Contracting Trends

ECRI Sponsors Meeting

7 June 2018

Contracting Trends

"Receivers Put Debts of Sinclair's C5 Concern at £7.75m"- The Financial Times (15 October 1985)

Contracting Trends

Did the Sinclair C5 pave the way for all-

electric vehicles such as the Tesla Model S?BBC Future, 2014

EVs by Make

Number of full electric models

(current and upcoming)

Audi 4

BMW 5

Chevrolet 1

Faraday Future 1

Fiat 1

Ford 2

Honda 2

Hyundai 3

Jaguar 1

Kia 3

Lucid 1

Mazda 1

Mercedes 4

Mini 1

Mitsubishi 2

Nissan 4

Porsche 1

Renault 1

Seat 1

Skoda 2

Smart 1

Subaru 1

Tesla 11

Toyota 1

Volkswagen 7

Volvo 2

Contracting Trends

Mega-Projects

Infratech

Collaborative Contracting

Participation in Emerging Markets

PPP

China Outbound Influence

Oil Price Fluctuation

US$ 212 trillion by 2030

Contracting Trends – China Outbound

Influence

• China is very successful in pursuing its

outbound construction ambitions;

• Key selling point is the ability to bring

Chinese funding for projects they are

appointed to construct

• Favour lump sum EPC or D&B contracts

• Given Chinese contractors a dominant share in target markets;

• To date, primarily, transport, power and natural resource projects in

developing/middle income countries (such as Africa), including

projects within the OBOR initiative;

• Bringing similar approach to high end markets (e.g. UK) as Chinese

economy grows and changes

• Additionally targetting factories, industrial plant and high end real

estate projects etc

Contracting Trends – China Outbound

Influence• Increasingly other contractors recognise they must

bring a competitive funding solution to compete

• Increasing use of European Export Credit Agency

support for this;

• UKEF priority, partly because of Brexit

• Country limit increased to £5bn and total capacity to £50bn in

Autumn statement

• Credit Agency support impacts contracting:

– Requirement for a minimum content of supply from the agency’s

home territory restricts choice of supply chain

– Some ECA’s require direct payment of supply chain

– ECA sign off of contract documents

Contracting Trends – Oil Price Fluctuation

• 3 years of low prices taken its toll

• Impact of rising prices yet to be felt

• Funding constrained as issues surface

– Funding deficits

– Declining asset values

– Increasing sovereign debt

• Spending is reduced

• Non priority projects suspended and there is less work

• Pricing is challenging in all markets

Contracting Trends – Oil Price Fluctuation

Bank lending

& bonds

Alternative funding and financing models coming more into focus

AndContractors/consultants looking to secure work by offering cheaper

ways to deliver or innovative commercial solutions (including funding)

Export Credit

support

All of which is affecting the basis of contracting

PPPAlternative cost models

(e.g. EPCM or Target Cost)

Contracting Trends - PPP

• PPP not politically favoured in the UK;

• But likely to be an acceleration in other jurisdictions as developing

countries (and even some developed countries like the US) seek

to address infrastructure deficits e.g:

– small existing market for PPP’s in Sub-

Saharan Africa. Zambia, Kenya and Uganda

(having already completed projects) but

have a growing pipeline and a number of

others have relatively new or are currently

introducing PPP legislation;

– Vietnam is in the process of developing the

regulation of social infrastructure PPP’s with

new legislation whilst 4 toll road PPP

projects in Indonesia were closed over 2017;

Contracting Trends - PPP

– Many Middle East countries have a strong track record of

PPP’s in power, water and now renewable

– a large number of the continuing projects are PPP’s, with

others currently being tendered.

– Nearly all Middle Eastern Governments are also now looking

at PPP for social infrastructure.

– Kuwait leading on this but with no closed projects yet.

– We see moves in the market to take advantage of these

opportunities:

• Chinese contractor’s are now encouraged to invest equity

as well as take on construction and seem to have an

increasing presence in the gulf;

• We see Consultants developing delivery capability to sit

alongside engineering skills to offer single point solutions.

Contracting Trends – Participation in

Emerging Markets

• Many developed G7 economies have still not reached

pre-financial crisis levels of construction activity

• as a consequence, some market shift towards

emerging or mid income markets in recent years

• Some painful lessons been learnt about

additional risk in those markets such as:

– Political instability

– Legal/regulatory immaturity and

uncertainty

– Local labour issues

• Now seeing that feed back into contract

negotiations

Contracting Trends - Infratech

To take some simple examples:

• the deployment of connected sensors in a public space (such

as around a transport hub) to optimise and re-direct footfall

during busy periods using data analytics;

• the deployment of sensors in train tunnels to inform

maintenance decisions.

“Infratech” is the use of or integration of digital

technologies with physical infrastructure to deliver efficient,

connected, resilient and agile assets. This produces assets

that respond intelligently, or inform and direct their own

maintenance, use and delivery. These assets may also be

automated and responsive to real-time or historical data.

Contracting Trends - Infratech

Contracting Trends – the Mega-Projects

• Increasing complexity and scale of

projects coming to market

• Whilst many of the risks are the same,

the consequences are not

• This is affecting the approach to

contracting:

– Much greater use of joint ventures;

– Multi-party “packaged” delivery;

– Push back on risk transfer to contractors under

traditional contract structures:

• Limits and exclusions of liability

• Wide ranging relief for cost overruns/delay

• Qualified responsibilities for defects

– Some use of collaborative contract structures

Contracting Trends – Collaborative

Contracting C

OLLA

BO

RA

TIV

E

LESS

Design & Build

Traditional (lump

sum)

Management

Contracting

Target Cost

Term/Framework

Agreements

Partnering

EPC Contracting

Traditional

(Reimbursement)

Construction

Management

Cost Led

Procurement

Public-Private

Partnerships

Two Stage Open

Book

Alliancing with

integrated body

Integrated Project

Insurance

Early Contractor

Involvement

MORE

Contracting Trends – Collaborative

Contracting• Outside upstream oil and gas, the more collaborative models

are still a rarity. Utilised in only a few westernised developed

countries

• In the UK, mainly used to procure large (over £100m)

infrastructure projects by Public Bodies/Regulated Industries

• Vast majority of contracts globally are let on more traditional

bases with major infrastructure and power projects tending to

be EPC turnkey (or similar within an overall PPP structure)

• Seems to be some small increases in the use of lower level

collaborative contracts – e.g. non contractual partnering, 2

stage contracting and, to a lesser extent, target cost models.

• Still very rare but that also seems to be the case more widely –

note effects of oil price fluctuations, for example.

Contracting Trends – Collaborative

Contracting

Increasing collaboration

Pure Alliancing

– Network Rail

Framework

Alliance –

Thames

Tideway

Incentives and

Target Cost –

Crossrail, HS2

Non-binding

Alliance Charter

– Bank Station

Upgrade

Others: Highways England, Anglian Water, Sellafield

Who’s doing something different?

Contracting Trends – revised FIDIC, NEC

and JCT contracts

• Coincldentally, all these standard forms recently revised

• After nearly 18 years, FIDIC Red, Yellow & Silver Books 2nd Edition 2017

launched on 5./12/.17

• After 12 years, NEC 4 was published on June 2017

• After a mere 5 years, JCT has steadily issued 2016 forms since June

2016

• The FIDIC revision is by far the most extensive and

substantial. 50% increase in word count (63 pages to108

pages). Is it really just a new contract ?

• NEC 4 is much less extensive but still contains some important

changes.

• JCT is similar but probably the least substantive – it looks

more because there has been lots of cosmetic reordering.

Contracting Trends - revised FIDIC,

NEC and JCT contracts

• One or two amendments bring the contracts into line.

• Arguably also reflect a trend for including provisions

which aim to achieve a prompt resolution of claims.

• JCT now also includes a provision which is intended

to require prompt notice as a condition precedent for

entitlements to loss and expense

• Also, after years of insisting that it was not

necessary, NEC4 now also has a final account

procedure

• Similarly, although not the same, many amendments

across the suites could also be said to follow a trend

for contracts to function as management tools rather

than only allocating risk.

Contracting Trends - revised FIDIC,

NEC and JCT contracts

• FIDIC is still by far the most popular for cross border contracts.

• The key question is whether the markets will adopt the 2017

form or stick with the 1st Edition

• Given the extent of change and that there are controversial

amendments for each party, there is speculation it will not

• As many changes improve the form, I suspect Employers will

reluctantly take it up in time but with amendment

• JCT is not used outside the UK.

• The market is already using the 2016 form and also NEC4.

• NEC is still struggling in the global market but is making some

progress in Asia, particularly Hong Kong.

• Interestingly, it is becoming more common for other forms (eg

FIDIC) to be amended to reflect some of NEC’s key principles.

• Does this suggests the substance is preferred over the style.

Mark Job

Partner

Construction & Engineering Practice Leader

Finance & Projects

T: +44 161 234 8397

M: +44 7711 657 193

E: mark.job@pinsentmasons.com

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