African infrastructure contracts need a fundamental rethink

Out-Law Analysis | 10 Jun 2021 | 8:46 am | 3 min. read

The traditional, lump sum priced contractual model has sown mistrust and division in Africa’s infrastructure sector and is not the right contractual model for delivering the new schools, hospitals and transport links that the continent needs.

Employers and contractors in Africa should embrace alternative contract models such as alliance contracting, as well as more collaborative ways of working that those models promote, to deliver new projects and nurture the value in the sector that is otherwise under threat.

Smit-Jason

Jason Smit

Partner

The revival of the African infrastructure sector is far more likely to be achieved if the sector as a whole is willing to embrace change when it comes to the core philosophies which inform how infrastructure project contract documents are structured and executed

The problem with the traditional approach

Infrastructure projects executed in Africa are often, in our experience, dominated by the philosophy of allocation of risk to the party perceived to be best able to manage that risk. The implementation of this in practice has become "mechanical", with contracts being awarded on a fixed, lump sum basis, with both employer and contractor commencing a project on the understanding that the contractor has priced the project risk correctly and will be rewarded accordingly for doing so.

Viewed in isolation, this allocation of risk and reward is understandable, but the assumptions underlying the fixed price model are not always realistic and in line with the complex nature of projects being executed across the continent.

The lump sum, allocated risk model has, it could be argued, at least contributed partly to the destruction of value in the infrastructure sector, taking into account not only project distress but also business distress – some employers are suffering financially as a result of delayed projects, whilst more than one large local contractor has ended up seeking bankruptcy protection in recent years, with suggestions in the market that others may soon follow suit.

This environment has led to an industry beset by mistrust, with projects fraught with conflict and a sense, rightly or wrongly, that the parties to an infrastructure project look, from an early stage, to start positioning themselves defensively. This, in turn moves the parties' focus away from the successful delivery of an infrastructure project and, inevitably, into a dispute landscape, the result of which, all too often, is that relationships are irreparably harmed by lengthy and costly dispute resolution processes, calls on bonds and other securities and contractual terminations.

Many of these destructive outcomes are driven by, often incorrect, baseline assumptions as to what motivates an employer, contractor or subcontractor in exercising its contractual rights.

As long as the industry is dominated by incorrect and unhelpful assumptions that employers look only to push contractors for as long as possible before terminating and calling performance bonds, or that contractors deliberately under-price tenders and then seek to recover profit margin by way of cynical money claims, then those assumptions, together with the lump sum contracting model, create a self-fulfilling prophecy where large, destructive disputes flowing from the execution of infrastructure projects are the norm, rather than the exception.

A logical extension of those assumptions would suggest that there is an entire industry of actors who have no interest in value preservation and delivery of projects in the infrastructure sector. We know that is not the case – it is surely better to proceed from the assumption that the various parties in the infrastructure value chain do actually have, as a point of common interest, the successful delivery of complex infrastructure projects and that they acknowledge the value inherent in the delivery of these projects. A fundamental rethink of the contractual models relied upon will help draw this out in practice.

Smit-Jason

Jason Smit

Partner

Forms of contract aside, better, more candid information sharing, both upfront and during the execution phase of a project, is needed

Other contractual models offer a solution

There already exist alternative contracting models that provide for a far more collaborative or consultative approach to infrastructure project delivery, moving away from the allocated risk, employer/contractor divide that, in our experience, seems to lead inevitably to significant contractual disputes.

The alliance contract model promulgated by the NEC is one such example of an approach to infrastructure project delivery which sees the parties collaborate toward the delivery of the project, rather than positioning themselves contractually so as to maximise their own gains.

However, for alliance contracting or other forms of collaborative contract models to succeed, there needs to be a willingness on the part of employers, contractors and subcontractors, to alter their practices so as to allow for alternatives to the traditional, lump sum priced contractual model.

Forms of contract aside, better, more candid information sharing, both upfront and during the execution phase of a project, is needed. A move away from the "build it via variations" approach could also potentially assist in reducing the fractious nature of infrastructure projects.

The case for change

The revival of the South African and, indeed, broader African infrastructure sector is far more likely to be achieved if the sector as a whole is willing to embrace change when it comes to the core philosophies which inform how infrastructure project contract documents are structured and executed.

This willingness to change is something which is not only to be encouraged but, indeed, is vital if what little value left in the infrastructure sector is to be not only protected but nurtured.