UK water companies embrace partnering and framework agreements

Sept. 1, 2003
Framework agreements in the UK are here to stay, says Stephen Homer, who discusses their strengths, weakness and future prospects.

By Stephen Homer

Water companies in the United Kingdom have embraced the partnering philosophy as a cost-effective, time-saving procurement route to construct new water and wastewater treatment plants.

The concept of partnering in the UK construction industry arose out of the report "Rethinking Construction" by Sir John Egan published in 1998. Partnering is essentially a relationship between contracting parties that is intended to be open, co-operative and trusting usually with some form of sharing of risk and benefits. The UK water industry has been at the forefront in developing partnering projects.

Several forms of project partnering contract have been published in the UK, notably the PPC 2000 Standard Form of Contract for Project Partnering and the Engineering and Construction Contract (formerly known as the New Engineering Contract) published by the Institution of Civil Engineers (ICE). However, partnering in the UK water industry has frequently been undertaken using the Institution of Chemical Engineers Model Form of Conditions of Contract for Process Plant (I Chem E Form of Contract ). This contract form has been drafted primarily for construction projects involving process plant, i.e. plant dealing which chemical and/or physical changes of materials in bulk.

Essentially two versions of the I Chem E Form of Contract are used — the lump sum version (The Red Book) and the reimbursable contract (The Green Book) — but the latter is used more frequently in the water sector. The reimbursable form of contract is often more appropriate where there is an initial lack of definition of the project. The I Chem E Reimbursable Contract, however, has been specifically drafted to convert to a lump sum contract part way through the project once every detail of the work to be carried out has been defined. The risk with the reimbursable form of contract for the water company is that it bears the risk of any over expenditure by the contractor as it generally agrees to pay actual costs incurred plus a percentage or a defined sum for profit.

The I Chem E Form of Contract incorporates several provisions that are common to partnering contracts, but water companies typically tailor the contract to their needs by amending general conditions. The provisions of this contract that are most closely aligned to the partnering concept are as follows:-

a) that the Contractor, in negotiating prices with sub-contractors and suppliers, shall ensure all discounts, rebates and preferential terms are passed on to the Purchaser.

b) that the Contractor, shall keep books and records for inspection by the Purchaser, who has the right to inspect the records and associated documents and to have an audit carried out. In particular the open book nature of the Contractor's costs is a core provision of any partnering arrangement.

Significantly, this contract form imposes strict liability on the contractor to ensure that the plant is constructed and operates as defined in the specification or any other contractual provision. If the plant fails to pass performance tests then this contract form provides an option for payment of liquidated and ascertained damages by the contractor. Liquidated and ascertained damages are normally calculated as a percentage of the contract price, which is to be deducted for each percent or unit of shortfall below the contractually agreed quantity or quality of product, usage of raw materials, etc. The calculation of liquidated and ascertained damages requires the consideration of a number of factors, for example, higher disposal costs which could arise from any problems in the quality or quantity of effluent.

It can be difficult to accurately predict the losses that may flow from a failure to pass performance tests and this has led to water companies deleting the LADs clause and relying on their right to general damages, that is proving their actual losses in the normal way.

Other provisions limit the contractors' liability for loss of production or profit or contamination caused by use of any process, consumable or catalyst. Nothing in the contract limits the contractor's liability to deliver the full scope of work as provided for under the contract or specification.

The contractor's liability to pay damages for delay and failure to meet performance tests is often limited to a specific sum. This is not the case for product liability or liability for death or personal injury caused by the negligence of the contractor.

The I Chem E Form of Contract also provides for alternative dispute resolution. Either party can refer any dispute under the contract for final determination by an expert to be selected by the president of the Institution of Chemical Engineers. The expert's decision is binding on the parties so long as he has answered the right question even if it can be shown that has got the answer wrong. Clearly UK water companies should consider deleting this clause from the contract. The alternative form of dispute resolution provided for in the I Chem E Contract is arbitration, which has the advantage that the process is private and the arbitrator to be appointed by the parties can be from a technical discipline.

Partnering arrangements under the I Chem E have been used by South West Water for the sewage treatment plants serving Dawlish and Sidmouth, UK. (Photo by South West Water)
Click here to enlarge image

Water companies have often amended this form of contract to provide for a target cost mechanism. If a project is completed within the target cost then the contractor, water company and other parties to the Risk Sharing Deed share in the financial savings in the proportions identified, whereas if the target cost is exceeded all parties are liable for the excess cost. Normally any savings or additional costs are shared by the parties up to a limit, often in the region of four percent of the project target cost with the water company bearing the remainder of the savings or additional cost. This can cause problems in predicting the final out turn cost for water companies, and the author predicts that water companies will look for cost certainty in the future.

One example where partnering arrangements under the I Chem E have been used is the provision of sewerage treatment plants that serve the UK towns of Dawlish and Sidmouth. The £27m project started off as two schemes, which were combined to exploit similarities by adopting similar designs. The UK water company South West Water Ltd had already appointed separate design managers, so a unique partnering formula was devised to enable the two projects to be linked in one financial pot with an agreed target cost.

The two design consultants Babtie and Pell Frischmann shared design ideas, innovations, drawings and calculations. They also used value engineering workshops to arrive at an agreed target cost with a pain/gain agreement. Early risk assessment was also carried out using statistical methods which led to a budget sum for risks in the agreed target cost, available to the partners should any risk items occur. The team jointly managed the risks keeping risk expenditure to a minimum. South West Water Ltd estimated that this procurement method reduced capital costs of some 8% to 10% below the target cost. Consequently, South West Water's future partnering arrangements will link projects by geography or type and provide continuity of work for the partners. Keeping teams together is considered essential to sustain continuous improvement.

The trend in the UK is to move towards virtual companies of integrated teams from different organisations sharing offices and IT systems. The main obstacle to this is the blurring of responsibilities and potential non-availability of insurance; however whole product insurance whereby there is one policy to insure all the team members against the insured risks is developing in the UK as an answer to this problem.

Framework agreements are used in the UK to govern the relationship between water companies and contractors over a defined period, which is commonly between five and 10 years. Often the water company appoints several contractors or consultants under framework agreements and then appoints the most suitable contractor or consultant for each individual project.

Framework agreements can save considerable time and money. They provide a set of terms common to each project undertaken within the framework period, which streamlines contract negotiations for future individual projects. The main problem with such agreements is their length and that an organisation can be tied to a set of contractual terms for many years.

Framework agreements often include a number of objectives to be achieved by the contractor such as a high level of customer satisfaction with products and service delivery, employment and training of the local work force to create sustainable employment and moving towards zero defects.

Framework agreements often provide for the establishment of a core group comprising of representatives of the water company and contractor who meet regularly to review and stimulate the partnering relationship and the performance of the parties against key indicators.

Non-confrontational dispute avoidance procedures are usually built into agreements. For example, these early warning systems calls for each party to contact the other providing all available information regarding a dispute as soon as one is aware of any matter, which could lead to a dispute or difference.

Framework agreements offer continuity and an opportunity for teams to learn from project to project. Conse-quently, they are here to stay.

Author's Note
Stephen Homer is a partner in the construction department of the UK law firm Bevan Ashford EPL, which is a member of the Advoc European Network of Law Firms. He can be contacted at [email protected]

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