Pitfalls to avoid when contracting on power transmission projects

Activity levels in respect of energy-related infrastructure, such as transmission infrastructure, are increasingly outstripping activity in other infrastructure sub-sectors, with this trend accelerating. This is stemming from federal and state policies that recognise the urgency of the energy transition amidst growing concerns about the climate crisis and rising electricity prices.

Inaction is not an option. However, due to the complex nature of this critical energy infrastructure, developers and contractors alike face risks when contracting for the construction of transmission infrastructure required to connect these clean energy projects with consumers. Our experience in other jurisdictions indicates that disputes can arise on transmission projects and primarily revolve around the quality of works. While we expect to see those types of disputes in Australia too, there are a number of characteristics of the Australian market which give rise to other risks.

Many of these issues can be mitigated and managed effectively through a variety of strategies and through effective collaboration between developers, contractors, and communities.

Get a handle on FIDIC contracts

The FIDIC suite of standard construction contracts is commonly used in other jurisdictions but has not previously been used extensively in Australia. That is changing, however, with an uptick in use for Australian construction projects, albeit in heavily amended form and weighted markedly in favour of the developer.

Due to the lack of experience with the FIDIC contracts amongst proponents in the Australian market, there is likely to be a lower level of fluency among those on the ground who are responsible for delivering the project in accordance with the contract. This risk may be particularly difficult to overcome on transmission infrastructure projects where there are crews working across multiple and often remote areas, with potentially limited oversight from contract administrators and experienced engineers.

FIDIC contracts as we have seen them amended in Australia have notoriously complicated claims and other processes. It is easy for a party to misstep while navigating these, potentially resulting in serious consequences, such as being barred from later raising a claim. Further, if the risk allocation is not managed effectively, onerous claims processes can consume contract administration teams, distracting them from their day-to-day roles and placing the project at risk of further distress.

Those with the power to determine the contracting model should carefully consider whether the additional administrative burden associated with FIDIC contracting is right for their project. If going ahead, they, and contractors, should ensure the project team has an understanding of what the processes are, as well as the language used, in the contract. The implementation of a coordinated claims management process, which may include the provision of contract manuals and regular training throughout the life of the contract, will be important.

Consider early contractor involvement

For some infrastructure projects, having contractors involved in the project before the design phase has been completed can provide benefits. One way of achieving that is through ‘early contractor involvement’ contracting.

In the context of transmission projects, early contractor involvement will generally not include the performance of physical works. However, it can, for example, enable contractors to provide support to the developer to finalise any environmental approvals or grid connection processes at the same time as early design works are being undertaken.

An advantage of early contractor involvement is that it can provide for a repricing process at the end of the phase – a mechanism that allows for the main delivery of the project to be priced in accordance with more accurate information gleaned during the early contractor involvement phase. However, we have seen repricing rights removed from contractors towards the end of the early contractor involvement phase in some projects, which actually creates additional risk for the contractor.

Dealing with cost-related risk

Volatility in the price of steel, aluminium, copper, diesel and labour, among other commodities, creates a risk of costs overruns. Typically, contractors are burdened with the risk of rising prices under traditional pricing models and fixed lump sum contracts. There are, however, ways that developers and contractors can mitigate the threat this presents to project delivery.

While so-called ‘rise and fall’ pricing provisions are used to a limited degree, effectively providing a mechanism for adjustments to be made to the pricing of work under the contract on account of the rise or fall of underlying costs, such as those associated with the supply of materials, alternative pricing models could be explored more widely – including incentives for meeting target costs.

It may also be possible for parties to adopt a greater risk sharing regime when it comes to commodities and other costs by including a broader rise and fall regime. We are already seeing this happen on transmission projects, which are commodities-heavy by their nature and, given contractors are well aware that even a minor instance of under-pricing has the potential to accumulate over the entire project.

Managing risks around approvals, land rights and social licence

Significant delays to transmission infrastructure projects, and consequent costs overruns, can be caused by delayed approvals or land access rights. Where on other types of projects a contractor might be granted access to the whole site at once, this luxury is not available on transmission projects. This is due to the site potentially spanning hundreds of kilometres and traversing land belonging to numerous and diverse landholders, including First Nations people. Instead, access will inevitably happen on a staged basis.

To ensure the successful delivery of a transmission project, there should be a clear allocation of responsibility for obtaining landowner consent, which should be sought as early as possible. Contractors will need to be flexible and, where possible, seek to mitigate any delay caused by a lack of access at a particular part of the site. Consideration needs to be given to how delays in the grant or subsequent transfer of approvals or access rights should be dealt with across the length of the project and how a contractor should be compensated for additional costs incurred in delivering the project in a way that is different to the planned sequence of work.

Developers and contractors should work together at the outset of a project to anticipate issues that might arise due to a lack of social licence. Careful consideration should be given to whether and when contractors might be entitled to relief for delays caused by social licence issues including obstructive landowners or protestors.

Consider implications of working across multiple jurisdictions

With transmission projects, works will often be undertaken across a broad geographic area. In Australia, projects will often cross state borders. This can have an impact on risk.

For example, each state and territory has its own security of payment legislation which entitles contractors and subcontractors carrying out construction work to make statutory payment claims that can be pursued through a fast track adjudication process. Amongst other rights, the legislation allows contractors to suspend further construction work where a statutory payment claim remains unpaid past the due date. Requirements regarding the format and timing of statutory payment claims, payment schedules and the adjudication process differ – in some cases, quite substantially – between jurisdictions.

Planning and environmental permissions may also be required in multiple states. The time taken to obtain approvals can have a knock-on effect on the ability of the contractor to undertake works.

Accounting for defects

There is a trend towards the use of contractual provisions in transmission projects to address the risk of serial defects arising in components such as transformers, shunt reactors and cabling.

A serial defect is where a defect arises across a defined proportion of the same component. In contracting for transmission projects, the thresholds for when a serial defect will be said to arise will need to be carefully negotiated and the provisions should reflect the length of the defects liability period – this being the fixed period during which the contractor is required to rectify the defects post-completion.

The parties will also wish to consider what responsibilities should fall on the contractor where there is an alleged serial defect, such as the extent of their monitoring obligations across the entire transmission line or requirements for them to replace all similar parts. The practical consequences of each approach need to be well understood by both parties.

In some projects, developers may also seek to secure a contractual right to reject works performed by the contractor that have such significant defects that the developer is deprived of the whole, or a substantial part, of the benefit of the project. In those cases, the developer would typically have an associated contractual right to require repayment of the amounts paid in relation to those works. This is a feature of the FIDIC contract which is commonly used in other jurisdictions, but until recently had not been a feature of the Australian market.

If contractors accept developer rights to reject works, they need to ensure that the defects clause itself is tightly drafted so that only contractor-caused defects are covered and that the contractor is granted adequate time and rights to rectify any defect before the right to reject works is triggered.

Allied to this, parties should seek to ensure there are exclusions for consequential loss as well as caps on liability because those losses can be eye-watering.

Recording keeping is also vital in the context of defects. This means keeping detailed inspection records, time-stamped photographs, up-to-date programmes, and other documents of who did what, why, when, where, and with what. Contractors should insist on their subcontractors keeping good records and that they submit them to a centralised system. If that is done and a defect emerges, contractors should be in a better position to identify and isolate it early, before it manifests as a serial defect.

Actions for contracting parties

Risk is inherent in every infrastructure project. Accelerated timelines, unfamiliar contracts coupled with complex claims processes, price volatility, social licencing issues, working across multiple jurisdictions and the potential for serial defects mean transmission projects are no different. While there is a lot for developers and contractors to consider with transmission projects, there is nothing they are unlikely to have encountered before, albeit in a different context. Careful thought is needed, however, about the risk parties are prepared to accept under the contract, and strategies to efficiently deliver the project and minimise the risk of dispute must be implemented early and actively monitored.

Co-written by Scott Ivey and Jade Williams of Pinsent Masons.