Sena Gbedemah, a construction specialist for Ankura in Saudi Arabia, explains how to avoid common pitfalls while negotiating acceleration agreements.
As Vision 2030, the 2029 Asian Winter Games, and Expo 2030 get closer, project stakeholders in Saudi Arabia (KSA) are adopting various measures to ensure timely delivery. On 7 December 2023, Bloomberg reported that the KSA Finance Minister Mohammed Al-Jadaan said that some Vision 2030 Projects would be re-scheduled to allow further building of manufacturing capacity and resources. Certain Projects are being prioritised and accelerated to meet the aggressive deadlines as the industry faces significant resource challenges to meet the unprecedented scale of the Kingdom’s giga projects.
Inevitably the re-scheduling and acceleration of existing project schedules may lead to supplementary agreements having to be concluded for projects to recover delays and participants having to find innovative ways of meeting ever-ambitious completion dates particularly where infrastructure projects are interlinked.
With care, supplemental agreements can allow owners and contractors to reach their goals without ending up in acrimony and dispute.
The Moving Baseline
At the outset of discussions, owners and contractors need to consider reaching an agreement on the project’s current status in terms of time and cost to provide an agreed baseline from which to negotiate the extent and effect of accelerative measures required.
Acceleration can be a complex concept and there is often overwhelming pressure to conclude a rapid agreement. Both parties should not underestimate the need for the management resources required to structure any plan and appropriate risk allocation along with technical and legal due diligence. The time taken to conclude agreements is often in tension with the programme and a phased or interim approach may assist whilst issues are concluded. Parties need to be attuned to the art of the possible and not promise more than they can deliver and control.
If negotiations take too long then the process can be self-defeating or have built-in obsolescence placing the agreement that everyone has worked so hard to define on paper, already at risk.
Prevention is better than cure. In drafting contracts, parties may need to consider how they can regulate and specify the process for instructing and compensating acceleration, ensure contract mechanisms are followed, and avoid constructive acceleration disputes.
Both parties will benefit from near real-time visibility on the progress of the works and the identification of the causes of any delay / future delays. Effective project and programme management to allow regular status checks on progress during negotiations will enable the development of an acceleration programme that aligns with the terms of the agreement that has been negotiated and agreed upon so that it remains relevant.
Unrealistic Expectations
Disputes can also arise from unrealistic acceleration milestones. In any negotiation, each party may have differing priorities. An owner may be driven by a fixed deadline (e.g. a sporting event), financial covenants, or other imperative deadlines. A contractor may have different considerations. Issues can be complicated if one party considers the other may have contributed to and/or have responsibility and liability for delays to date. These competing priorities can sometimes result in agreements that are under immediate tension. Acceleration programmes need the inclusion of a clear delivery timeline and details of how resources will be obtained and deployed with clear lines of responsibility.
Any acceleration plan may benefit from taking into account issues that might arise, such as lower productivity caused by congested sites, extended working hours, and the need for increased supervision. Issues that need to be considered realistically are:
- Whether there is enough labour and engineering capacity and where will it come from?
- Whether there is enough equipment and materials and is supply secured?
- Where will the equipment be sourced?
- What is the impact of cost inflation either generally or on specific materials?
Power Imbalances
Acceleration agreements can fail or falter if either party exploits a power imbalance, for example, any change to a contractor would be counterproductive or costly to the owner or conversely may face too much risk if the issue is not resolved.
Aspirations need to be realistic. An issue is the incentivisation of milestones, the resulting deployment of additional resources but the milestone not being achieved, and arguments then ensuing relating to the accelerative costs but limited recovery and sliding scales or some other mechanism that does not lead to a binary outcome. It is natural for parties to strive to get what they consider to be a good deal. But the priority needs to be delivery of the project which may require visible compromises from both sides.
Project Governance is Critical
Solid project governance is an essential element to ensuring sufficient information and visibility for both Parties to be able to work together and devise appropriate solutions to demanding schedules that appropriately allocate risk for the unforeseen.
Reliable and timely reporting by the project management in conjunction with an incentivised supply chain will give both parties a clear view of moving baselines and illuminate hidden pitfalls.
The best agreements and solutions may founder unless there is also an overriding project culture of trust and clear communication – driven from the top of both employer and contractor organisations, and the realisation that for many of the Kingdom’s projects which link into immoveable deadlines, failure is simply not an option if the Kingdom’s vision is to be achieved.
This article was first published for Construction Week Middle East.
© Copyright 2024. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
