Focus: Tendering for projects - administration risk
Services: Property & Projects
Industry Focus: Property

Lawyers are often asked to provide a high level 'red flag/horrors only' review of potential risks under proposed project documentation for tenderers. Quite often the party requesting the review is a new entrant in the Australian market, or a newly formed Australian company venturing into the major project space in its own name for the very first time. These parties will have a proven track record in the technical delivery of such projects and will therefore encounter few issues in preparing and pricing the technical aspects of the proposal. However, if and when these parties decide to submit a tender response without the assistance of a local in-house legal team who would ordinarily advise on the legal aspects of the contract for the purposes of the tender response, there are several considerations that can sometimes be overlooked.

It can be very tempting for some parties to resist proposing any departures to the contract terms in the belief that it will take their company out of the running, and in the hope that it will assist in getting their first project over the line and on to the deal sheet. Matters can become more complicated if the contract in question is a subcontract drafted on a back-to-back basis with a head contract, as the head contracting party in these circumstances will naturally seek to pass down all corresponding risks. Sometimes the scope for negotiation will be very limited.

In addition to the commonly known risks, it is very easy to overlook the sleeping tiger in this process – administration risk.

What to look out for

In any high level risk review, there are generally three key categories of concern from a legal perspective regardless of the nature/subject matter of the project. The first two categories of risk are well known and typically receive the most attention.

  • Liability: What is your total potential liability to the other party (worst case scenario) and how could such liability arise? Is liability for consequential loss excluded? Are you required to provide indemnities? Does the contract provide for a proportionate reduction in liability to the extent the loss is caused or contributed to by others? Is liability capped, and if it is capped, are the exclusions to the cap so significant as to render the cap meaningless or will you end up carrying significant uninsurable liability?
  • Entitlements: How do the payment provisions operate? What must you achieve/provide to ensure timely payment so as to avoid cash flow issues? What deliverables are required and when? Under what circumstances can payment be withheld or delayed? Which party takes on the risk for neutral delays and/or concurrent delays? What notices are required to obtain entitlements and in what time frames must these be provided? Are there time bars?

Most contracts will contain provisions to address some (or indeed all) of the above issues and this list is by no means exhaustive. Whether they are acceptable or open for negotiation by the other party will vary on a case by case basis depending on the type of project (high profile or not), the nature of the contracting parties (public or private) and the key drivers for the project (whether it is time/cost and/or quality critical).

Regardless of the particular facts, there is a third consideration that is often overlooked, but is critical for any party preparing a tender response. It is this: in addition to considering the contract and pricing the technical delivery aspects of a project, it is important to remember the need to factor in (and price) the administration risks.

Administration risks and management/mitigation – what you should know

It is essential to assess what will actually be involved in administering the contract in accordance with its terms in order to preserve your contractual entitlements and to then factor these costs into your tender price.

For example you should consider the following:

  • Consideration of the preparation of numerous and ongoing deliverables – you may be required to provide design documents, programs, management plans, quality plans, testing and acceptance plans, maintenance plans, risk management plans, disaster recovery plans, training plans, work health and safety plans, environmental plans, traffic management plans, security management plans, transition out plans etc. Many of these documents will require amendments and updates during the course of the project. If you are contracting with Government the list can be extensive and overwhelming, particularly for new entrants. It is also not uncommon for provision of these deliverables to be expressed as pre-conditions to payment or to your ability to progress the works or services. Do you have adequate resources and experience to prepare these? Have you priced the cost of engaging the appropriate experts that may be required to assist?
  • Consideration of the ability to administer entitlements – if you cannot (or prefer not to) amend the contract to avoid tight time frames and often onerous or inflexible notice provisions and time bars, do you have adequate resources to administer the contract? If not, what additional resources might you need and at what cost? Do you need a dedicated contract administrator(s), additional project managers, administration support or legal support during the project delivery phase? Will this be achieved on a project contract basis or will you require long-term in-house resources? How can you ensure that the project knowledge and detail is captured and recorded, particularly if the delivery phase is followed by a long-term maintenance or operation phase?

Large and/or sophisticated parties no doubt already have these resources available and the experience in providing the often numerous and ongoing deliverables and ongoing notices required under these type of contracts. However, new entrants in the project space are often unaware or reluctant to factor in these costs in when preparing tender responses and instead may be content to wait until they have the first few projects underway before they consider they can justify the associated costs.

Experience has demonstrated time and time again that factoring in these risks and making provision for these additional resources may be absolutely essential to ensuring that you are able to comply with the requirements of a contract and therefore be in a position to claim and recover amounts you would otherwise be entitled to. Taking on ad hoc resources once the project is underway can be haphazard, costly and can lead to unquantifiable reputational damage if not managed properly. Issues can also arise if the management 'on the ground' is not regularly updating the management 'in the office' who are often charged with the task of issuing contractual notices.

Less experienced principals can also come undone by putting forward principal–friendly contracts which require onerous administration and strict timing requirements if they do not have the appropriate management in place to themselves administer and/or comply with the requirements of contract.

Administration risk can certainly be a sleeping tiger for any party preparing a tender response. In order to prevent that sleeping tiger from becoming a hidden dragon, it is incredibly important to consider your ability to administer the contract and to appropriately price such arrangements right from the start to ensure that a proposed project does not become your last!

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories