Reducing the risk of disputes on major infrastructure programmes

As published in Rail Professional Magazine, April 2021

Mitigating the risks of dispute when investing and delivering infrastructure projects is not new. But even with the host of mature contracts and ‘practitioner interventions’ from Risk, Project Management and Commercial Management professionals (to name a few), it is still one that is no mean feat. Knowing the risks and their likely causes in advance is of great value, not only with regards asking the right questions during procurement and developing planned interventions, but also in the pursuit of dispute avoidance.

The HKA CRUX Insight 2020 report has shown that across a global sample of rail and transit projects with a capital value of £117bn, the risk of dispute crystalising at almost 10% of capital project value, equating to a premium of £1.33bn. The report confirms that the most common causes of disputes in Global infrastructure projects to be (1) change in scope; (2) contract interpretation issues; and (3) incorrect or incomplete design.

There are clearly huge sums in dispute.

These causal factors are perhaps unsurprising, given that since the 1990’s there has been an acknowledged and growing fragmentation of design elements of projects, with many diverse subcontractor design packages being introduced into the design development phase? While design activities in most cases are confined to early stages in the project cycle, thus giving a longer period in which to recover the lost time, a serious error affecting multiple interfaces can cause severe time and cost impacts, which can be difficult to recover.

Despite best efforts, it is a challenge to assess project risk with absolute certainty, not least because, it is only during the construction phase that any practical issues can be fully appreciated, and new issues arise. Design risk events will also affect procurement, for example, where details are all too often left to fabricators and manufacturers[1]. Some of this can be out of necessity, for example, because fabricators are familiar with the constraints of the fabrication process, whereas a general design consultant would not be. Consequently, it is not always possible to robustly define interfaces at the ideal time. The packaging of works and services in an optimal way is one of the most critical parts of the procurement process, creating the most effective interfaces with and between suppliers, allowing a client to manage the risks it is best placed to manage. Packaging also drives the organisational delivery model and structure. Get it wrong, and significant delays and additional costs will follow.

Further danger lies in the transition gap between digital technology and the practicalities of the physical construction. Insufficient allowance for the necessary design iterations between the detailed and scope design, can store up problems for the future.

Positively, there has been a growing appetite to address this fragmentation from within the construction industry itself and from influencers of the sector. Collaborative working has been gaining ground, both in contract agreements and in practice for a number of years, as the benefits of maintaining relationships and working in a non-adversarial manner manifest themselves. In essence, the focus of collaboration is mostly on teams working together in a spirit of co-operation to design and build a project, identifying divergences in terms of planned time, cost and specified technical matters as they arise, then dealing with them using appropriate behaviours via the available contract mechanisms. To do this, attention is applied to designing out problems prior to manufacturing and construction, then monitoring and controlling any identified residual risks to reduce or maintain an accepted risk level.

Therein lies a downside, in that risk monitoring can become a retrospective exercise, looking back and taking a ‘lessons learned’ approach, while other new risks that manifest can remain unidentified.

Focus on existing risk can reduce perceptions of new risk. Maintenance of risk registers solely by those intimately involved with the project can result in significant upcoming issues being overlooked, because those monitoring the risks are simply too involved in the detail. It is also not unknown for a significant risk to be worked around on a daily basis, as its severity increases, while being played down by those who should be sounding the alarm to the decision makers with the authority to sanction possible solutions.  This is a recipe for future disputes and goes against a significant ‘learning point’ in the recent National Audit Office Cross-government report ‘Lessons Learned from Major Programmes’ which says bodies must: “ensure that information within their organisation is accurate, consistent, and timely. Decision-makers should consider whether the indicators they are given are the right ones, and how these would alert them to emerging issues. They should also actively consider whether the types of management information may need refreshing to keep fulfilling this purpose, and if so, when” [2].

Setting up and running regular multi-disciplinary design reviews is essential to enable interface co-ordination, particularly given the increasing and often diverse factors requiring to be optimised and balanced that influence the phases of a project. The latest of these, sustainability, has become a growing focus area, adding a fifth influencing factor to the traditional ones of time, cost, quality and safety.

With each additional factor lies additional risk down the line, which could affect both manufacturing and construction. For example, changes to legislation, standards and guidance, all of which have the potential to drive design and specification changes that were unforeseeable during the concept and detailed design phases, during which the majority of risk assessment were undertaken. Few clients, knowing there will be a superior bench mark by which to measure quality, or environmental impact compliance created by new standards, will want to their project to pursue an inferior benchmark, particularly if significant political pressure for compliance will influence return rates expected after handover.

In short, events with the potential to drive delays and additional costs are inevitable, so continued identification and prevention are key.

But if a 10% dispute premium on global rail and transit investment is the norm, what additional techniques could be employed for further mitigation?

One client that has made progress in moving towards prevention rather than intervention is Network Rail (“NR”). As the UK’s largest infrastructure client, NR is entrusted by the government to manage a £multi-billion investment to improve the railway during its sixth Control Period (CP6) running from 2019 to 2024. Within this investment is some £29bn to renew and enhance the railway.

Given such significant sums, were NR to have a dispute premium similar as that found on global infrastructure projects in  HKA’s CRUX analysis (10%), NR would have to deal with a claims portfolio of £2.90bn over 5 years or £580m per annum. This would have a clear detrimental impact to the value for money of UK rail investment to the tax paying passenger.

In practice, whilst NR recognises many of the common causes of dispute highlighted in the CRUX Report, their ‘disputes premium’ is less than a quarter of their global comparators and perhaps reflective of mature and effective collaborative relationships developed with its supply chain over the last 10 years.

As part of this collaborative relationship, Stephen Blakey, Commercial Projects Director for Network Rail working in concert with key suppliers and industry stakeholders, led the sector in exploring what more could be done to further reduce the propensity for dispute. The result of this collaboration was the developed and ongoing deployment of Dispute Avoidance Panels (“DAP”). The concept is simple; seek to avoid disputes from ever arising in lieu of only employing techniques that focus on intervention. 

The technique is gathering momentum and is being employed across a number of its key projects With HKA having recently been awarded the framework to provide DAPs on a number of its projects, The DAP process starts with a review of a programme by a panel comprising subject matter experts across commercial, legal, planning, and uniquely, behavioural disciplines who understand major infrastructure delivery and the genesis of disputes.

In collaboration with the project teams and using their collective expertise, the DAP members are able to identify potential issues of concern and provide the project leadership team with practical ways to avoid or mitigate the implications of such issues.

NR see the value in investing a relatively small sum during the project for interim reviews by an independent panel of experienced professionals able to view the project objectively and draw the relevant parties’ attention to potential disputes and recommending preventative action. 

The cost of such preventative techniques has proven to be a high value proposition and could help avoid significant claims and irrespective of how the cost of DAPs is calculated, the cost of deploying such preventative measures is nominal when compared to the potential costs of managing a claim. The challenge of course is how to measure the value associated with something that didn’t happen. This is where analysis of historic ‘norms’ can help. 

NR did just that in the development of DAP alongside its key suppliers, realising that whilst there is a range of mature techniques for dispute intervention and resolution, there was little by way of techniques to support dispute avoidance. The DAP members were likened by Blakey “…to being on ‘fire – watch’, looking for smouldering embers of dispute in the ‘dry grass”. And if you can show that for projects where a DAP is employed there is a lower frequency and impact of disputes than against historic norms for projects where such an approach isn’t taken, you can show the value of the ‘fire-watchers’.

Conclusion
For many major construction projects and infrastructure programmes with medium to long durations, risks on the investment, in particular the risks of ‘dispute premiums’ can be difficult to predict prior to procurement and are notoriously difficult to manage during construction. The NR experience when compared to the findings of the CRUX report suggest that collaborative working is an effective approach for mitigating the risks of a dispute premium occurring on an infrastructure project. 

Encouragingly, in addition there is a growing awareness of the benefits of avoidance rather than intervention and the value of an independent pre-emptive assessment by a panel of experts in the form of a Dispute Avoidance Panel.

The risks of adopting this type of technique is a small one; namely paying for a review where either no risks are to be found (possible but unlikely) or where no ‘dispute risks’ materialise (more liklely) which in turn presents the challenge of demonstrating the benefit where ‘nothing actually happened’.

However, the potential savings in averting major schedule delays, additional cost and the inevitable breakdown in working relationships are real, as illustrated by current ‘norms’. So maybe the questions should be whether infrastructure programmes are doing enough to address the common causes of dispute as highlighted in The HKA CRUX Insight Report? And whether such programmes can really afford not to utilise dispute avoidance techniques such as DAP?

If you require any further information, please contact Paul Cacchioli at paulcacchioli@hka.com,

[1] In recognition of the importance of this phase of the design process, the new IStructE Structural Plan of Work 2020 which largely mirrors the RIBA Plan of Work 2020, contains a Substage 4b (Production Information) between Stage 4 (Technical Design) and Stage 5 (Manufacturing and Construction).

[2] NAO Report ‘Lessons Learned from Major Programmes’ by the Comptroller and Auditor General: Session 2019-2021 So November 2020 HC 960

Paul Cacchioli, Director – HKA
Paul Cacchioli is a chartered quantity surveyor with more than 30 years of construction industry experience. He has been appointed as a quantum expert on seven occasions.

Paul has acted as the quantum expert for disputed projects including transport infrastructure and residential, mixed-use and healthcare buildings, with values of up to £250 million. His experience includes arbitration hearings, pleadings for arbitration (domestic and international), referral notices and responses for adjudication process, statements of claim, counterclaim and defence submissions, and resolution via negotiation.

Paul has worked as a commercial manager and a quantity surveyor, providing commercial stewardship, on major projects across rail and infrastructure, buildings, industrial, and power and utilities sectors in the UK, Europe and the Far East. He also has significant experience of working with distressed and insolvent companies within the construction sector.

Lori Noeth, Independent Delay Consultant
Lori is a chartered construction manager and chartered structural engineer with over 30 years experience in the construction industry and over 20 years dispute resolution experience. She has undertaken dispute resolution and engineering work for clients in many sectors including power, transport, healthcare, pharmaceutical, housing, retail, commercial, education and leisure. Her experience covers delay investigation, research, analysis and preparation of expert report material, design and engineering management for a wide range of projects, including new build, refurbishment, and historic buildings.

Stephen Blakey, Commercial Projects Director – Network Rail
Stephen is a Fellow of the Royal Institution of Chartered Surveyors and the Chartered Institution of Civil Engineering Surveyors, with 21 years of rail experience and over £12bn of major infrastructure works procured and commercially managed under his auspices. He is well versed in commercial dynamics of rail infrastructure delivery and has accountability for strengthening commercial stewardship, bench-marking and supply chain collaboration across Network Rails capital works portfolio.

His role also brings a strategic emphasis to cross industry collaboration, with responsibility to lead commercial innovation and market engagement through various forums with industry stakeholders, clients, suppliers and professional bodies.