Australia: Corrs High Vis: Episode 25 - Early contractor involvement

Last Updated: 18 May 2018
Article by Andrew McCormack

Most Popular Article in Australia, June 2018

In our latest Corrs High Vis podcast, we take a closer look at Early Contractor Involvement.

It's a model which is becoming increasingly popular for engaging the market and procuring major projects. Margot Tait talks to Lawson Katiza, Associate Director at Savills and Andrew McCormack, Partner in the Corrs Brisbane Construction team.

The podcast series, brought to you by Corrs, offers analysis and insights to help you make smarter decisions.

TEXT VERSION

Margot Tait: Commentator – Corrs Chambers Westgarth – Brisbane - Business Development Manager for the National Construction and Property Team

Andrew McCormack: Corrs Chambers Westgarth – Partner - Brisbane – Construction Team

Lawson Katiza: Savills - Associate Director

MARGOT – Hello and welcome to High Vis. The Corrs Chambers Westgarth Construction Podcast. My name is Margot Tait and I am the Business Development Manager for the National Construction and Property Team. Early contractor involvement or ECI contracting is becoming increasingly popular as a model for engaging with the market when procuring major projects. I am joined today by Andrew McCormack a partner in the Corrs Brisbane Construction Team and Lawson Katiza Associate Director at Savills to discuss some of the key issues that should be considered when using an ECI process. Lawson I will turn to you first. What is ECI contracting and what are the key benefits of ECI for both the project sponsor and delivery contractor?

LAWSON – Thanks Margot. Perhaps we can go back and look at the conditional procurement model for construction where the principle will engage a design team and subsequently they will tender up the full design and get a contractor to build it. What this normally does is the principle shifts the majority of the project risk onto the building team and not surprisingly the building team will price the risk into the contract sum. In a competitive environment the contractor will sometimes wear some of the risk, but in doing so they may absorb the risk in the areas that they feel that they control some of the risk. Depending on the form of contract, the contractor may have opportunities to claw back some of this risk allocation. But where they are not able to you find that adversarial behaviours tend to creep up in the construction process. One way to manage this is early contractor involvement or ECI, which attempts to optimise risk management, risk allocation, price and control for the principle. So what ECI does is it allows the contractor to work with the design team from an early stage and to assist in managing costs and buildability issues. By so doing a builder better understands how the project is going to be delivered, they understand the design rationale that was used to achieve that design and therefore they are able to build it more competently, more quicker, cheaply and ultimately more efficiently.

MARGOT – Is ECI one size fits all propositions?

LAWSON – Look I think the short answer to that Margot is no. There is a key difference between whether ECI is competitive or non-competitive. They will produce very different types of documents and processes. Non-competitive means you are only dealing with one contractor and the key issue around that process is how long and how wide is the exclusive mandate that you give to the contractor during the ECI phase. If you have what's called competitive ECI as the name suggests there is more than one person involved in the process. You might two or even three contractors engaging in the first part of the process. What's key there, because it's not exclusive, there are two or three bidders is to deal with the probity issues and confidentiality issues between the competing bids. The other thing that's probably different between various ECI models and agreements are the types of deliverable that each project requires and that will always be different from project to project regardless of whether you are dealing with competitive or non-competitive ECI models.

MARGOT – Are there different types of ECI for different projects?

LAWSON – Well Margot different property sectors may employ ECI in different forms. This comes down to the cost risk, complexity of the project, whether there are long lead term items for equitable equipment, the allocation of design responsibility and a few other things that are project specific. Typically an ECI will be a predecessor to a D&C contract or managing from contract arrangement. However what we are starting to see now is it actually emerges in different types of hybrids for and even in fully designed lump sum contracts as well. In those cases the principle may appoint a contractor through a tender process at the outset or they may appoint someone directly based on relationship or specific expertise that the ECI contractor may have. The appointment may be two phased with the early stage being a fixed fee for the ECI involvement and that may be tendered out to various contractors. What may follow that is an advanced ECI stage or D&C contract and that may be tendered out again depending on how much value the principle or things that they have achieved from that first process. In practice ECIs take the form of ongoing or selective design workshops. Sometimes it's a toing and froing exercise between the various design teams and this tends to happen where we have geographically disparate locations or just by nature of the design that it does not necessarily require the face-to-face engagement.

MARGOT – So Lawson when should a project start to consider using ECIs as a procurement strategy?

LAWSON – Consideration of when to use a ECI should really be incorporated into the early stages of a project. Really at the project brief stage or when the procurement strategy is being formulated. By doing that you know exactly where you need to employ your ECI contractor, how they need to be engaged and how they work with the rest of the design team. Notwithstanding that the actual implementation of an ECI is ideally best suited to sort of the schematic and the design development phases, because at this stage the concept has been developed, the contractor comes in there knowing roughly what the boundaries are, what they are trying to achieve and there is brief that they can work to and start working to optimise.

MARGOT – Right thanks Lawson. Andrew what does an ECI agreement look like. Is it always a detailed and complex document, or can it be simplified?

ANDREW – The short answer I think is it depends, all your good lawyers answer. An ECI agreement or an ECI contract can be something as short as a simple letter form agreement or it could be a large document with many clauses and multiple schedules. It's really driven by the needs of the project, what needs to be delivered, what commitments need to be made at this stage and the needs and perhaps more appropriately the type of client is using the ECI phase, because if the client is a government client then the likelihood is they will be requiring a greater degree of probity and more onerous probity obligations than might be required in a private sector transaction. However a common theme in any ECI agreement is it's got to set out the process for engagements, it's got to set out how the client's team and the contractor's team are going to sit down together, workshop, risks with each other, work out ways to mitigate and provision for and then ultimately allocate risks and as Lawson alluded to previously typically that's done through a series of risk workshops and the development of a risk register.

MARGOT – I see. So what are the key legal issues that need to be considered in any ECI agreement?

ANDREW – An ECI agreement is still ultimately a contract. So the key legal issues are not that different from that which you get in any type of contract. But because it's at the front end of a transaction and it's dealing with an agreement that may or may not as Lawson mentioned before, go into a second phase when the projects actually delivered. The key things I would expect to see in there are – well what are the deliverables that a contractor actually has to provide, what sort of reports, what sort of specifications, what sort of pricing, how long is this ECI process going to go on for and is there an exclusive mandate, if it's one contractor that's going to be the key for them having an exclusivity and how can it be brought to an end early if there are termination for convenience right for the principle for the clients. Given the big costs is also going to be very important. Typically an ECI will allow a contractor to recover some of its bid costs which then becomes an issue of well – how do I verify that those costs were properly incurred, is there any cap on the recovery that I can make and indeed are there any preconditions to my entitlement to claim those bid costs. So for example, if I don't submit the key deliverables I am required to do as a contractor, I don't actually get paid and that's not a typical arrangement. I think the final point to touch on probably is confidentiality. The whole point of this exercise is to encourage a free exchange of ideas and information between the contractor and the client. If you have multiple contractors bidding, so we have got two or three involved, they will be keen to ensure that their confidential information is not shared with the other bidders. Particularly if they are ultimately not successful. In addition to that you will have the client and the contractor exchanging perhaps sensitive information with each other and they will want to make sure that this is strict confidentiality rules upon what can be done with that information and who it can be shared with.

MARGOT – Lawson what are the practical challenges in administering an ECI process and then following through into full project delivery?

LAWSON – It is important at the outset to ensure that the governance frameworks are in place for what the ECI contractors role will be. So what is the extent of it, do they inherit a design team from the principle or does the principle's design team lead, those sort of issues. It is also important that there is a clear alignment between the principle's design team and the contractor's design team just to ensure that the principle's design team don't feel that their design integrity is being undermined by having a buildability expert in the room. By doing that you create confidence between the various parties and that helps to establish a good rapport between all of the stakeholders throughout the ECI process. One way to respond to your question Margot is to pose a few other questions that the principle and the project manager ask at the outset. For example, deliverables, what are the actual deliverables as Andrew mentioned earlier for the ECI contractor, is it value management, is it [00.11.16]buildability, is it price, or is it design smarts. How much influence should a contractor have on the design and how hand's on should they be with the design inputs. Because that ends up informing how they interact with the rest of the design team. What is the cost benefit of the ECI to the project and is the ECI cost beneficial to the overall outcome of the project itself. These are business case issues that they need to consider at the outset. Should the ECI contractor be retained for subsequent stages, and if so, should there fee be determined at the outset or be progressively agreed. The last thing you want is to have a lot of variations seeping through which again starts to undermine the confidence of the team. How does a principle ensure that they are still getting market value at the end of the ECI process. So what we are saying is here is should they tender after subsequent ECI stage or indeed building stage. What form of contract would the ECI out puts go into and this is critical because it influences how much work the design team does. So do they develop a full design themselves or are they just going the design specification that will ultimately be passed on or novated to a D&C contract by the contractor. And these are just some of the challenges and questions that I encountered in developing or implementing the ECI process and they are project specific. So what we are saying is you can't apply these to every project, you just need to create or understand the specifics of the project so that you can customise the delivery to suit the challenges.

MARGOT – Right okay, thank you. And Andrew I just wanted to pick on something that you mentioned earlier. How might an ECI agreement deal with intellectual property rights in documents prepared during the ECI process?

ANDREW – Sometimes the best question of intellectual property rights. It rather depends on what the project is for as to how important ownership of intellectual property rights is. The less complex a project or whether it's using well known technology then a licence is usually sufficient. Sometimes a client will want to own the IP created in the ECI phase and as Lawson mentioned before, that might be a problem for a contractor in a competitive scenario where he loses the bid but sees his IP walk out of the door. So setting the rules of the game around use of IP rights is really important to do in your ECI contract. Working out what rights does the client have to use pre-existing IP of the bidding contractor which may be necessary in order to perform the project. Working out who indeed does own any new IP that is created in the ECI processes that are owned jointly, so that both the client and the contractor are able to use it moving forward is it owned by the clients and retained by the contractor and they give a licence to the client to use it. If it is any IP licensed the two key issues are really, what is the scope of that licence, typically it will be just for the project at hand and no broader licence for obvious commercial reasons and then in a tentorial sense if the contractor is not the selected contractor often he will say – well look that IP licence is now at an end. I am picking up my bat and ball and I am going home. So we have to see what the project throws up as to how important IP is and there is a number of ways that one can deal with it.

MARGOT – Great thank you. Some fantastic points in there gentlemen. Thank you very much both for your time today and thank you to our listeners for listening.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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