Towards model Australian underground works contracts: Regulatory Baseline reporting—fairness when government rules and regulations change
By Professor Arnold Dix
Scientist & Lawyer, Professor of Engineering
CEO & Managing Director—ALARP Consulting Group
Starting with the Sydney Harbour Tunnel, which opened in 1992, Australia has delivered an impressive set of urban tunnel infrastructure projects using unconventional contract methods. While the rest of the world has moved towards industry-standard risk-sharing contract forms (for example the FIDIC Emerald Book 2019), Australian practice has been to use bespoke contractual forms with increasing offloading of risk to the Contractor. So, while Australia has delivered an enviable list of projects, the unequal risk allocation has taken its toll. From 1992 to now, the number of Australian owned first-rank Contractors and consultants in the infrastructure delivery business has fallen to a few. This paper advocates returning to a more appropriate risk-sharing format and proposes setting Regulatory Baselines in contracts to deal with regulatory risks, analogous to Geotechnical Baselines.
The greatest financial, technical, approval and time burdens on underground works projects in Australia are a result of regulatory uncertainty and change.
Free Trade Agreements and Investor Treaties provide a mechanism for investor-state dispute settlement to foreign companies—a set of rights unavailable to local companies. Foreign companies get to claim potentially billions in compensation through an extraterritorial tribunal if they believe their rights have been infringed. No such mechanism is available to local companies.
Leaving this distinction between foreign and domestic companies to one side, despite the potentially large impact on projects of these regulatory risks (as reflected in the existence of specific clauses in Free Trade Agreements and Treaties to redress them) our industry focus on the technical matters has historically focused our attention on addressing risk allocation for geotechnical uncertainties.
Geotechnical Baseline Reports (GBRs) originated in the USA as a mechanism to clarify the contractual allocation of geotechnical risks. After the contract is awarded, additional costs for geotechnical conditions are only paid if the conditions exceed the baselines. An entire class of latent condition contractual action virtually disappears with an appropriately drafted contract which incorporates a GBR. What is less well recognised is that well-chosen baselines also bring benefits before the contract is awarded, by forcing all of the bidders into a similar risk profile. A simple example is useful—supposing that a closed face TBM is likely to encounter 1-2 unknown, undocumented piles and that an emergency shaft and pile extraction process would be required at each pile to allow the TBM to proceed. Before the GBR, the winning tenderer is likely to be the one that assumed no piles would be encountered and planned to invoke the latent condition clause if one was hit. However, a baseline of two piles would likely compel a similar risk allocation from each tenderer. An incorrect use of the GBR would be to set the baseline at 100 piles—the net result would be the same—the winning tenderer assuming less than 100 piles (and looking to find a way to claim somehow), because the baseline was unreasonable. In summary, well-chosen baselines promote sensible allocation of risk and also clarify the identity of the owner of the risk should it eventuate.
Who should own the risk? There is a theory that the proper owner of the risk is the person best placed to control the risk. Actually, this theory is a gross simplification. A better owner of the risk is often the person best placed to bear it. A classic example of this issue is that of car accident risk. The person best placed to control the risk is the driver, but our society has long understood that this is not the correct place to leave the risk, which is why every driver must carry compulsory third-party insurance. The third-party insurance socialises the burden of the risk. In underground works projects it is the Crown that is usually best placed to burden the risk, and for regulatory risks it is the Crown that makes the laws, regulations and authorities that create and vary them. There can be no doubt that in part the loss of Australian ownership of major tunnel Contractors is the result of the application of poor risk allocation in tunnel contracts since the 1990s.
Major risks that relate to tunnel projects include the ground risk, but a greater risk may be the assumptions made about the regulations and laws that will apply to a project. Almost all Australian tunnel contracts of reasonable size currently place all of the geotechnical risk onto the Contractor without redress. This is unfair but can be explained away by the erroneous application of the theory described above without needing to ascribe any malice. However, when we turn to regulatory risks, the situation changes.
Most tunnel contracts are set up by the various state governments in Australia (the ‘Crown’), even when the Federal Government provides a significant amount of the funding. In some cases, the Crown uses existing agencies, and in other cases, a corporatised entity is set up. The Crown controls the entities agencies and organisations that create these regulations, laws and requirements. Regulatory cost and delay risks ultimately become costs of the project in terms of finance, delay, and quality of outcome—usually eclipsing ground condition risks in terms of magnitude and, unlike engineering risks—entirely beyond the Contractor’s control. Placing these risks on the Contractor is not explicable by error, it is simply unfair, and could be described as risk allocation by ambush.
Therefore, we propose the development of Regulatory Baseline Reports (RBRs) which crystalise the regulatory ecosystem for the purposes of a bid and specify how the costs will be adjusted if the regulatory environment changes. RBRs would form part of the representations made by the Crown which can be relied upon to allow a commercial bid to be formulated and a project to proceed with confidence.
An RBR encourages fairness because it allows parties to anticipate regulatory impacts (such as in design, cost and time) which can be costed in accordance with the baseline at the time of contracting. Departures from the RBR can be used to either increase or decrease the liability of the Crown.
The RBR would be a mechanism for Crown accountability for unanticipated cost and delays associated with services relocation (retail and wholesale water, power, gas, sewerage, roads, telecommunications, drainage), third party approvals (planning, environment, transport regulator, fire authorities and other government discretionary processes), changes to applicable standards, betterment, and even inappropriate exercise of project certification/verification mechanisms.
If RBRs are adopted, they must also be coupled to conditions which preserve their role as instruments of fairness. As has been seen by the perverted use of GBRs in Australia—bespoke drafting can transform a clause intended to create fairness into an even more unfair set of terms. Australia is long overdue for its own set of standard Underground Works Documents (like many other advanced countries)— the bespoke contracts industry having run its course and devastated our local contacting industry in the process.
The unfairness is not that any of the above matters are unanticipated, but that, by virtue of the existing contractual arrangements the risks are often unmanageable by and unquantifiable at the time of bid. Therefore the Contractor must endure these burdens with little and typically no accountability of government for their abrogation of control over their own authorities and servants. Delivery authorities—no matter how well intentioned or resourced—cannot effectively deliver projects for their client (the Crown) when there is no accountability to the Crown for the actions of its other Crown agencies.
The fair apportionment of regulatory risk in underground works contracts is fundamental to the Crown achieving the best value for its citizens in the delivery of underground works. With the lack of accountability of the Crown and stakeholders each regulatory discretion becomes a tool for different authorities to achieve non-disclosed objectives. Projects are forced to agree to manifestly inappropriate requirements from government agencies because the cost of delay is entirely born by the Contractor no matter how unmeritorious the demands of the regulatory process. Accountability in the contracts for such conduct, via the adoption of a RBR, would at the very least provide a level of accountability to the Crown for such conduct.
RBRs should be adopted so that the Crown assumes responsibility for regulatory risks uniquely within its control, or best placed to manage. This would clearly make the Contractor responsible for regulatory matters anticipated at the time of contracting while also creating accountability for the Crown if Crown agencies and processes failed to deliver the necessary approvals or resulted in the imposition of unanticipated costs and delays.
In the 21st century strong and trusted relationships between the Crown (and those entities over which it has direct or indirect authority and control) and the private sector are often required to deliver the complex and demanding underground works required to support and propel nations into a prosperous 22nd century.
Archaic contractual practices that emerged through the 19th and 20th centuries to transfer sovereign risk and regulatory risks no longer serve nations well because they tend to bring the Crown and the private sector into disrepute and promote hostile claims based project delivery with a focus on litigation and not engineering.
Modern 21st century mechanisms for risk allocation and dispute management—with their focus on engineering and the delivery of timely infrastructure, are a fair and welcome change in Australia to the legalistic practices of the past. The adoption of RBRs with the objective of developing a common contractual framework is encouraged. Prudent risk apportionment and modern forms of dispute avoidance should be at the heart of a modern approach to underground works project delivery. A Regulatory Baseline Report is a prudent risk apportionment tool that should be embraced in Australian contracts.
