Construction and legal experts discuss the many and varied complex challenges when working on global megaprojects.
Industry professionals at the FIDIC International Contract Users’ Conference in London on 30 November took a deeper dive into some of the key issues to consider when looking to deliver global megaprojects.
Major global projects featured at the conference including Rail Baltica, a greenfield rail transport infrastructure project to integrate the Baltic States in the European rail network, involving five European Union countries, ITER, an international project for the construction of a first-of-a-kind fusion nuclear installation licensed in France, CERN, the scientific research project in Switzerland and the UK nuclear power station project, Hinkley Point C.
Aiga Benfelde, procurement manager at the Rail Baltica project, gave an overview of the project where the design works were already at an advanced stage on 640km of track. As well as the three Baltic states of Latvia, Estonia and Lithuania directly involved in the project, Finland and Poland also had significant interest in the megaproject which covered nearly 20% of EU territory.
Using FIDIC contracts as a compass
Dealing with five nations was a significant challenge, said Benfelde. The FIDIC Yellow and Red Book contracts were being used on the project. “FIDIC templates in a way can be compared to a ‘compass’ which helps to navigate to keep the project’s contractual conditions together not only between the different FIDIC contract types but also reflecting changing needs of the project,” Benfelde said.
The main challenges of the project were the fact that five countries were involved in a project with both local and horizontal project delivery. The multi-layered funding model, including EU and Baltic States’ financing, was also a challenge especially in the areas of public procurement and the constant change management involved on a project with constant timeline pressures. The war in Ukraine had also thrown up unexpected issues which all stakeholders had to grapple with.
White and Case partner David Robertson then highlighted the issue of dispute avoidance on megaprojects working with the FIDIC contracts. Robertson said that FIDIC had moved decisively away from the ad-hoc dispute adjudication board (DAB) model in the 1999 Yellow and Silver books, with the preference now being for a standing dispute avoidance and adjudication board (DAAB) in all 2017 contracts and subsequent publications.
Early contractor involvement essential
Robinson spoke about the importance of early contractor involvement on megaprojects. The benefits of such an approach were that it allows maximum contributions by the contractor to mainstream risk management, as risks can be identified as early as possible. The early exchange of data on design, cost, time and supply chain allows for early risk identification, planning of steps to reduce risks, insurance to be arranged where appropriate, with the added benefits of resultant savings then being shared amongst parties. There was real evidence that early contractor involvement reduced project risk, Robinson said.
Referring to the contractual lessons learned from megaprojects, Robinson highlighted some of the operating contractual mechanisms for managing changes, delays and additional cost. Citing the contractual advantages of the effective use of escalating dispute resolution clauses, he also caveated this by saying that that consideration of instituting a non-mandatory mediation process should also be considered to avoid disputes escalating.
Karoly Tamas Olajos from the ITER project said that international collaboration is a must as this led on his project to coordinated development, testing and infrastructure deployment which can deliver fusion technology faster, with less difficulty and at a lower cost. He also said that stakeholder engagement was vital to keep all interested parties on track and onside, especially where politicians were involved.
Focus on Hinkley Point C
Paul Merrett, a senior in-house lawyer at EDF working on Hinkley Point C in the UK, said that the £26bn megaproject was key to the UK’s net zero aims and when complete would be on stream for 60-80 years, making a significant contribution to the UK’s electricity generation needs.
Merrett said that the project was using FIDIC on around 150 of the 300+ contracts being used at Hinkley Point C. These were based on the 1999 Yellow Book (Plant and Design-Build) and used for international procurement of specialist equipment, design, manufacture, delivery (and in some cases installation) and also commissioning and operations.
The project used FIDIC contracts because of their well-regarded international reputation in the market and the fact that they were seen as industry leading. Merrett also said that they hoped to use FIDIC contracts when the project moved to the commissioning phase and underlining the confidence in the contracts, he also revealed that EDF hoped to use FIDIC contracts again on the Sizewell C nuclear plant in Suffolk, the go-ahead for which has recently been given by the UK government with a £700m public stake.
“Contract general conditions only take you so far”
Pinsent Masons partner Rob Morson, who works in the lawyer’s construction and project solutions team, then talked about his experiences of working on megaprojects. Morson stressed that with a contract “the general conditions only take you so far” and that there were many other issues and areas to consider. These included industrial relations, procurement profile and local commitments to communities and project policies and procedures.
He also highlighted the importance of effective stakeholder engagement and putting in place a framework that facilitates this. Morson also said that with longer term projects that continued for many years it was important to schedule mid-stream reviews and resets as often, with megaprojects, “they don’t land where you start them”.
Dispute boards and adjudication
Nicholas Gould, a partner at Fenwick Elliott, highlighted his practice’s work on the Large Hadron Collider at CERN in Switzerland and also addressed the use of dispute boards on projects more generally. Gould said that according to the Dispute Resolution Board Foundation (DRBF), a survey of 1,300 projects worldwide with a total construction value of $95bn had revealed that the average number of disputes per project was 1.3 and that 60% of projects with a dispute board had no disputes. Significantly, around 99% of the projects with dispute board recommendations had no subsequent arbitration or litigation.
Gould spoke about CERN’s panel of adjudicators which had five adjudicators including one chairperson and had to take into account of two systems of law and construction codes and procedures. Gould said that the panel was working well and benefiting from on-site meetings, which he said were crucial in the panel’s success.
Other success factors included an initial project meeting at the very outset, regular site visits every four months, presentations covering project progress, anticipated completion, variation status, notices and claim status, a regular assessment of the conditions on the ground – Covid, inflation, Ukraine – together with regular discussion and dialogue and the use of informal opinions and decisions if required.
When things go wrong – and why
Rounding up the panel discussion, Karen Gough, barrister, attorney-at-law and arbitrator at 39 Essex Chambers (pictured above), talked about megaprojects from the perspective of someone who “only sees these projects across my desk when they have gone wrong, often disastrously so”.
Gough said that often when projects go wrong it wasn’t a surprise, with lack of discussion and dialogue amongst the partners, funding constraints leading to changes to scope and design changes and poorly drafted contracts and inappropriate risk allocation all common factors when projects break down leading to disputes. She also warned against the adulteration of FIDIC contracts which often led to project problems.
In conclusion, Gough said that good faith and collaborative working obligations were key tools of dispute avoidance and they do not function as dilutants of contractual rights and obligations. “The catalysts for successful megaprojects are good planning, fully developed design, good procurement and project management. And given the risks, effective and timely dispute resolution mechanisms are also essential,” she said.
The central role of tried and tested FIDIC contracts was a key thread raised by all the speakers in the session together with a warning not to “adulterate” and change the contracts in such a way as to dilute contractual rights and obligations.
While it was inevitable that FIDIC documents would be changed to suit key statutory requirements across different territories, this needed to be done in a way that preserved the essential essence of a FIDIC contract which was to promote fair and equitable terms for all project partners, including the proper allocation and management of risk.