How to mitigate risk for large-scale infrastructure projects

Large-scale infrastructure projects present huge procurement challenges. Contracting parties can mitigate risk through careful contract drafting and negotiations.

12 October 2017

Large-scale infrastructure projects present huge procurement challenges.

Proactive project management is vital for building ongoing relationships between stakeholders and suppliers, maintaining a positive public image and ultimately, securing the success of the project.

Below, we outline some of the obstacles that contracting parties face when procuring large-scale UK infrastructure projects. We also suggest ways that you can mitigate the risks through careful contract drafting and negotiations.

How can parties mitigate the risks arising from long project programmes?

Large-scale infrastructure projects have long-term project programmes. This means that contracting parties are susceptible to legislative changes that could affect the project. Allocating responsibility for changes in law can become a significant issue, particularly given the uncertainty around the effect of Brexit.

With this in mind, the primary risks to consider when dealing with European counter-parties include the following:

  • Who takes the risk of any change in immigration law that affects a contractor's workforce?
  • Who will be responsible for import tax increases arising from the UK leaving the EU common market?
  • What will the likely costs be of dealing with a European partner? This could be complying with data protection laws/quality requirements which European entities are obliged to ensure are observed throughout their supply chain?

Other factors to consider on long-term projects include risk allocation for currency fluctuations, indexation of pricing and the availability of workforce and resources.

Parties should consider upfront how such risks will be allocated in project contracts. By entering into contracts which deal expressly with risks at an early stage (ideally prior to the commencement of the works), parties can help to provide a degree of cost certainty and avoid cost uncertainty and potential disputes down the line.

How can contracting parties reduce the risk of disputes?

Often, parties set hard deadlines for agreeing contracts and completing transactions, e.g. to ensure key deadlines in the programme are met and momentum is maintained in negotiations.

However, retaining some flexibility allows negotiators to deal with the unanticipated issues and sticking points that large-scale infrastructure projects inevitably present.

Parties can reduce ambiguity in their documents and mitigate the risk of future disputes by:

  • methodically identifying risk areas through effective due diligence and dealing specifically with those areas (e.g. specific site and/or technology risks)
  • aligning the work undertaken by professional advisors (e.g. lawyers, insurance experts and technical advisors) to ensure that there is no discrepancy between the transaction documentation and the relevant schedules
  • giving equal weight to the various stages of the project lifecycle. For example, there can be a tendency to focus on construction phase issues and to neglect the terms on which the long-term operation and maintenance issues will be carried out.

How can interface risk be managed?

Complex developments need a broad range of supplier and contractor expertise. For large schemes and new technologies, a single point EPC solution is often not commercially achievable or available, so the developer’s only option may be a multi-package approach.

Engaging multiple suppliers and contractors increases the risk of interface gaps and disputes about which party is responsible for delays or defects, so it is important that stakeholders work collaboratively to understand who takes technical responsibility for the various matters and specifications.

The developer’s professional advisors should also review the transaction documents to ensure interface gaps are adequately covered. This analysis can be helpful in developing an interface matrix, which can be appended to professional appointments or works contracts to reinforce the counter-parties’ obligations.

What is the effect of public funding and political factors?

The involvement of public funding and other public support attracts additional layers of complexity, e.g. public procurement rules, increased accountability for delivery within a prescribed cost or timeframe and the need to retain positive public perception.

Political factors include the availability of government incentives for particular schemes. In the energy sector in particular, the viability of a project can be contingent on availability of incentives. It is therefore essential for a developer (and any funders) to manage supply chain delivery to ensure that the requirements of any relevant incentive schemes are met.

Transparency at the outset is important for aligning expectations. It provides developers with greater assurance as to the availability of incentives and suppliers with clarity on the standards and timescales they are required to meet (as well as the consequences if they fail to do so).

How can a developer ensure bankability of a project?

It is rare for large-scale projects to be funded entirely from equity contributions. As such, bankability of the project is a key issue, particularly in the context of non-recourse funded projects.

There is a tendency for funder nervousness where a scheme involves new and emerging technologies and markets e.g. battery storage.

A pragmatic approach to risk allocation can greatly assist a developer in mitigating the risk that development costs become disproportionate to financial return. However, often funder requirements will drive the scope of flexibility here. For example, provision of adequate performance security and ensuring assignability of key project documents by way of security will often be a key concern for funders.

Conclusions

The procurement of large-scale infrastructure projects can present a number of challenges. However, contracting parties can mitigate the challenges by:

  • transparency with counterparties
  • realistic procurement programmes to allow proper consideration of challenges
  • a pragmatic approach, particularly in the context of emerging technologies and an uncertain market.

Written by Lauren Luscombe.

Key contact

William Gard

William Gard Partner

  • Construction and Engineering
  • Infrastructure
  • Arbitration

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