December 2012 CONSTRUCTION ECI: WHAT IS IT, WHY USE IT AND WHERE IS IT GOING? Increasingly, the market is embracing alternative contracting models to deliver complex and large projects. One such model is ECI - Early Contractor Involvement. BUT WHAT IS ECI? The “traditional” construction contract model involves the Principal engaging a designer to design the works and an engineer to oversee the project. The Principal subsequently engages the contractor to build the works and the Contractor enters into subcontracts with sub trades. The problem with this “traditional” contracting is that it leads to adversarial behaviours given the conflicting objectives of the parties. stage. The rationale being that it is during this early stage of project planning that the greatest influence on capital costs and project outcomes is possible. It is essentially a form of collaborative contracting. Like alliancing, ECI envisages the early involvement of the Contractor and the adoption of “best for project” attitudes by all parties. HOW DOES ECI WORK? ECI attempts to optimise risk management, risk allocation, price and control for the Principal. Similar to a project alliance, ECI contractors are selected usually through a non-price selection process where significant emphasis is placed on the capability of the proposed team (although depending on the ECI model selected, margins and selected rates may also be requested). The tender process is frequently interactive allowing the Principal to get a feel for the contracting behaviours of the tenderers. The contract when awarded can be a standalone “preconstruction” agreement or one contract with two distinct stages. While collaborative behaviours are motivated and encouraged throughout, Stage 1 is where good collaboration and communication can reap the greatest benefits. ECI is effectively a first cousin to the Design Build contract model. It seeks to exploit a Contractor’s specialist knowledge of construction processes to the benefit of the design process. The key difference between Design Build and ECI is that ECI, as its name suggests, seeks to obtain this benefit at a much earlier In Stage 1 of an ECI contract model, the Contractor proceeds with design development up to outline design phase or even preliminary design. This development is usually undertaken on a cost reimbursement basis which can encourage the exploration and assessment of innovative design alternatives. Under a “traditional” model the Principal can seek to minimise its risk exposure by adopting variants such as Design Build or Turnkey contracts, however the trade-off is that it can lose control over the project. Also, such contract models can result in a reliance on risk allocation rather than risk identification and mitigation (ie risk management). In such circumstances, the lack of pre-contract risk management can be exacerbated by inappropriate apportionment of risk or inappropriate pricing of risk. www.simpsongrierson.com 01 It is during this phase that value engineering and issues with constructability can be addressed and risks properly identified, mitigated and apportioned. Stage 1 concludes with the submission of detailed design and pricing for Stage 2 from the Contractor. ECI contracts tend to have differing degrees of discretion for the Principal with regard to the transition from Stage 1 and Stage 2. Price tension is better maintained by making the transition discretionary. Stage 2 in ECI contracts tends to be a fairly traditional Design Build contract. This is the key difference from alliancing. Stage 2 in an ECI contract is usually lump sum. In most cases, the traditional design build model works well as a base document in Stage 2 because the scope of work will have been well defined as a result of the efforts undertaken in Stage 1. The most significant construction issues should have been identified, resolved or mitigated. Key ‘extras’ which should also be included are the continuation of the flavours of collaboration and cooperation engendered at Stage 1 and incentivisation of the Contractor by way of potential risk sharing/performance reward. WHY USE IT? ECI includes the Contractor at the stage where most value can be extracted. It reduces the cost of tendering as only one design process is undertaken, therefore avoiding inherent duplication of effort. It enables risk to be identified, mitigated and/or properly allocated (and priced). Importantly, relational and collaborative behaviours are motivated for the benefit of the project. From the Principal’s perspective, it retains control through collaborative working with the Contractor and its consultants at Stage 1. Control by the Principal is further maintained by ensuring that ultimate discretion to proceed to Stage 2 is retained. Contractors like the ECI approach because at the early stages they can often provide genuine value and it allows them to have early “buy in” to the project. The collaboration in Stage 1 creates a feeling of ownership which encourages greater commitment to performance and quality. Also, incentives included at Stage 2 can be attractive motivators. The risk management benefits of course apply equally to the Contractor as to the Principal. Some detractors consider ECI takes the edge off competitive pricing. However, proper management and transparency should ensure that pricing is competitive with no hidden gains. Such risks can also be mitigated firstly, by ensuring that there is sufficient time allowed for value engineering in Stage 1 and secondly, by providing that the transition to Stage 2 is conditional upon satisfactory pricing having been negotiated. An independent audit and/or ‘sign off’ of the pricing can also be incorporated into the procurement process. WHERE IS IT GOING? ECI contracts in their current form had their genesis in the boom markets of the last decade but despite the cooler current market, interest in ECI remains constant. There is growing interest in ECI given its collaborative nature combined with benefits of greater certainty and control over design outcomes, and greater price certainty than other collaborative models. ECI is being increasingly adopted on major projects in New Zealand. NZTA have adopted ECI on at least five major projects including the Papakura Interchange Upgrade and in the Rangiriri Section of the Waikato Expressway and have produced an ECI template (see http://nzta.govt.nz/resources/state-highwayconstruction-contract-proforma-manual/docs/sm031-h1.pdf). Our expectation is that ECIs will also be a useful tool in the rebuilding of Christchurch where it is increasingly apparent that parties will need to be creative with the use of resources, time and funding. CONTACT DETAILS MICHAEL WEATHERALL - PARTNER T. 09 977 5097 M. 029 977 5097 E. michael.weatherall@simpsongrierson.com GRAEME CHRISTIE - PARTNER T. 09 977 5074 M. 021 960 493 E. graeme.christie@simpsongrierson.com SONIA VITAS – SENIOR ASSOCIATE T. 09 977 5317 M. 021 221 6304 E. sonia.vitas@simpsongrierson.com LISA CURRAN - SENIOR ASSOCIATE T. 09 977 5143 M. 021 498 641 E. lisa.curran@simpsongrierson.com CHARLOTTE FOX - SENIOR ASSOCIATE T. 03 365 0971 M. 021 242 1602 E. charlotte.fox@simpsongrierson.com SHANTI DAVIES - ASSOCIATE T. 09 977 5273 M. 021 242 6821 E. shanti-davies@simpsongrierson.com A SIMPSON GRIERSON PUBLICATION This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters. © Copyright Simpson Grierson 2012. www.simpsongrierson.com 02