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Contracts:
Construction Contracting

Rob Morson School of School of Construction Economics & Management

Partner, Finance & Projects
London/Johannesburg University of the Witwatersrand
rob.morson@pinsentmasons.com
8 May 2023
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It’s not “just a contract”

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It’s not ‘just a contract’

• An evolving subject matter against a backdrop (very often over an extended period
of time) of evolving circumstances (both unforeseeable and foreseeable, albeit not
always predictable).
• Breach (albeit not material) is expected. A degree of breach is the rule rather than
the exception and events or circumstances giving rise to disputes are common
place; not because of the nature of the industry players but rather the nature
of the activity.
• Risk is considered (not avoided at all costs), understood and allocated.
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A Construction Contract…
• Provides, based on what is known at the time of contract, for what is ultimately
Deliverable, by When and at what Price.
• Deals with a relationship (not necessarily founded on good faith, mutual cooperation
and trust) just as much as it deals with the Deliverable.
• Defines or restricts, in common law jurisdictions, the extent to which the common
law would otherwise govern the relationship.
• Defines the relationship - it is not a mere formality in the process.
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Construction Contracts
• The Deliverable: To define the deliverable, with the degree of accuracy possible at
the time, and to allow the deliverable to evolve in a controlled manner;
• The Price: To define the price of the Deliverable based on what is known /what ought
to be reasonably foreseeable to an experienced contractor at the time, and to provide
for the price to change in a controlled manner;
• The When: To define the time for completion of the Deliverable based on what is
known /what ought to be reasonably foreseeable to an experienced contractor at the
time, and to allow the time for completion to change in a controlled manner;
• The Risks: To allocate the foreseeable and unforeseeable/likely and unlikely risks
between the Parties; and
• Disputes: To provide a mechanism to principally avoid, but to otherwise effectively
deal with disputes.
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Bespoke and Standard Forms

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The Basics
• What is bespoke (Employer in-house or Project bespoke)?
• What is standard form (International vs. Local)?
Plethora of standard forms of construction contracts

ACE Model Forms IChemE Model Forms

(Association of Consultancy and Engineering) (Institution of Chemical Engineers)
ENAA Model Forms IMechE Model Forms
(Engineering Advancement Association of Japan) (Institution of Mechanical Engineers)
FIDIC NEC
(Fédération Internationale Des Ingénieurs-Conseils) (ICE – Institution of Civil Engineers)
ICC - The Infrastructure Conditions of Contract SAICE GCC (South Africa)
(jointly sponsored by ACE and the Civil Engineering (South African Institution of Civil Engineering)
Contractors Association (CECA)
JBCC (South Africa) JCT (UK)
(Joint Building Contracts Committee) (Joint Contracts Tribunal)

The obvious benefit of the standard form is common understanding and the resultant efficiency in tender
and execution phase… BUT… STANDARD FORM DOES NOT MEAN STANDARD APPROACH
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Bespoke v Standard Form

• Traditional vs. Non-Legalistic approach;
• Use in Country & Internationally (know the market);
• Flexibility for use as a broader procurement methodology;
• Suitability for construction procurement:
• construction and consulting services;
• design and build/turnkey/construction;
• availability of standard form Sub-Contracts;
• The role of the Engineer/Project Manager/Principal Agent – in-house vs.
Independent.
• Designated forms for construction procurement in Country? CIDB…
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Pause: South Africa & The CIDB

• Construction Industry Development Board (CIDB) - Standard for Uniformity in
Construction Procurement.
• Issued in terms of sections 4(f), 5(3)(c) and 5(4)(b) of the Construction Industry
Development Board Act 38 of 2000 read with Regulation 24 of the Construction
Industry Development Regulations, 2004 (as amended) issued in terms of section 33
of the Act.
• Establishes requirements for procurement within the construction industry which are
aimed at bringing about standardisation and uniformity in construction procurement
documentation, practices and procedures.
• Covers (i) Solicitation of Tenders, (ii) Quality (functionality) Requirements, (iii)
Procurement Documents & (iv) Register of Contractors.
• Mandatory compliance for organs of state when engaging in construction
procurement.
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SA: Public vs Private Procurement

Private

Bespoke CIDB Recommended Forms

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SA: Public vs Private Procurement

Private State-Owned Entity

Bespoke –
CIDB CIDB Only for non-
Bespoke Recommended Recommended CIDB
Forms Forms regulated
procurement
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SA: Public Procurement standard forms

Construction Professional Services

FIDIC

NEC PSA
NEC

JBCC CIDB Standard Forms

GCC

CIDB standard forms

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Construction Contracts - usual provisions

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What we expect to see…

• Design/quality responsibilities and • Delay damages
related obligations • Low performance damages
• Contract price • Limitation of liability
• Payment structures (progress/milestone • Insurance responsibilities and related
based) obligations
• Time & cost entitlement • Dispute avoidance and resolution
• Variations procedures
• Bond requirements (performance,
retention & advanced payments)
• Early warning & risk management (risk
registers & progress reporting)
• Programme requirements and status
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Construction Procurement & Pricing

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Construction Procurement Models

A. Turnkey &/or EPC (Engineer[ing] Procure[ment] & Construct[ion])*
i. Performance orientation with greater transfer of risk to Contractor
ii. Trade off between certainty of price and control of (i) design and (ii) contingency
iii. Aim: cost, time and performance certainty (e.g. availability, yield etc.)
B. Design-Build*
C. Traditional Construct to Employer’s Design*
D. EPCM (Engineering Procurement & Construction Management])/Delivery Partner
E. Multi-Package/Contractor*
F. Management Contracting:
i. Management Contracting
ii. Construction Management
G. Partnering/Alliancing
*PRICING AGNOSTIC (IN THEORY)
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Project: Gas Fired Power Station

Owner –
Gas Supplier Customer
Employer

FEED Design Project Engine/ Technology Site Survey

Engineering Manager Turbine Supplier
Design Supply

Ground Ancillary Civil Mechanical & Gas tie–in Commission Pipe

Stabilisation Infra-structure Engineering Electrical & Test Fabrication
Installation
 Pinsent Masons A purpose-led professional services business with law at the core

Project: Gas Fired Power Station

Owner –
Gas Supplier Customer
Employer

FEED Design Project Engine/ Technology Site Survey

Engineering Manager Turbine Supplier
Design Supply

Ground Ancillary Civil Mechanical & Gas tie–in Commission Pipe

Stabilisation Infra-structure Engineering Electrical & Test Fabrication
Installation
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Construction Pricing Models

A. Lump-Sum (Fixed/Firm/Variable – rise and fall/CPA)
B. Re-measurable (Fixed/Firm/Variable)
C. Cost-Plus
D. Target Price (Fixed/Firm/Variable rise and fall/CPA underlying rates/prices)
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Infrastructure Procurement
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Infrastructure Procurement
Who builds, owns and operates

Works & Services

PPP
Public Sector

Private Sector
Procurement:
Construction to Employer
Design
Turnkey &/or EPC
Management & Operating
Design-Build Contracts
Traditional (Construct to Leases Affermage
Employer’s Design)
Concession, DBO, BOT &
EPCM/Delivery Partner BOOT
Multi-Package/Contractor Joint Venture
Management Contracting:
(i) Management Contracting
(ii) Construction Full public divestiture (all
Management models enter the arena again
but procured by the private
Partnering/Alliancing sector)

Low Extent of Private Sector Participation High

EPCM/ Delivery Partner

EPC
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Complex Infrastructure Procurement

Procurement Mechanisms
• PPP
• Concessions,
• Leases and Affermage Contracts

Procurement Mechanisms / Delivery Mechanisms

• Design-Build-Operate (DBO), Build-Operate-Transfer (BOT) / BOOT
Contracts
• EPC/ Turnkey contracts
• Management/ Operation & Maintenance Contracts
• Joint ventures

Delivery Mechanisms Financing Mechanisms

• Consortiums • Project Finance
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What is PPP?
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What is PPP?
A. Public Private Partnership – a broad form of procurement method based on public
and private sector collaboration (across assets, services and finance) and uses
finance obtained by the private sector to deliver public infrastructure and services
B. Private sector funds the construction of the asset during the construction period
C. Public sector only pays for the asset once it has been built & made available to them
D. Payment is made for the performance of certain services and the availability of the
asset during the life of the contract
E. If the asset is not “available” or the services are not performed to the required
standard – payment deductions are made
F. Asset is typically handed back to the public sector at the end of the contract period
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Typical PPP role-players

Stakeholder Role

Authority: Procures the project and ultimately enters into contract with Project Co for
construction of the asset and provision of the services
Project Co: Special purpose vehicle, created specifically for the Project, which enters into the
Project Documents & Finance Documents which underpin the project
Lender: Enters into Loan Agreement with Project Co. - normally lending around 70/80%
(but even up to 90% at various levels) of the capital value of the Project
Sponsor: Provides initial investment in Project Co. and (usually) assists with negotiation of
the contracts and operation of the Project
Hold Co: Special purpose holding company set up specifically to hold the shares in Project
Co. and to ring fence the Sponsor’s other assets
Construction Designs and builds the asset and accepts the pass down of Project Co.’s
Contractor: construction related obligations under the Project Agreement
O&M Operates and maintains the asset once built. Accepts the pass down of Project
Contractor: Co.’s O&M related obligations under the Project Agreement.
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The PPP Spectrum

A. “Concessions, Build-Operate-Transfer (BOT) Projects, and Design-Build-
Operate (DBO) Projects are types of public-private partnerships that are output
focused.”
B. “BOT and DBO projects typically involve significant design and construction as well
as long term operations, for new build (greenfield) or projects involving significant
refurbishment and extension (brownfield).”

Source: World Bank Group PPPLRC Public-private-partnership Legal Resource Center

https://ppp.w orldbank.org/public-private-partnership/agreements
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The PPP Spectrum

“A Concession gives a concessionaire the long term right to use all utility assets
conferred on the concessionaire, including responsibility for operations and some
investment. Asset ownership remains with the authority and the authority is typically
responsible for replacement of larger assets. Assets revert to the authority at the end of
the concession period, including assets purchased by the concessionaire. In a
concession the concessionaire typically obtains most of its revenues directly from the
consumer and so it has a direct relationship with the consumer. A concession covers an
entire infrastructure system (so may include the concessionaire taking over existing
assets as well as building and operating new assets). The concessionaire will pay a
concession fee to the authority which will usually be ring-fenced and put towards asset
replacement and expansion. A concession is a specific term in civil law countries. To
make it confusing, in common law countries, projects that are more closely described as
BOT projects are called concessions.”

Source: World Bank Group PPPLRC Public-private-partnership Legal Resource Center

https://ppp.w orldbank.org/public-private-partnership/agreements
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The PPP Spectrum

“A Build Operate Transfer (BOT) Project is typically used to develop a discrete asset
rather than a whole network and is generally entirely new or greenfield in nature
(although refurbishment may be involved). In a BOT Project the project company or
operator generally obtains its revenues through a fee charged to the utility/ government
rather than tariffs charged to consumers. In common law countries a number of projects
are called concessions, such as toll road projects, which are new build and have a
number of similarities to BOTs.”

Source: World Bank Group PPPLRC Public-private-partnership Legal Resource Center

https://ppp.w orldbank.org/public-private-partnership/agreements
Pinsent Masons A purpose-led professional services business with law at the core

The PPP Spectrum

“In a Design-Build-Operate (DBO) Project the public sector owns and finances the
construction of new assets. The private sector designs, builds and operates the assets
to meet certain agreed outputs. The documentation for a DBO is typically simpler than a
BOT or Concession as there are no financing documents and will typically consist of a
turnkey construction contract plus an operating contract, or a section added to the
turnkey contract covering operations. The Operator is taking no or minimal financing risk
on the capital and will typically be paid a sum for the design-build of the plant, payable in
instalments on completion of construction milestones, and then an operating fee for the
operating period. The operator is responsible for the design and the construction as well
as operations and so if parts need to be replaced during the operations period prior to its
assumed life span the operator is likely to be responsible for replacement.”

Source: World Bank Group PPPLRC Public-private-partnership Legal Resource Center

https://ppp.w orldbank.org/public-private-partnership/agreements
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The PPP Spectrum

“Management contracts and Operation and Maintenance (O&M) contracts are
contracts governing a type of public-private partnership (PPP) agreement. … The term
"management contract" has been applied to cover a range of contracts from technical
assistance contracts through to full-blown operation and maintenance agreements and
so it is difficult to generalize about them. The main common features are that the
awarding authority engages the contractor to manage a range of activities for a relatively
short time period (2 to 5 years). Management contracts tend to be task specific and input
rather than output focused. Operation and maintenance agreements may have more
outputs or performance requirements. …The simplest management contracts involve the
private operator being paid a fixed fee by the awarding authority for performing specific
tasks - the remuneration does not depend on collection of tariffs and the private operator
does not typically take on the risk of asset condition. Where the management contracts
become more performance-based, they may involve the operator taking on more risk,
even risk of asset condition and replacement of more minor components and equipment.”

Source: World Bank Group PPPLRC Public-private-partnership Legal Resource Center

https://ppp.w orldbank.org/public-private-partnership/agreements
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The PPP Spectrum

“Leases and affermage contracts are generally public-private sector arrangements
under which the private operator is responsible for operating and maintaining the utility
but not for financing the investment.”
They “differ from management contracts principally in that:
• the operator does not receive a fixed fee for his services from the awarding authority
but charges an operator fee to consumers, with
– in the case of a lease, a portion of the receipts going to the awarding authority as
owner of the assets as a lease fee and the remainder being retained by the
operator
– in the case of an affermage, the operator retaining the operator fee out of the
receipts (prix du fermier) and paying an additional surcharge that is charged to
customers to the awarding authority to go towards investments that the awarding
authority makes/ has made in the infrastructure;
• the operator tends to bear greater operating risk;
• the operator tends to employ the staff directly.”
Source: World Bank Group PPPLRC Public-private-partnership Legal Resource Center
https://ppp.w orldbank.org/public-private-partnership/agreements
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The PPP Spectrum

“Key Features of Leases and Affermage Contracts
• Medium length - typically between 8 and 15 years;
• Collection risk passed to operator in lease;
• Lease operator will require assurances as to tariff levels and increases over term of
lease, and compensation/ review mechanism if tariff levels do not meet projections;
• Cost of maintenance and some replacement passed to operator (operator takes
some degree of asset risk in terms of the performance of the assets);
• Operator may be put in charge of overseeing capital investment program/ specific
capital works;
• Employer is paid a fixed lease fee (lease)/ receives net receipts from customers (less
affermage fee) (affermage);…”

Contd. …

Source: World Bank Group PPPLRC Public-private-partnership Legal Resource Center

https://ppp.w orldbank.org/public-private-partnership/agreements
Pinsent Masons A purpose-led professional services business with law at the core

The PPP Spectrum

“… Key Features of Leases and Affermage Contracts
• Review process every 4 or 5 years to review performance, costs, tariff levels, etc.;
• Employees seconded or transferred to the operator;
• Operator to maintain asset register and operation and maintenance manuals/
records, etc.;
• Typical to include minimum maintenance or replacement provisions towards the end
of the contract, so that facilities are handed back in an operational state.”

Source: World Bank Group PPPLRC Public-private-partnership Legal Resource Center

https://ppp.w orldbank.org/public-private-partnership/agreements
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Summary
PPP
What is it? Used: Features
By whom When? How?
Procurement of By public sector, Optimised form of Generally through ….
Infrastucture generally from procurement tender process or
delivery through (but also with) sequence of
obligation to private sector. Public sector does tender processes.
construct asset not have financial
and deliver a The with could and/or human Contracts include:
service include: (i) resources to
Consortium or manage the (i) • Project
(ii) Incorporated or procurement Agreement
unincorporated JV and/or (ii) • Construction
between public execution process Contract
and private sector and/or (iii) the • O&M Contract
operation of the • Interface
asset. Agreement
• Facility
Agreement
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Summary
PPP
Features

• Deliverables are (A) (i) completed works and (ii) a service or (B) a service with or without
associated works

• Term goes well beyond construction – construction take-over and defects take on a different level
of importance and relevance at (i) Project Agreement (ii) Construction Agreement and (iii) O&M
Agreement level

• Where works are required, payment is made after asset is constructed, for availability of
infrastructure and delivery of service

• Public sector may or may not own the (i) land and (ii) infrastructure asset/s

• Private sector (perhaps in JV with public sector) manages and operates the asset/s and provides
the service but the spectrum is broad.
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Industry terms and buzz words

Lets talk about a few PPP terms and buzz words
• Risk matrix
• Flow-down
• Market
• LTA’s
• Wrap
• Financial Model
• Term
• Off-take
• Debt/Equity
• Completion risk
• Completion guarantee
• Long-stop date
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Letters of Intent & Award

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The Basics
• Letter of Intent: Records intention to negotiate and conclude an agreement perhaps
detailing some pre-determined negotiation parameters.
• Letter of Acceptance (or Letter of Award): Records acceptance of the terms offered
and agreed and confirms that an agreement has been concluded.
• When is an agreement a contract? Some general principles to start…
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The Basics
• RFQ / RFP: Invitation to do business on terms required by Employer.
• Tender: Offer to provide goods and/or services on required terms
(save to the extent qualified if permitted by terms).
• Contract: Tender Award.
• Formal Contract Document: Requirement depends on tender terms.
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The Basics

• Letter of Intent: Records intention to negotiate and conclude an agreement perhaps

detailing some pre-determined negotiation parameters.
• Letter of Acceptance (or Letter of Award): Records acceptance of the terms offered
and agreed and confirms that an agreement has been concluded.
• What is done in practice is often (unfortunately) somewhere between the two
• What it is depends on the content NOT the heading.
• Let's consider some examples…
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Lecturer
Rob Morson
Partner
Finance & Projects
T: +27 10 493 4618 or +44 20 7490 6454
M: +27 82 413 6061 or +44 7919 691 277
E: rob.morson@pinsentmasons.com

Rob is a Visiting Senior Lecturer at the Wits University School of Construction Economics and Management
in Johannesburg.

He is a Finance & Projects Partner based in Pinsent Masons’ London office. Rob specialises in non-
contentious construction matters with a focus on Africa and has extensive experience on complex Energy
and Infrastructure projects.
Rob has acted for employers (private and public sector), developers, contractors, lenders and consultants
and is acclaimed for his (i) solution driven approach, (ii) strong FIDIC, JBCC and NEC credentials and (iii)
understanding and practical application of procurement and project execution strategies.

He is endorsed by the leading legal directories and is ranked "Star Individual" in Chambers and Partners.
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