such as Cyril Sweett and Gardiner & Theobald, have avoided the contract in either capacity.
The reasoning of these firms is that the terms of the delivery partner's contract are essentially unknown, and therefore so is the risk. It will be the first major contract to use the competitive dialogue procedure - an EU ruling introduced in January for large, complex projects.
Under the structure, the three shortlisted bidders - five have expressed an interest (see "On the starting blocks, right) - are asked to share their ideas and plans prior to the final pitch, so that each can have the best proposal possible. This might improve the quality of the competition, but it also meets with groans from bidders that their best ideas might be used by a rival, that might then win the appointment. More importantly, it is through this process that the consortiums will agree what form the contract - for example, design-and-build or PPP - with the ODA will take.
Some consultants believe that this would result in a fixed-price, design-and-build contract. Those are the ones that have avoided the role, as it would mean that the consortium would bear the cost of any project overruns. Davis Langdon will advise a consortium comprising Mace, Laing O'Rourke and US project manager CH2M HILL. Rob Smith, its senior partner, says that the pull to implement such a contract proves that the ODA has no interest in seeing a consultant take a lead role. He says: "Fundamentally, the ODA wants to appoint an organisation that can build buildings. We're not builders."
Fundamentally, the ODA wants to appoint an organisation that can build buildings. We are not builders
Rob Smith, Davis Langdon
The confusion over the result of competitive dialogue means that others are quite convinced that the ODA actually has no interest in seeing the private-sector partner risk its balance sheet. It just wants to get the job done. Jonathan Goring, executive director of Capita Symonds, which is part of a Bovis Lend Lease-led consortium, says: "Rather than passing on the risk, it's more likely that the ODA will be paying to have the best people from anywhere in the world."
What is certain is that the descriptive document for the role, published in March, states that the delivery partner will be in charge of managing all design and construction for the Games, including permanent, temporary and enabling projects, as well as the legacy work. Many consultants feel that this is too much to take on, especially as each member of the consortium is required to be "jointly and severally responsible for the due performance of the contract".
This means that consultants could have to pay enormous sums for mistakes made by either themselves or the other members of its consortium. The prequalification requirements for the delivery partner demand that every member of a consortium has minimum professional indemnity insurance cover of £10m for any single incident. To make matters worse, there is no limit on the number of incidents they are required to insure. It is not yet clear whether the consortium or the ODA would be liable for delays caused by subcontractors going bust or failing to complete work on time.
A leading QS described the requirement as "frightening", and Jon Coxeter-Smith, partner at Davis Langdon, said: "Those going for it will need to think about the liability they are exposing themselves to. People view it as high risk, particularly in terms of reputation."
Consortiums were also asked to nominate a "lead organisation" that will take primary responsibility for the contract: that one company will almost certainly be the contractor, and it would decide who is to blame for any problems. One cost consultant said: "Would you hand over power of attorney to another company, even if that company was a partner? I certainly wouldn't."
Rather than passing on risk, it’s more likely the ODA will be paying to have the best from anywhere in the world
Jonathan Goring, Capita Symonds
Other concerns have emerged that consortiums are bidding for a role that is, so far, ill-defined. The descriptive document refers, for instance, to a 100-year legacy for the works; it is possible that the winning consortium could be held liable for that whole period.
The delivery partner may also be called on to take on extra work, and therefore greater liability, within the Stratford City scheme, which is not part of the Olympic Park, but will host the athletes' village and the media centre and recently hit the headlines. Just two weeks ago a fight between three developers for control of the site was interrupted when the leaseholder, London & Continental Railways, began legal action to dismiss them all.
Clients, too, are increasingly concerned that their suppliers' chase for Olympic glory will cause them to lose the best teams from their own projects. One London developer is known to have demanded undertakings from consultants not to bid for large Olympic works if there is any chance of it affecting their own projects.
Those clients might not offer their consultant the opportunity to put the phrase "London 2012 Olympic Games" in their letterhead - but they won't give them the same headaches, either.
The lawyer’s view
Rachel Barnes, partner at solicitor Beale & Company, casts her expert eye over the ODA’s descriptive document …
The responsibilities to be undertaken by the delivery partner are awesome. The ODA is described as a comparatively small, intelligent client, which means that the delivery partner will be correspondingly large.
But virtually nothing is said in the descriptive documents about the powers the delivery partner will have to discharge its responsibilities. There is only one reference to delegated authority and this is in relation to the day-to-day management of contracts. However, without the necessary powers or authority from the ODA it could be impossible to achieve the hugely ambitious project targets.
In particular, nothing is said about any limitation of liability for the delivery partner. The professional indemnity insurance required is a minimum of £10m “for any one incident without limit on the number of incidents or reduction in cover”. This is not, of course, the same as limiting liability to that sum.
No professional indemnity insurance provides cover of £10m on that basis. Even those policies that are on a per-claim basis have aggregate limits for certain sort of claims – in particular pollution, contamination and asbestos. It is known that the site on which some of these projects are to be carried out is polluted and no company will be able to offer a per-claim limit for any claims arising out of pollution or contamination.
Project insurance for the individual projects such as that used for the new airport in Hong Kong in the 1990s would seem to be a more realistic solution to this problem. It worked well and helped minimise disputes for that project and it can provide a higher aggregate cover, which sits above a lower per-claim cover.
The ODA acknowledges concerns about the confidentiality of ideas and solutions provided by participants in the competitive dialogue phase of procurement. What it says in this document, however, is not altogether reassuring. It refers to Regulation 18 (22) of the Public Contracts Regulations but, rather strangely, not to the preceding regulation, which says that a contracting authority shall not reveal to the other participants solutions proposed by a participant without that participant’s agreement.
On the starting blocks: The bidding teams
- Mace, CH2M Hill and Laing O’Rourke; supported by Davis Langdon
- Parsons Brinckerhoff, Taylor Woodrow, EC Harris and Sinclair Knight Merz
- Bovis Lend Lease, Capita Symonds and KBR; supported by Franklin + Andrews
- A team led by Bechtel
- Amec, Balfour Beatty and Jacobs Babtie; supported by Gleeds and Faithful + Gould
- A single bidder must have turnover of at least £100m
- Joint bidders must each have turnover of £50m
- Every consortium member must have PI insurance of £10m per incident for unlimited incidents