Delays to the delivery and completion of major infrastructure projects can arise as a result of the realisation of a number of project risks. One risk that has interfered with the delivery of a number of projects is the identification and management of interfaces with key third parties, such as the identification and relocation of existing utility services. In this article we consider a number of practical strategies that principals can apply to managing this interface risk.
During procurement of a contract for delivery of a major infrastructure project, the focus is often on issues such as identification of relief and compensation events, the conditions for achieving completion and the details of the payment mechanism so that the commercial deal is acceptable to all parties and the contracts can be signed. However, scope and technical issues can be equally as important to the success of a project as the commercial issues. In order to create the best conditions for successful delivery of a major infrastructure project, both technical and commercial issues need to be carefully considered and addressed.
Historically the risk of dealing with hard interfaces such as identifying and relocating utilities is one that has been borne by the contractor. This is a practical position based on the fact that the party undertaking the design and construction of the works is best placed to manage the risk that those works will interfere with existing properties, infrastructure and utilities. However, there is now discussion in the market as to whether the risks relating to hard interfaces such as relocation of utilities should be borne, in whole or in part, by the principal. In this situation, what are the strategies available to a principal to manage these risks?
It is possible for the risks relating to hard interfaces to be shared between the principal and contractor. Such approaches may include the following.
- Relieving the contractor from its obligations if specific circumstances arise on interfaces. Examples of risks are a failure of the third party to carry out works or provide services on time
- Compensation for additional costs or loss of revenue for the contractor if specific circumstances arise, such as a fundamental physical change to the interface after the date of the contract
- The principal agreeing to carry out specific activities relevant to the interface. For example, completing reports for the third party.
There are also practical steps that a principal can take as an alternative, or in addition to, these commercial approaches to interface risk sharing to proactively manage the interface to minimise the risks of delay to the construction program. Outlined below are the steps and considerations involved in managing these interfaces based on our experience, using the identification and relocation of utility services as an example.
Identify the physical interfaces early
Hard interfaces such as the interaction of project works with existing utility services need to be carefully considered and identified early in project development and a strategy developed in order to identify and deal with the risks to the construction program posed by these interfaces.
Eliminate the interface
Once the interface has been identified, consider if the interface can be eliminated by changing the design or construction methodology. If the utility provider’s rights are property rights, acquiring land or other property rights by compulsory process or negotiation can also be used to eliminate or minimise the interface.
Establish a relationship with the interface party
The best results with management of interfaces are achieved where the principal establishes a relationship with third parties, such as utility providers, early in the procurement process so that a strategy can be agreed, developed and implemented by the utility service provider and the principal to manage the delivery of the project works.
Ideally, the person representing the principal in these negotiations will have a good understanding of the utility provider’s operations from both a technical and commercial perspective. This allows the representative to present the interests of the project in terms that make sense to the utility service provider and to communicate effectively back to the project team the legitimate concerns and constraints of the utility service provider. The knowledge does not need to be held by a single person: often a technical representative will be accompanied by a commercial representative to ensure both aspects are managed.
Implement a governance structure
Where an interface is significant, implementing a governance structure between the utility services provider and the principal is worthwhile so that issues can be escalated and resolved expeditiously as they arise. Without a governance structure, valuable time can be lost simply identifying who are the relevant decision makers in each organisation.
Put in place arrangements for delivery of services
Management of interfaces often requires third parties to review and approve designs, sign off on completion, carry out inspections, carry out works or provide qualified staff to attend at construction. In some cases, the provision of such approvals and oversight is a statutory requirement. In these cases, a principal should consider establishing an arrangement well before construction commences that allows for the principal to obtain those services within agreed time frames and to pay for those services at pre-agreed rates. This mechanism will allow contractors to allocate adequate time in the construction program and accurately price the cost of complying with the requirements of third parties such as utility service providers.
Importantly in times such as these where there is a lot of work available in the infrastructure industry and experienced technical advisors are sought after, the mechanism will need to allow for the utility provider or other third party to commence the process of engaging those advisors early so that they are available when they are needed to progress the project design and works.
Documenting the agreement for managing the interface
Managing the interface may or may not involve a formal agreement. If a formal agreement is required, utility providers have a suite of standard documents that are well known in the industry that can be applied in many ‘business as usual’ situations. Between government agencies, an exchange of letters may suffice to outline the principles the parties will apply to regulate their relationship. Where an interface is so extensive, or so unusual, that it cannot be dealt with in these standard agreements or a simple exchange of letters, a project-specific interface agreement may be required.
Benefits of project-specific interface agreements
The benefits of project-specific interface agreements include the following:
- the agreement can be tailored to the project and therefore align with the provisions of the main construction contract to facilitate delivery
- unlike an exchange of letters, responsibility for compliance with some or all of the obligations of the principal can be transferred to the contractor under the third party agreement provisions of the contract
- third party agreement provisions allow for the allocation of responsibility for the obligations in the agreement to be adjusted to suit the commercial and technical requirements of the project and the parties
- arrangements in a project-specific interface agreement can be tailored to meet the technical specifications of the project and eliminate unnecessary, but otherwise ‘standard’, processes.
Please get in touch with one of our Construction & Projects team members if you would like to discuss the management of interface risks in further detail.