15 Dec 2010

Managing complex infrastructure contracts: seven suggestions for getting it right

by Stuart Cosgriff

The success or failure of a complex infrastructure project will rest in part upon contract administration, so it's important to know how to maximise your chances of success with good contract management skills.

The contractual arrangements for the procurement of any major infrastructure project are voluminous, complex and usually heavily negotiated, particularly where those projects are privately financed.

In this article we'll turn our attention to what happens (or perhaps what should happen) when the parties' focus turns to delivery of the project in accordance with those contracts, after the memories of the commercial and financial close celebrations have faded.

From this time on, the success or failure of a complex infrastructure project will be, at least in part, in the hands of the project directors charged with administering this complex set of commercial relationships. Set out below are some suggestions on how to administer the contract to maximise the likelihood that a project is successful.

1. Start with the right contract. There are many insightful commentaries on the importance of selecting an appropriate contracting model and formulating the optimal risk allocation under the selected contract, to the successful procurement of an infrastructure project. I don't propose to add to that commentary here other than to state that the right contract will also:

  • have been negotiated with an eye on how it will be managed/administered in practice and the risk mitigation strategies that can put in place;
  • provide for the management and reporting of contractor performance and the provision of feedback to the contractor;
  • include change control, management and initiation processes which are both flexible and provide certainty of entitlement for both parties; and
  • include clear communication protocols, well developed project control processes and effective dispute management and resolution provisions. 

2. Recognise that administration of the contract is important. In particular, be prepared to allocate the appropriate resources to manage the contractual arrangements – put the right team in place and give that team the resources they need to do the job. The core skills that are generally needed include:

  • relationship management and building/team building skills;
  • project management and performance management/problem-solving skills;
  • subject matter/industry knowledge;
  • negotiation skills; and
  • accountability and financial management expertise.

3. Manage the relationship between stakeholders. A relationship based on open lines of communication will allow problems to be identified and resolved early and at an appropriate level of expertise and responsibility.

The teams engaged by both principal and contractor charged with responsibility for managing the contract should understand each other's needs and objectives, as well as the contract structure and risk allocation which have been chosen (and negotiated) for the purpose of delivering those objectives. A sometimes overlooked (or undervalued) contract management tactic is ensuring the transfer and, preferably, continuity of understanding those needs, objectives and contracting strategy.

Effective relationship management does not mean not enforcing the contract in accordance with its terms. Rather, enforcing the contract in a consistently professional manner and with a clear understanding of the respective rights, responsibilities and obligations of each of the parties should facilitate the effective delivery of the project.

Problems that do arise should be addressed promptly and always within the timeframes prescribed by the contract. In most cases, responsiveness to the agreed procedures for claims and dispute management will facilitate, rather than inhibit, a co-operative approach to responding to unexpected changes in circumstances and resolving claims and disputes which might arise from them.

4. Maintain the contract documentation. It is crucial to document changes carefully and maintain comprehensive records of changes, formal notices, site inspections and meeting minutes and agenda. You should maintain version control of all key documents to insure that all personnel are using the correct and current versions of all documents. All scope changes, however minor, should be controlled and transparently documented and authorised.

5. Manage variations carefully. These are the most common source of the time and cost overruns in any project.

The careful management of variations (directed, requested and claimed) will be one of the most effective steps towards the effective management of the time and cost risks of a project. Be aware that multiple variations and other changes to a contract over the life of the contract have the potential to alter the underlying allocation of risk. Accordingly, each variation should be carefully analysed with the potential for unintended consequences borne in mind.

Failure to adequately and accurately assess entitlements with respect to delay can lead to:

  • the grant of unnecessary or inadequate extensions of time;
  • paying excessive or inadequate delay costs; and
  • unecessary elevation of disputes about entitlements to extensions of time and delay costs.

6. Manage disputes. Typically a contract will include an agreed dispute resolution process which itself must be carefully managed to avoid litigation.

When disputes do arise it is important to narrow the scope of what is in dispute and resolve the dispute as early as possible. Expert advice and analysis at this stage of a dispute can provide good long-term value to the parties.

The most effective dispute resolution procedure will be the initial discussions between the parties where differences of opinion arise. Careful preparation and planning should be undertaken at this stage including (where necessary obtaining specialist advice) to ensure that each party is ready should a dispute be elevated to other procedures such as expert determination, arbitration or litigation.

7. Take care of the details. This means paying attention to practical issues including:

  • the effective transition of knowledge from the negotiation to the management teams, which will reap dividends for both parties;
  • diarise key dates and follow up when dates are not met. Manage missed contract deadlines appropriately (either enforce them or formally vary them so that they are not at large);
  • develop contract administration manuals and document key contractual processes in a user-friendly way. Tools such as flow charts and decision trees can assist decision-making;
  • review invoices and other payment claims, including any substantiating documents carefully;
  • document all changes, however minor, and keep a register of all such changes;
  • seek to resolve disputes efficiently and at the appropriate level of responsibility (and drawing upon on resources with appropriate experience/expertise early); and
  • always serve formal notices, such as claims for extensions of time, claims for variations and the like in accordance with the agreed procedures (if the agreed method of communications is proving impractical, the parties should formally agree on an alternative).

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.