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Infrastructure agreements take closer look at risk

Owners will provide schedule relief if designer-builder can show delays have been caused by pandemic

Infrastructure agreements take closer look at risk

As the COVID-19 pandemic continues to rage, it has affected developments in procurement and contracts in the infrastructure sector through agreement provisions and risk allocation.

“It’s a very hot topic at the moment,” says Doug Younger, who chairs the Infrastructure Group for Aird & Berlis LLP, in Toronto. His firm closed a highway project in Nova Scotia in the spring, acting for the government of Nova Scotia, and after the procurement was complete but before the agreement was signed, the firm drafted and negotiated a provision in the agreement on pandemic relief.

“It was quite narrow relief, but given the stage that we're at in the procurement the government didn't have to give as much ground as it would have otherwise, so the relief is quite surgical and quite narrow,” Younger says, noting that Moody’s rating service had “positively opined” on the pandemic relief provision.

“It's a huge topic on every procurement that's going on right now, and Infrastructure Ontario is looking at making and providing a change to its entire portfolio to provide some relief,” he says. “But the reality is that contractors and project companies want to be fully protected against any consequences of any pandemic that might ever occur, and clearly owners, because they want to transfer risk, are generally not prepared to offer blanket reliefs like that.”

Where we end up remains to be seen, Younger adds; “but there’s no question that for projects that are in procurement, contractors are telling owners that they’re not prepared to bid unless they can get significant relief. Private parties are saying they want protection, and there’s little to no protection in most of the existing project-agreement templates designed to cover these circumstances.”

Risk-structuring in contracts has also seen a trend toward early contractor involvement, says John Dipple, partner, MLT Aikins LLP in Regina. Early contractor involvement, a procurement model that allows a builder to engage in a construction project and even start work before the design has been completed, is a benefit touted in the construction management model, in integrated project delivery and even design-build, he adds. It aims to “improve the constructability of a project and minimize design coordination claims. These are good things both from an owner and a contractor’s point of view.”

Aligning the interests of owners and contractors related to relief events is top of mind during the COVID-19 pandemic, and another trend in contract risk allocation is for owners to be more willing to compensate contractors for cost, but not profit, Dipple says. 

“If the event happens, the contractor is not motivated to draw the event out; they're motivated to solve it, to reduce the impact, because it's not increasing their profit. It's just extending the time they're on the project.”

Owners are also assessing contracting parties against their needs to travel, due to interprovincial travel restrictions, as part of the evaluation process. “Having key people fly in, fly out, drive in and drive out is no longer seen as an essential or necessary part of the project.”

Project bidders are looking for relief in time and money, says Younger. If the pandemic continues, bidders want extra time on the basis of closure orders, supply chain disruptions, employees who are refusing to come to work or call in sick; and they want more money in order to implement social distancing and run more shifts, involving overtime.

Proponents want to be fully compensated, and they want schedule relief. “Owners, on the other hand, are hoping that Project Co [responsible for the design, build, finance and delivery of the project] will retain some of the risk in order to incentivize Project Co to implement a workaround and deal with the problem.” So, owners may offer partial compensation and agree to pay senior debt service as long as the effects of the pandemic continue, but not pay any further compensation.

“Typically, owners are prepared to provide schedule relief so long as Project Co can demonstrate that any delays have in fact been caused directly by the occurrence of the pandemic.”

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