06 September 2005
Key Points:
The project is the largest Build Operate Transfer project currently being undertaken in the world.
In July 1998 Taiwan High Speed Rail Corporation ("THSRC") entered into the Taiwan North-South High Speed Rail Project Construction and Operation Agreement ("C&OA") with the Taiwan Government. Under the C&OA THSRC will construct, operate and, after 35 years, transfer back to the Taiwan Government a high speed railway between Taipei and Kaohshiung. Upon completion, trains will operate at speeds of up to 300km/h and link Taiwan's major population hubs. The project is the largest Build Operate Transfer project currently being undertaken in the world.
The total cost of the construction phase of the project is estimated to be approximately US$15 billion (excluding the land cost, which is the Taiwan Government's only contribution to the project). The project includes the provision of:
The civil construction works consist of approximately 250km of viaducts, 50km of tunnels and 26km of cut and fill sections, which had an estimated cost (at 1999 prices) of approximately US$6.5 billion. This article provides a brief case study of the civil construction works contracts ("Contracts"), with particular emphasis on:
The chosen delivery method
Design and construct contracts were virtually unknown in Taiwan prior to the high speed rail project. The Taiwan Government directly undertook major infrastructure works, usually on a re-measurement basis. Normally an advance payment of 20 percent of the contract price was made to the contractor upon award of the contract.
Time for completion of the Taiwan high speed rail civil construction works was of the essence, due to the heavy upfront project expenditure and the finite concession period. A realistic construction programme was therefore required. There was a need to integrate and overlap different activities to minimise construction time.
THSRC's financial model assumed 30 percent equity and 70 percent debt financing. Sound financial management calls for accurate budgets and vigorous expenditure controls. Therefore, to provide certainty of outturn cost, the Contracts were required to cover, as completely as possible, all operations and risks for a lump sum fee. The use of a predetermined payment schedule was considered to provide the optimum cash-flow control for both THSRC and the contractors.
Therefore, THSRC decided to:
The resolved solution was to award comprehensive lump sum design and construct packages with all major risks and contingencies carried by the contractors.
The options ranged from awarding one super Contract to dividing the civil works into approximately 40 separate Contracts. The critical factor in determining the number of Contracts was that THSRC required all of the civil works to be completed on programme as an integrated whole. The greater the number of Contracts the more likely it was that Taiwanese companies would be able to participate, which had numerous advantages. Fewer contractors meant less risk and increased the likelihood that the required quality would be achieved. Ultimately the decision was made to geographically divide the civil works into 12 separate Contracts. The successful contractors consisted of major international construction companies from Germany, Thailand, Korea, Hong Kong and Japan, in joint ventures with Taiwanese entities.
Various standard forms were considered including: FIDIC; US, Australian and New Zealand standard forms; Hong Kong Airport core programme; and publicly available contracts from international railway projects. Ultimately, the ICE Design Build Model Conditions (1st edition) from the United Kingdom were selected as the basis for the Contract general conditions. The model conditions were amended to accord with the project constraints.
Influencing factors in drafting the Contracts
The aim in drafting the Contracts was to allocate risk to the party that was best able to control that risk. The most critical issue was to place design responsibility on the contractors.
The C&OA was the fundamental document that controlled THSRC's requirements. The C&OA specified that quality standards were to be as high as reasonably possible. The Contracts therefore had numerous provisions regarding quality, including the requirement that the contractors provide a quality plan. The Contracts also required THSRC to engage an independent checking engineer to advise THSRC on quality and technical issues, although this was not strictly required under the C&OA. A further independent verification and validation engineer was required under the C&OA to issue a certificate to the Taiwan Government before commencement of revenue service.
The Contracts expressly required that the works be fit for the purposes specified or implied in the Contract. The contractors were also required to exercise the skill, care and diligence of contractors experienced in work of a similar size, scope and complexity as the civil construction works.
The C&OA did not prescribe how THSRC were to manage the construction phase. THSRC elected to take a "hands off" approach to management of the design process because its intention was to be a railway operator and not a civil contractor. THSRC required commencement of operation as soon as possible. Therefore, as part of the design review process, the Employer's Representative [1] did not approve the contractor's design, but rather issued a statement of no objection to that design. A statement of no objection did not relieve the contractor from any its obligations under the Contract. As a matter of practice, depending upon the criticality of the particular design, the Employer's Representative or the independent checking engineer generally checked between 10 percent and 20 percent of the design.
Effective management of interfaces between different contractors on the project was critical. These interfaces included all facets of the project, including trackwork and the core electrical and mechanical systems. One suggested option was a master interface agreement between all project contractors, under which a breach by one contractor would result in direct liability to the other contractor that suffered a loss. However, THSRC did not apply this option.
Instead, a contractual obligation was included that required the contractors to use their best endeavours to facilitate the integration and coordination of the civil works with the works and activities of all interfacing parties. The contractors were not given exclusive access of the site and were expected to allow interfacing parties' access whenever it was safe to do so. This best endeavours obligation was placed on the contractors because:
Payment was made under the Contracts upon the contractors achieving prescribed "milestones". These milestones were linked to important items in the baseline programme. If the contractor did not achieve the milestone by the agreed date, the price centre associated with that milestone was frozen until the date the milestone was achieved. On every Contract there was at least one revision to the baseline programme and a consequential adjustment to the milestones and price centres. This gave the contractors the incentive to work in accordance with the baseline programme through to substantial completion.
An additional useful tool in the payment regime was "Price Centre One". Price Centre One was an amount equivalent to 10 percent of the total Contract price, payment of which was spread over the duration of the Contract. If there were ongoing quality problems or if the contractor breached the onerous safety obligations under the Contract, payment under Price Centre One could be frozen.
Risk for ground conditions was allocated to the contractors. This approach was considered reasonable because:
Potential contractors were told early in the tender process that opportunities for extension of time would be limited. The contractors were contractually obliged to use their best endeavours to overcome and mitigate the effect of any potential delay event. The contractors were expected to have the ability and experience to deal with typhoons, obtaining Government approvals in a timely manner, preventing illegal access and managing the design.
Insurance was controlled by an extensive and robust programme, paid for by THSRC that covered THSRC, contractors, subcontractors, manufacturers and suppliers. Subject to responsibility for any policy excess, insurance moneys would be paid on a loss basis and not according to risk allocation under the Contract. The insurance programme included coverage for claims from third parties, damage by third parties, escalation costs for reinstatement and damage to adjoining property.
Dispute resolution under the Contracts comprised of three stages. The first stage was a decision by the Employer's Representative within 30 days of referral of the dispute. If the dispute was not resolved then an independent conciliator (or panel of 3) could be appointed. The conciliator was required to make a decision within a maximum period of 120 days. Importantly, conciliation could occur during the course of the Contract and the conciliator's decision would be binding
on both the contractor and THSRC. Either party then had the option to proceed to arbitration. Alternatively, the parties could agree to waive the requirement for conciliation and proceed directly to arbitration.
The success story
The first Contract was awarded in January 2000 and all the civil works Contracts were awarded during the first half of that year.
You may recall that in September 1999 Taiwan suffered a devastating earthquake and over 2,000 lives were lost. As a result, the Taiwan Government decided in April 2000 to revise certain building and structural seismic design criteria. This was potentially disastrous for the civil construction works. Following a period of review by internationally reputed seismic specialists and negotiation with the Government, an approach was agreed which allowed the civil construction works to proceed.
Despite this obstacle all 12 of the Contracts were completed by the initially programmed dates. The first Contract achieved substantial completion in November 2002 and the final Contract was substantially completed in November 2004. 30,880 piles totalling 1,400km in length, 2 million tonnes of rebar and 8.5 million cubic metres of concrete have been placed.
Notably, the total cost of the civil construction works was less than 5% higher than the tender prices (excluding the cost effects of the Government amendments to seismic design criteria). Only 2 conciliations occurred and in both cases final accounts were agreed after conclusion of the conciliation. No disputes proceeded to arbitration.
All parties involved with the successful completion of the Taiwan High Speed Railway civil construction works are to be commended. This new infrastructure will have a significant impact on the socio-economic development of Taiwan.
Clayton Utz has been involved with the THSR project since 2003. Assistance in preparing this article from Mr Bernard Fleming, Vice President of THSRC's Contract Administration Department, is greatly appreciated.
[1] The Employer's Representative was the person appointed by THSRC to act on behalf of THSRC for the purposes of the Contracts.
