21 Sep 2011

Nothing suburban about this fast track to success

by Vanessa McBride

This new quasi-alliance contractual arrangement turned a failing rail project into a successful, on-schedule, below budget procurement of additional trains.

What is the project all about?

In early 2003, RailCorp contracted with UGL Rail for the design and manufacture of new train carriages, known as Outer Suburban Cars (Oscars). The first two stages of this train procurement resulted in 122 carriages. However, the last carriages were delivered more than a year after the dates originally contracted, and the drawn-out process proved commercially unsatisfactory for both RailCorp and the contractor.

Stage 3 of the Oscar Project, which commenced in 2009, involved the procurement of a further 99 carriages (an initial tranche of 72 carriages and a further tranche of 27) at a cost of around $445M. The reason why this third stage was so successful was that, rather than merely exercising an option under the existing contractual arrangement, this final stage was delivered under "quasi-alliance" terms.

The new trains being purchased under the Oscar Stage 3 contract are modern, air-conditioned trains with high standards of passenger amenity and accessibility. They will be used to provide outer suburban services (ie. services to Kiama, Gosford/Wyong and Springwood). These routes are presently served by a mixture of Oscar and Intercity trains. The Stage 3 Oscars will replace the Intercity carriages on these routes, increasing seating capacity and making the service fully accessible.

The first trains have already been delivered ahead of time and on budget (almost unheard of in Australian rolling stock projects), with the prospect of significant cost savings over the whole delivery. It was this significant turnaround on the project, in cost and timing of delivery and also in the greatly improved relationship between the parties, that gave the NSW Government sufficient confidence to increase the original order of 72 passenger carriages by a further 27 carriages to 99.

What's so unusual about Oscar 3?

Passenger train projects are complex and historically have suffered delays, defects, cost overruns and disputes. The opening stages of the Oscar Project were no exception. In a dramatic turnaround of a failing project, Oscar Stage 3 is a different story.

In March 2009, when the Stage 3 contract was signed, there were still carriages from the earlier orders undelivered, no Oscar train had achieved “Practical Completion” (ie. reached the contracted specification), and claims were still outstanding. Entering into the Stage 3 contract required each party to place great trust in the other's ability to change their entire approach to the project.

We all experienced great satisfaction when the first Stage 3 train was delivered in September 2010, five weeks early, and again when the next train and the next were delivered ahead of time. A focus on safety has meant that there has not been a single lost time injury. The project as a whole is on schedule and significant cost savings are expected to be shared between the parties.

A passenger train project with no disputes, no cost overruns, no delays and excellent quality control – unique indeed.

What did Clayton Utz do?

At the end of 2008, RailCorp sought advice from Clayton Utz about how to revitalise the Oscar Project and how RailCorp could procure additional trains in an environment of hostility and claims. UGL Rail was pushing for an alliance contract, but given the rail safety regulatory regime and the safety, reputational and political risks that RailCorp is unable to transfer or effectively share with the private sector, a standard alliance contract was not a feasible option.

Despite these challenges, the parties invested in alliance workshops during the negotiation phase. Clayton Utz (through a small core team of Owen Hayford, Vanessa McBride and Emily Griffiths) assisted RailCorp to negotiate a quasi-alliance arrangement which sought to align the interests of the parties closely enough to ensure positive and co-operative behaviours would transpire.

In view of the claims and disputes that had arisen on the first two stages of the Oscar Project, a Dispute Resolution Board was established to provide speedy issue resolution (and we are pleased to report that there have been no disputes in relation to Stage 3). Claims from the earlier orders were dispatched to a fast-track arbitration process and managed by separate teams. New project managers were appointed for Stage 3, with significant changes to both project teams. Collaborative supply chain management was introduced. The first two trains were treated as a pilot build and were shepherded through the production line by a “tiger team” to identify opportunities for quality and efficiency opportunities. Lessons learned have been embedded in the production line processes. Senior management remained close to the project to ensure issues were dealt with promptly.

The personal commitment of the project teams is reinforced by the contract structure developed by RailCorp and UGL Rail, with the assistance of Clayton Utz. Some key differences in this Stage 3 contract include:

  • New leadership structure using a Project Leadership Team;
  • New risk-sharing structure;
  • New payment regime and liability regime;
  • Tailored performance incentives, including:
    - A Target Outturn Cost which includes some RailCorp costs as well as Contractor costs to encourage cooperation in the on-track testing and commissioning phase;
    - Cost underruns are shared between RailCorp and UGL Rail, with UGL Rail able to earn a greater share for each train delivered on time; and
    - Cost overruns: UGL Rail takes 80% up to two thirds of the Fee, then 40% to a maximum of the Fee;
  • No LDs for late delivery (but Fee entitlement is deferred);
  • Minimal design risk as the Stage 3 Baseline Technical Documentation has already been established in the earlier stages;
  • New regime for variations;
  • Refined testing regime; and
  • New dispute resolution process incorporating a Dispute Resolution Board who attend some Project Leadership Team meetings in order to stay abreast of current issues.

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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.