Bevan Brittan LLP- Highways Maintenance Contracts Nathan Bradberry, Senior Associate Johnathan Adams, Associate 6 November 2014

Introduction Introduction to Bevan Brittan and the Highways Team Topics to be covered: –Payment Options (including the Construction Act) –Task Orders –Performance regime –Common issues and potential disputes

Payment options Lump sum Target cost Cost reimbursable The Construction Act

Payment options – lump sums Profit and overhead Risk allowance Estimated cost of labour, plant and materials Lump Sum Price

Lump sums – summary Characteristics: –payment of a fixed lump sum regardless of actual cost Best used where : –parties are able to assess an appropriate global payment for a clearly defined output –competition between bidders will encourage keener pricing Downsides: –no visibility of actual costs –risk that competition squeezes margin and risk allowance (not cost) so Contractor focuses on recovery/enhancement of margin not wider performance

Payment options – target cost Profit and overhead Risk allowance Estimated cost of labour, materials and plant Declare and ring-fence Reduce by identifying and managing potential risks Reduce actual cost by greater understanding of what work is to be carried out and how it can be carried out more efficiently Target Cost

Pain/gain-share example Where the Annual Services Provided to Date are greater than the Annual Target Cost the Contractor shares 50% of those extra costs (50% pain-share) Annual Target Cost Where the Annual Services Provided to Date is less than the Annual Target Cost = Contractor receives 50% of the difference between the two (50% gain- share) Cost of Annual Services Provided to Date Guaranteed Maximum Cost Where the Annual Services Provided to Date are greater than the Guaranteed Maximum Cost the Contractor is responsible for 100% of those extra costs

Target cost - summary Characteristics: –payment of actual cost (subject to Disallowed/Excluded costs) –if actual cost is less than TC – share savings –if actual cost is more than TC – share overspend up to a maximum (Guaranteed Maximum Cost) Best used where : –both parties are seeking mutual benefits from process improvement –there is no clear understanding of exact services/works required in advance –the client wants to understand true cost of activities Downsides; –agreeing TC brings commercial tension (but no different to agreeing lump sum) –don’t get any bargains (but do have the opportunity of shared savings and don’t pay for risks that don’t occur)

Cost reimbursable Payment of actual cost plus fee (‘Cost Plus’) Open-book principles Incentives on contractor to ensure efficiencies? KPIs? Use in projects where it is very difficult or impossible to accurately estimate costs – emergency service provision? Client will require experience and resource to interrogate costs etc.

Payment options - summary Pressure on budgets – certainty over costs attractive But factors outside the control of either party can make lump sum pricing poor value for money Agreement of lump sum prices during contract period faces the same difficulties as agreeing target costs, with none of the benefits of transparency or gain-share At the end of the term, Council will be better informed as to true cost of maintaining network and carrying out highways activities and will be able to challenge on the basis of hard evidence Mixed approach? Different payment options against specific services or task orders

The Construction Act Housing Grants, Construction and Regeneration Act 1996 The Local Democracy, Economic Development and Construction Act 2009 Key date: 1 October 2011 Paid when paid prohibited (excluding upstream insolvency) Payment Notices and Pay Less Notice Default payment notices Failure to pay - entitlement to suspend part of obligations with rights of compensation and extensions of time Adjudication at any time (statutory right)

Task orders Task orders in respect of all Services Timing of issue Content of task orders –detailed description of Task(s) –location –payment terms Need for flexibility and budgetary considerations

Performance Management Purpose of Performance Management –Delivery of clear aims and objectives –Encourage / discourage behaviours –Long-term improvement to service Reviewing Performance under the contract –Strategy and Performance –Strategy Board and Operational Board –Objectives/Key Strategy Indicators and Key Performance Indicators –Collaborative approach and self-reporting

Key Performance Indicators (1) What are they and how are they used? Links to contractual entitlements/penalties Setting KPI’s –Agreed between the parties –SMART targets –Additional considerations Examples…

Key Performance Indicators (2) Measuring KPI’s and achieving ‘Acceptable Performance’ Consequences of ‘Unacceptable Performance’ –Improvements –Deductions –Default / termination event? Unintended consequences of KPI’s Reviewing and amending the KPI’s Potential area for disputes

Incentivising the Contractor Using the KSI/KPI information –Extensions to Contract Term Initial term plus extensions Increase/decrease contract term –Performance Related Pay Linking bonus payments to performance Setting bonus payments –Annual Efficiency Target Approach / Rationale

Incentivising the Contractor - Exclusivity Entitlement of the Contractor to perform: –the Services –Minor Schemes –Major Schemes? –HMEP approach Needs to be discussed and agreed with the Contractor Link to KPI’s Potential area for dispute

Common Issues and Potential Areas for Dispute Tiered Dispute clause under HMEP –Intention of the process –Notification and negotiation –Referral to senior representatives –Consideration of Mediation –Adjudication (at any time) –Litigation Common Issues