Project Agreement

Project Agreement

The principal agreement in a PPP arrangement is the project contract.  Originally, different agreements were used for different phases of the project, for example, the development agreement to cover the development and construction and operation agreement or the facilities management agreement to cover the operational phase. The more modern practices provide a single agreement to cover all the elements applicable to a particular project.

Under the traditional type of construction project, the public authority would typically employ its own consultants to design the project. This will include both the outline design and the detailed design for planning permission and eventual construction.  The authority would then award the contract on the basis of tenders (usually to a construction company.)  The construction company would have no responsibility for the design of the project.

A development of this which has existed for a considerable period, a design and build contract.  In this case, the contractor is responsible for design as well as construction.  This may be appropriate where the design needs to evolve during construction.  For example, specialist subcontractors or consultants may be appointed as the project develops and with their input may be changes and evolutions.

Design & Build

In a public-private partnership, the partnership agreement is closer to a design and build contract than a traditional construction contract.  Public-private partnership agreements are effectively designed and built agreements with a greater degree of overall responsibility and correspondent risk passed to the private sector contractor.

In a design and build contract, the public authority will usually retain its own consultants to develop a brief in relation to its requirements.  This will set out its requirements in output terms.  The design and build contractor responds to the proposals by setting out its own detailed proposals to implement and meet the requirements.

The design and build contractor will be responsible for a design to the extent of the design proposed.  There may be a question of degree as to the extent to which the design has been specified.  In some cases, the design and build contractor will be obliged to take over the design responsibilities entirely, including the element of design originally specified by the authority or contract.

Payments during the course of the design and build agreement will usually be made in the same manner as construction contracts.  There will usually be a payment for work done on account, less a retention which is designed to be security.  Traditionally, these payments would have been met by the authority from its own resources as a contractor.  In a public-private partnership arrangement, the financing is by a third-party funder.

Extention & Completion

Traditionally, under construction contracts, the employer appointed a project manager to administer the contracts.  Under design and build agreements, the employer’s agent plays a lesser role.  The employer’s agent may issue instructions which change the design and build and the scope of the work.  This will usually involve an adjustment in the price and may involve an extension of the completion date.

Contracts will typically allow an extension of time where third-party or external uncontrollable events outside the control of either of the parties occur, such as force majeure or its equivalent.  Upon completion, the employer’s agent or administrator will issue a certificate of practical completion indicating that the works required by the contract appear to have been completed.

Practical completion generally means that the works are finished to a degree such that they may be taken over and are fit for use.  Minor defects may be outstanding, which are to be remedied within a defects liability period, usually 12 months. Generally, half of the retention is released on practical completion, and the other half is released after the end of the defects liability period.

The contractor is usually responsible for defects in the work for a period of 6 or 12 years under the terms of the contracts.  However, their liability for indirect and consequential loss is limited. The contractor will have an obligation to remedy defects in the defects liability period.  After that, for a period, it may be liable for latent and other defects in the original work.  At a certain point, the contract’s rights will be statute-barred.

PPP Contract

In the case of PPP, the awarding authority appoints the project company under the project agreement. That project company will be responsible for design, construction and operation and finance depending on the nature of the agreement concerned.  There may be long-term obligations to maintain and upgrade the facilities.

There will be a single price which covers all the elements of the transaction.  This is often described as a unitary price or payment.  There may be a provision for deductions if the requisite standards are not met or there are defects.

The project company will appoint a construction contractor under a construction contract.  The construction contract will be in the form of a traditional contract with stage payment.  There is likely to be restrictions on subcontracting obligations. The construction company may with the approval of the awarding authority, enter key subcontracts and appointments under the construction contract.

In some senses, the project companies take the place of the awarding authority under the traditional contract. It may also contract with the operating company or entity post-completion.  It may seek to pass some of the obligations and risks to these parties under the terms of a contract.

PPP Design Risk

A significant aspect of PPP is to transfer the design risk to the project company and other private sector parties.  The awarding authority will set out its output specifications or requirements.  It will seek to specify its requirements in such a way as not to unduly fetter the scope for innovation from tenderers in the delivery of the ultimate project.

Particular factors such as legislation and technical requirements may necessitate detailed specification of requirements in some instances.  For example, in hospitals, schools and prisons, some elements of the accommodation may be prescribed. The output specification may be in whatever form is appropriate to specify requirements in relation to space staff accommodation services, location-specific features and technical requirements.

The project company’s proposal may be based on the contractor’s proposals prepared by the construction company. It  may have a stake in the project company.  It may be involved in technical discussions and negotiations.  Its subcontractors and consultants may be involved in the development and evolution of the design.

The tendering company may wish to limit its exposure to costs prior to the award. The company’s proposals would usually include reasonably detailed plans and drawings.  More detailed drawings may be required on a larger scale with respect to key aspects of the project.

The project company will define the construction and design obligation.  This must be linked to the output specification. Standards may be specified in relation to durability, performance and fitness for purpose. If the authority requires certain materials and finishes, they may be specified.  There may be provision for substitution of materials which cannot be readily obtained.

Design Issues

In PPP projects, a significant amount of the design work may take place while the awarding authority is working with the preferred bidder. The  design may be fully developed prior to entry into the project agreement.

There may be meetings between the project company’s advisers and those of the authorities in order to reach an agreement on design and an understanding of the requirements of the authority.  These will need to be documented in the agreement.  By the time the project agreement is entered, outline drawings and specifications will likely be employed and incorporated into it.

The awarding authority may seek to limit the extent to which it seems to approve the documents so as to avoid the transfer of risk to it. It may approve documents without prejudice to the obligations of the contracting company to comply with the output specification.

Commonly certain elements of the design will need to be undertaken after the agreement is signed.  There may be a procedure in relation to the evolution of the design.  The awarding authority may wish to approve the various aspects of the design as it evolves.  There will be likely relatively short time so as to ensure no delay to the project.

The project company may seek to limit the extent to which the awarding authority has a veto on project details.  Its rights may be limited to providing comments without a right to actually reject the drawing and proposal.

There may be provision for a revision of the design to take place subject to review and approval by the awarding authority.  If this affects the output specification, there will be an obligation to notify the authority. The procedure may allow the awarding authority to review, reject or require changes to a designed document.

Collateral Contracts

The awarding authority will likely be required to approve the principal contractor and key subcontractors as well as the terms of their contracts and appointments.  Almost invariably, the project company is a special purpose entity, so the awarding authority will, in practice, be reliant on the competence of the construction companies, subcontractors and consultants.

The funders and the awarding authority will usually require collateral agreements from contractors and consultants as well as key subcontractors, consultants and sub-consultants.  The purpose is to allow the authority to step into the project if the project company fails.

Typically, the debt funder will have a right to step in to protect its position.  The awarding authority may have the right to step in if the funder fails to do so.

As set out in separate chapters, direct agreements or collateral agreements may be required.  These will provide for the step-in rights.  They typically also provide for a direct undertaking of a duty of care and corresponding legal liability by the relevant consultants, contractors, et cetera, for the awarding authority and the debt funder.

Pre-Completion

Guarantees or bonds are common in large construction contracts to mitigate against the risk of the contractor’s insolvency.  They usually cover a percentage of the entire contract sufficient to cover prospective loss in the event of failure e.g. 10 percent to 15 percent.

Bonds and guarantees may be required in a PPP project. They may need to be purchased from financial institutions of high standing.

In a traditional design and build agreement, the developer/employer will require that it and its agents have access to and monitor the project during construction.  The awarding authority will not wish to undertake any responsibility for any failure to take action as a result of anything arising from inspection.

The awarding authorities agents may be entitled to make comments under the contract. The contract may determine whether and to what extent the project company is obliged to have regard to these.

In some cases, the authority itself may appoint specialist contractors directly.  The authority will wish to ensure that its specialist contractors have access to the work at various stages as required.  The project company will ensure that its contractors do not impede its progress and its works. There may be provisions in relation to liaison and cooperation.

Completion

The issue of practical completion is critical.  Prior notice will be given at practical completion so that the awarding authority may inspect the work prior to being complete. There may be a provision for contesting whether works have been properly completed.

The parties may provide some method of objectively measuring practical completion. There may be a reference to an independent party who acts as an expert in resolving a dispute to completion.

In PPP agreements, completion will be critical.  It may or may not be the point of payment of the monies. It will usually be the critical point at which facilities are accepted and are to become operational.

There may be provision for commissioning and testing key elements of the works.  The agreement may provide for inspection and commissioning within a certain period prior to the anticipated completion date. The awarding authority will usually be entitled to require problems to be rectified before valid commissioning and completion takes place.

Mismatches may arise in relation to the interaction between the completion obligations under the project agreement and those of the main construction contractor under its contract. The project company will ensure that both obligations are interlocked.

Completion Issues

The construction company will not generally be responsible for defects beyond 12 or 6 years.

The date for completion and the prices may change as a result of variations to the work.  There may be changes in law, delays due to default of one party of circumstances outside of each party’s control.  The contract will specify on whom the risk arises.

As with construction contracts, there may be a provision for liquidated damages or a fixed penalty per day if the project works are not completed by a particular date.  The payments must be a genuine pre-estimate of loss as otherwise, it would constitute an invalid penalty.