Apropos cost overruns, it is interesting to note HERE that when Siemens hits a delay on a project in China and, elsewhere, defects on a project in Budapest it suffers a loss of €200 million, but when roads cost more in the UK the taxpayer takes the loss. Who, in the name of goodness, does the UK Roads Authority use to write its contracts?

Should we not ask our Irish ambassador in China to procure a copy of the Siemens contract and urgently check with the National Roads Authority for an assurance that their contract writer is not the same one as used by the UK Highways Agency?

I have written (HERE) of the need for speed in challenging the award of a public contract where the provisions of the Regulations governing such contracts have not been followed. (European Communities (Award of Public Authorities’ Contracts) Regulations 2006 (Statutory Instrument No. 329 of 2006) ).

The Regulations expressly embody a good idea; that the nation get the best value for money. It is not easy to ensure this.

For instance, one assumes the contract for the “regeneration� of Ballymun was awarded on the criteria adopted in the 2006 Regulations (not pursuant to them; they post-date the Ballymun contract).

We now see (HERE) that the Ballymun contract is €500 million over budget.
Who can now say that the seemingly more expensive underbidder was not in fact the cheaper of the bids? (Assuming there was an underbidder).

The problem is endemic in such contracts (especially in IT contracts).

In truth, neither the contractors nor the public authorities seeking tenders genuinely know what the costs of such projects are; the tenders are guesses.

The man who built the Empire State building in New York was asked what the most important element was in the construction; he replied, “getting the contract�.

Following that line of thought, the best guess is the one that seeks, not to estimate the actual cost of the project, but to guess the cost projection of the public authority for the project. That will secure the contract.

It is possible to try and ensure that the cost overruns do not fall to the account of the public, but that, too, seems to be hard to avoid as we see in the Metronet debacle HERE and HERE.

What Transport for London seemed to have overlooked was the freedom of the individual members of the Metronet consortium to become sub-contractors (they gave the contracts to themselves) When Metronet went into administration, Transport for London continued answerable for the claims of those sub-contractors.

It is an important element in the negotiation of such contracts to ensure, to the greatest extent possible, that there will be no re-negotiation of the contract later. The World Bank has this to say on the matter:

8.3.1Avoiding renegotiations
According to one study,55 percent ofwater concessions awarded in Latin America were renegotiated in the 1990s,many within two years ofthe award (Guasch 2004). In some cases, the operator or contracting authority may reasonably refuse to renegotiate.Moreover,developing a reputation for being hard-nosed could reduce the likelihood that the contracting authority will be exposed to opportunistic behavior in the future. In other cases,circumstances may have changed in ways that mean the current arrangements are no longer appropriate,and renegotiation can help both parties.
Often,both the contracting authority and the operator have strong incentives to renegotiate rather than terminate the arrangement:contracting authorities are often concerned that terminating the arrangement may result in an interruption to key services,while operators do not want to lose any past investment or future profit. Yet renegotiation changes a previously agreed arrangement.The contracting authority or the operator may try to renegotiate in order to reduce its risk exposure or to gain advantages it was unable to obtain in the initial agreement (Box 8.1).When the operator is selected based on the lowest tariff bid or highest concession payment,operators may engage in aggressive bidding strategies (lowballing) to win the contract and then seek to renegotiate for more favorable terms once competitive pressure is no longer an effective constraint.

Modern governments have phenomenal spending power. Like a householder, they need to engage tradesmen and professionals of various types to do work the State needs done.

You want a new motorway? Here is a company to build it. You want a new harbour? Here is a company to dig it. You want a contract drafted for the motorway construction to secure your interests and ensure you get value for money? Here is the solicitor to write it for you.

These contracts are very valuable. They allow the person to whom the contract is awarded to, at the very least, pay the wages of the staff of the successful tendering company, say, during slack industry trading periods.

They also represent opportunities for pork-barrel politics. The politician who formulates and guides the policy resulting in the decision to have a motorway in the first place and then the decision as to who will get the contract, wields enormous power. The exercise of that power can secure re-election by the votes of grateful beneficiaries or the money to win those votes in an election.

Clearly, they represent opportunities for criminal activity in the form of fraud and corruption.

That aside, the State, as a major economic engine, can “distort� the free market in goods and services. The European Union is professedly wedded to ensuring such markets, as are of a minimum size, will be free.

Consequently, EU member states are obliged to adjust their national law to conform to Directive 2004/18/EC intended to ensure only economic considerations (broadly defined) are the determining factor in the awarding of those public contracts which reach the threshold limit.

(HERE is a reference to an Irish-related case dealing with the obligation to advertise (or not!), that the contract is available.)

Ireland passed European Communities (Award of Public Authorities’ Contracts) Regulations 2006 (Statutory Instrument No. 329 of 2006) to comply with its EU obligations in this regard.

The Regulations are legally binding on the awarding authority. In Chapter 3 there is set out the basis for the awarding of the contracts:

Criteria for the award of a public contract

66. (1) A contracting authority shall, in awarding a public contract on the basis of the tender that is most economically advantageous to it, adopt criteria linked to the subject matter of the contract.

(2) Except as provided by paragraph (1), a contracting authority shall award a public contract on the basis of the lowest price.

(3) For the purpose of paragraph (1), the criteria may include (but are not limited to)―
· quality,
· price,
· technical merit,
· aesthetic and functional characteristics,
· environmental characteristics,
· running costs,
· cost-effectiveness,
· after-sales service and technical assistance, and
· delivery date and delivery period or period of completion.

(4) The contracting authority shall specify in the relevant contract notice or contract documents or, in the case of a competitive dialogue, in the relevant descriptive document, the relative weighting that it gives to each of the criteria chosen to determine the most economically advantageous tender. That weighting can be expressed by providing for a range within an appropriate maximum spread.

If an unsuccessful party wishes to challenge the legality of the award of a public procurement contract it is necessary to do so as quickly as possible.
Failure to act swiftly will preclude the applicant from relief. (See HERE).

The Irish property market has slowed if not stopped. According to the Irish Times the construction sector owes €100 billion to Irish banks.

In these circumstances there will be considerable pressure to avoid making due payment on contracts, not to speak of an inability to absorb the cost of contractors’ or developers’ errors.

In short, the frequency of disputes in the sector is sure to rise.

At the retail level they will not get to the level of the scandal in Spain, where the Guardian reported:

Britons are being scared off buying property on Spain’s Mediterranean coast, with the number of potential buyers plummeting after a series of corruption and planning scandals and the announcement of plans to demolish thousands of illegally built homes.â€?

They will, however, get to the level where subsidiary agreements will appear and misunderstandings will grow.

The standard source of building agreements in Ireland is the suite of contracts devised by the Royal Institute of Architects in Ireland, some of which are listed HERE.

In the UK the standard source of building agreements is the suite of contracts devised by the Joint Contracts Tribunal Ltd. listed and downloadable HERE.

For Irish sub-contractors (nominated) the Construction Industry Federation form is used.

What happens when the disputes break out? That depends on the form of contract and indeed, the terms of the contract.

Many parties to these disputes fail to understand that the dispute is a legal dispute and that the terms of the agreement will, in principle, if not in practice, dictate the outcome of the dispute. In short, the contract is the source of the parties’ rights and obligations and the dispute will consist of teasing out the point on which one of the parties failed in its legal obligations, as defined by the contract/s.

This is not to say that parties can and do settle disputes on a practical basis, rather than a legal basis.

When this happens the experience can resemble THERAPY rather than law.

It is important to recognize that the expense of construction (which is considerable) carries the hidden reciprocal cost of the dispute and that the parties should budget for spending that money if and when the dispute breaks out. If that is budgeted for there will be a minimized loss of momentum in driving the dispute resolution process to an early conclusion.