General infrastructure contract:

The contract between DFID and the supplier is critical given the complexity and risk profile associated with infrastructure, and because it is the means through which the programme is delivered. It does so by forming a binding legal agreement between DFID and the supplier to ensure the successful delivery of the programme through sound project management principles and practices as well as defined legal responsibilities. Careful consideration of the contract and procurement strategy must be made at the Business Case development stage.

Careful consideration of the contract and procurement strategy must be made at the Business Case development stage, given the complexity and risk profile associated with infrastructure.

There are a number of forms of contract available which could be used for an infrastructure programme.

DFID infrastructure contract:

From a DFID perspective the contract options are as follows:

  • DFID Standard Terms and Conditions
  • New Engineering Contract (NEC)
  1. The DFID Standard Terms and Conditions (T&Cs) were updated in October 2017.[1] These are designed primarily for technical assistance work. This contract is widely used within DFID, but it fails to address a number of key factors and issues that are characteristic to most infrastructure programmes:
  • Defects and the defects liability period
  • Management of Risk
  • Changes to scope
  • Work-Plan

The contract also doesn’t facilitate additional contract measures such as the use of; Key Performance Indicators; Pain/Gain shares; incentivisation schedules; and quality management systems. Bespoke clauses need to be drafted and added to the main contract to incorporate these features.

  1. The NEC contract, which is specifically for infrastructure work, is actually a suite of contracts, and was first published in 1993 – then known as the ‘New Engineering Contract’.[2] The most recent version of the contract – NEC4 – was released in June 2017, however NEC3 is the version most widely used.

As a suite of contracts it is extremely flexible and can be used for the procurement of works, services and goods across all sectors, as well as at all stages of a programme lifecycle. Critically, it is fully aligned to programmes which involve infrastructure and as such facilitates the provision of all the contract measures that are necessary to ensure success.

The NEC suite of contracts has become the public sector contracts of choice in the UK, being used for nearly all projects procured by national and local government bodies and agencies. This makes it a very viable alternative to the DFID Standard T&Cs. Indeed, with regards to infrastructure based programmes it is far more suitable. See box 17 for more detail on the NEC contract.

The FIDIC contract[5] is also commonly used by suppliers and contractors in Africa, but to date has not been used by DFID.  FIDIC has also worked with the Multilateral Development Banks (MDBs) on a contract that includes special provisions the MDBs require their borrowers to follow[6].

Key considerations for contracting:

  • Cash-flow is one of the key issues with infrastructure programme and needs to be carefully considered during contract design to ensure the supplier is not adversely effected by poor cash-flow. Both the NEC and T&C facilitate open-book accounting[7] which means DFID has much greater scrutiny of costs and sub-contractors.

 

  • Robust risk management is critical to ensuring successful delivery of the programme, and a process should be set out within the contract to describe how risk will be managed. The NEC contract provides for risk to be carefully managed and dealt with as and when it occurs, and includes clauses to facilitate risk management. Central to this is the risk register, which identifies the risks within a project and is the basis for the ongoing management of risk. It also includes for the time and cost consequences of risk related events. The NEC approach to risk applies pre-assessed and documented risk management procedures to specific identified hazards.  It is a key tool for the successful management of a project.  It is the responsibility of the project team to regularly review and update the risk register.  The approach to risk under the NEC contract provides a useful basis for projects implemented under other forms of contract.

 

  • KPIs are a measurable value that demonstrates how effectively the supplier is delivering the programme outputs and outcome. Within infrastructure programmes they are an excellent mechanism for managing supplier performance. However, they are only really effective if used in combination with an incentivisation schedule and some form of Pain/Gain mechanism, all of which must be written into the Contract and should be considered at the Business Case development stage. It is always recommended to incentivise rather than penalise – the carrot as opposed to the stick. Examples include a bonus for completion of construction by a given date, or for less than a given number of defects identified upon final inspection/testing.

 

  • Change Management. The nature of infrastructure programmes means changes in scope are inevitable. At the Business Case stage it is strongly recommended that a contingency of at least 10% is put in place to facilitate change. This will avoid the need for a contract amendment at a later date as a result of change. The contract should also include a clear process for how change is managed and delivered with regards to DFID and supplier responsibilities and liabilities.

In some situations, and types of construction, ‘community contracting’ is an alternative to the more traditional approach outlined above. It empowers communities by ensuring they play an executive role in the identification, planning and implementation of development initiatives.  It reflects more of a partnership approach, to build confidence and according to the ILO is a useful approach in conflict/post conflict infrastructure[8].

A further approach to consider is whether there would be benefits from a adopting a labour-based rather than a mechanized approach to construction.  For example, road and other transport infrastructure construction and maintenance can provide significant short-term employment opportunities.

References:

[1] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/657021/DFID-Standard-Terms-Conditions-Services-Contract.pdf

[2] https://www.neccontract.com/About-NEC

[3] Currently being used by DFID Sierra Leone to rehabilitate the Freetown water network.

[4] Currently being used by DFID South Africa (ARD) on the CRIDF II programme.

[5] Fédération Internationale Des Ingénieurs-Conseils

[6] MDB Harmonised Construction Contract (3rd Amendment, 2010).

[7] Open book accounting involves including in an organisation’s accounts all those with an interest in the organisation, not merely its employees and its shareholders

[8] ILO, 2007, Community Construction Approach, ILO Somalia Programme