Time out on the Society of Construction Law protocol?

The Society of Construction Law's "Delay and Disruption Protocol" was published at the end of last year. Whether or not it heralds a change to conventional construction contracts remains to be seen – but will it get a fair hearing in the landscape of PFI construction?

Construction projects often have to cope with the effects of delay and disruption. These issues are so prominent that in October of last year the Society of Construction Law published the final form of its long consulted and much publicised "Delay and Disruption Protocol". It's a guide for dealing with the effects of delay and disruption in construction environments.

The protocol can be found at: www.eotprotocol.com

The protocol was produced through a collaborative effort of those involved in the construction /legal industry. It primarily deals with the time and cost implications of delays and extensions of time (EOT's) but is not meant to be a contractual document. It identifies common themes in EOT, delay and disruption claims and proposes guidance on the issues. The protocol purports to have as a key theme an "equitable sharing" of risk when delays occur.

The success of the protocol will be measured by its acceptance across relevant parts of the construction industry. Can it's application extend to all parts of the construction industry? At this stage, we don't think so. The present dynamics of the standardised PFI environment reduce the scope for application of the protocol in the near future. Take a typical PFI accommodation project as an example.

The PFI Structure

A typical PFI project agreement will be entered into by a special purpose company (Projco), whose shareholders include the design & build contractor, where the financing is secured against the income stream which only triggers on the "completion" of the facility. All of the obligations on Projco will be subcontracted to others. In short:

• the PFI project agreement will have design and build obligations and a completion date (Projco is only paid after completion is achieved)
• these will be stepped down into a fixed price design & build (D&B) contract
• residual risk will not be allowed to sit with Projco so all design and build risk is stepped down
• therefore the D&B contractor will not (as a rule) receive benefits or reliefs unless they are derived from the project agreement or covered through another source (ie insurance).

The public sector is discouraged from levying liquidated damages under project agreements – instead it is urged to rely on the economic incentive on Projco to "complete" and thereby commence its income stream. This is a product of contractual standardisation in the PFI sector. The D&B contract, however, will impose liquidated damages to insulate Projco against the lost income stream that arises when the D&B contractor completes late.

Differing dynamics

The distinction between the PFI project agreement on the one hand – and the D&B subcontract beneath it on the other – is an important one. There is little commercial incentive (or room) within this current PFI framework to move to a more "equitable" approach on issues addressed by the protocol such as EOT's. For Projco to grant reliefs and benefits to the D&B contractor, it must first secure the reliefs from the public sector under the PFI project agreement. The protocol brings this to the fore in two main areas.

Relief from liquidated damages

The protocol explains that the benefit of an EOT is twofold:

• it relieves the contractor of any liability to pay liquidated damages; and
• it ensures that a completion date remains certain.

With no liquidated damages under a PFI project agreement one of the important drivers behind the protocol is absent – the liability of one party to pay liquidated damages for late completion is not there. Also worth noting is that the public sector pays nothing until completion. The incentive to trade off liquidated damages payable (by granting EOT's or otherwise) against sums owed by the employer is also absent.

However, late completion poses the spectre of lost revenue to Projco. Liquidated damages are imposed by Projco under its D&B contract to cover this lost revenue. Projco can't forgo liquidated damages by granting EOT's to the D&B contractor if it can't recover this lost revenue from another source (ie insurance or its public sector counterpart under the project agreement). To recover it from the public sector under the PFI project agreement would mean coaxing the public sector to increase the reliefs it currently offers so that these could be passed to the D&B contractor.

The conventional wisdom in PFI is that an optimal risk transfer is currently being achieved so any increase in "reliefs" will be difficult to achieve (as it might be seen to water down the risk transfer). Statistics may support this – the NAO recently reported to parliament on the 5th of February that only 24 per cent of PFI building projects had been delivered late with just 8 per cent being delayed by more than two months: a dramatic improvement over a previous 1999 survey which found that 70 per cent of building projects had been delivered late to the public sector.

Paying for delay and owning "float"

The protocol advocates paying for delays where the completion date is not affected and draws upon the concept of "float". The float is 'the amount of time by which an activity or group of activities may be shifted in time without causing delay to a contract completion date'. Invariably, float means the contractor has targeted an earlier date for completion than required by the contract. Under the protocol, where an employer delay affects the contractor's "own" completion date, the contractor should be entitled to the cost directly associated with this (if the contractor has made it clear at the time the contract is entered that it intends to complete earlier - it also goes on to say that where the float is reduced to below zero there should be an EOT as well). Whilst not expressly recognising float, the PFI standard contract guidance recognises increased costs may not be linked to late completion (an inherent recognition of float perhaps?). This is similar, but not the same, as the principle in the protocol that the employer ought to compensate the contractor for "delay" generally notwithstanding the completion date may remain unaffected. The NHS standard contract does not recognise either of these concepts – compensation is linked to delay to contractual completion dates. There is room here therefore to enshrine the principles behind the protocol in non-NHS deals at least.

Conclusion

For the time being, express recognition of the protocol is unlikely to be achieved in PFI project agreements. This means that it is unlikely to be achieved in the D&B subcontracts as well. The dynamics in the current environment would seem just a little too different, and the risk transfer achieved to date just a little too far removed, from traditional construction projects for the protocol to get the consideration it might merit on PFI projects.

However, the equitable sharing of risk in the protocol may well have long term pricing implications and redressing the balance of time and money risk in PFI's may well offer greater long term value for money to the public sector. This may take a little time to achieve but the benefits of this should be obvious and rather than writing it off, the jury should still be out on the protocol and its "fit" with PFI.

For further information please contact Richard Guit at [email protected] or on +44 (0)20 7367 2946.