Red flags throughout the lifecycle of an infrastructure project

August 10, 2022 BDO CANADA

Given the nature and complexity of infrastructure projects, disputes frequently arise. There is an even greater risk of disputes arising in projects involving Public-Private Partnership infrastructure projects (P3s), which typically involve design, build, and long-term operation contracts. In recent years, disputes on P3 projects have increased in size and complexity. While some have been heard in courts with public decisions, the majority have been resolved through private and confidential arbitration, meaning there is little publicly available guidance on how to best navigate such disputes.

The most common causes of disputes we see in infrastructure projects include:

  1. Failure by the contract administrator to properly administer the contract
  2. Ambiguous or difficult to understand contract specifications
  3. Failure to comply with contractual obligations, including notice and claim provisions
  4. Disputes over obtaining permits, licenses, and approvals
  5. Incomplete design information or owner requirements

BDO professionals have advised clients on over 5,000 infrastructure projects. We've seen and dealt with all manner of issues, including the types of disputes listed above. Based on our experience, we identified “red flags” for contractors to watch out for throughout a project's lifecycle that may lead to disputes, along with proactive steps to mitigate risks and reduce costs.

Phase 1: Defensible and accurate bid

Red flag #1 — Errors in your financial model

A good foundation starts with a well-supported bid, which includes a defensible financial model. If a bid contains flawed or incorrect assumptions, this can lead to issues down the road that unnecessarily create risk. How well that risk is minimized can often be related to the amount of up-front work done to support the bid and financial model. Some key questions to consider:

  • Where do you think the commodities and labour markets will be when the project starts and why do you think they will be there? Have you priced in a reasonable shift, if necessary, accounting for a later start/spend?
  • If the project intends to rely on products or services purchased in foreign currencies, where do you think the Canadian dollar will be when the project begins, and why?
  • How much is likely to change and how will those changes affect the overall cost?
  • Will the environmental obligations such as carbon tax rates change throughout the project's lifecycle? If so, how?
  • How will technology change over the course of the project?
  • What will the expected tax burden be for the project?

These are tough but critical questions. It's a good investment to engage subject matter experts, in addition to financial model experts, to provide supporting opinions so you're not saddled with an undervalued contract. Doing this will ensure that your model is defensible, logically structured, and aligned with the bid.

Red Flag #2 — An unclear RFP

Do the details of your bid accurately reflect the costs of the work and other deliverables required in the RFP and other tender documents?

This may sound like a simple question, but it's not. A lack of alignment among the parties understanding on topics such as:

  • deliverables and requirements,
  • evaluation process,
  • project timelines,
  • contract,
  • and supporting documents and appendices,

could cause a contractor to complete the work and incur the expense of putting a bid together that doesn't accurately respond to the RFP.

This lack of alignment is, in our experience, a common problem that occurs in complex projects and can lead to either losing the bid all together or, worse, winning the bid without a clear understanding of your full contractual obligations until it's realized they cannot be met.

Given the relatively vague state or early design stage of P3 project plans at the bid stage, either of these situations are possible. Therefore, it's good practice to consult with an expert before preparing a detailed bid, or at least prior to it being finalized. BDO can help you understand your bid obligations surrounding, among other things, project schedule, project management, project financial model, document control/management and reporting. Being armed with this knowledge will help you put together a smarter, more responsive, and less risky bid.

Red Flag #3 — A laxed approach to tax planning

Tax-related issues, including selection of a sub-optimal legal entity structure, can cause various tax inefficiencies. If careful tax planning is not implemented from the outset, as part of the bid phase of a project, unexpected tax liabilities could significantly impact profits. In addition, consortium partners may have competing interests and objectives depending on their tax profile or preference for financial reporting disclosure. The preferred financial reporting structure may not always align with an optimal project structure. Preventing unexpected tax exposure should be a primary concern for leaders. Consider bringing in professional tax planners with an infrastructure background to make sure nothing gets missed.

Phase 2: Contract provisions

Red Flag #4 — Poorly drafted contracts

According to Arcadis reports in 2020, stakeholders' failure to understand or comply with their contractual obligations has become the number one cause of construction disputes.

It's important to ensure that contractors fully understand the contract that they bid on and won—and all parties understand their obligations. What a contractor thinks the contract intends to say about an issue, based on meetings or casual conversations, and what the contract document actually says can often be different. If a dispute arises, in almost every case, a court or arbitrator will give priority to what contract documents say over what someone may have thought or said.

To avoid problems, you need to have absolute clarity on issues such as:

  • What does or doesn't fall within scope in each stage of the project and who is responsible for keeping the project in scope
  • When reports are to be made and what should be included in those reports
  • The change order process and the notice obligations.
  • Where to find institutional knowledge about the project in cases of personnel change
  • Ensuring subcontractors also understand their obligations, when to engage them, and when they are to be paid

A thorough review of contract provisions can add value in this phase and help minimize this risk.

Phase 3: Project execution and control

Red Flag #5 — Schedule monitoring and control

During the execution, it's significant to adopt a proactive approach to formulate rapid responses to any changes in the project plan. A consistent and accurate level of monitoring, control, and status reporting provides an opportunity for redirection or recovery as needed to meet the target completion.

To avoid any delays, it's vital to:

  • Evaluate if the base plan is achievable
  • Periodically monitor the progress against the baseline plan
  • Address the slippages, if any, to get back on track
  • Regularly update the key stakeholders about the project progress

BDO can help you validate the base plan, implement a robust project monitoring and control system to identify issues or risks that occur, create mitigation and recovery plan with the team during the execution to keep the project moving towards successful completion.

Red Flag #6 — A breakdown of cost tracking

Infrequent or inaccurate project cost tracking can lead to unexpected surprises and impact profitability of the project. They can also lead to short-term cashflow surprises, problems with financial reporting, and impact how your external auditor recognizes revenue. Poor cost tracking can lead to a whole host of issues down the road, not just accounting issues but the ability to support claims for extras or scope creep or unexpected events, such as COVID.

BDO professionals often see cost tracking issues arising from ineffective processes and systems to bandwidth to ineffective training. Identifying and remedying such issues early in a project's lifecycle can often be done at a minimal cost as compared with the large cost and risk impacts that not fixing them can cause, including more complex and costly disputes.

Red Flag #7 — A poor change order process

Is there a contractual process for getting change orders approved in a timely manner? Does that process involve mandatory notice obligations and/or adherence to other contractual provisions that the contract sets out for a valid claim for a change in the work?

Disputes over changes to the work can arise because the changes were discussed and agreed to informally, which often do not meet the applicable contractual requirements and when a dispute occurs down the road (when the contractor wants to be paid for changed work already done), the owner falls back on the contractual provisions.

A proper understanding of, and adherence to, the contractual change order process is an essential tool to reduce the risk of not being paid for out-of-scope work. It is advisable to proactively consider these matters when implementing contract administration systems. For example, while the negotiations can be informal (business-level), the administration system can remind staff to send out the applicable contractual notices to preserve the contractor's rights in the event of a later dispute.

Red Flag #8 — Joint venture between international stakeholders

At the execution phase, we frequently see misalignment between project teams comprised of JV partners from different countries that come together to deliver large and complex projects. In addition to differences in working styles, working language, and comfort with certain technology, an internationally assembled team has to contend with local laws governing local partners and the way contracts are interpreted differently around the world. Mitigating these issues is far easier with experts who have international experience in your corner.

Phase 4: Project closing

Red Flag #9 — Payment delays

After substantial completion of a project has been achieved, and the project is moved into the operations maintenance phase, is when most construction contractors on P3 projects receive their end-of-job balloon payment. If issues arise and there are delays with being paid for your efforts, our experts can assist with disputes, and if necessary, litigation. We can help ensure your claims are well-supported, records are maintained, and financial reporting is in order.

BDO in the infrastructure space

Infrastructure projects require collaboration from a range of stakeholders, including professional advisors. We understand the political and stakeholder issues that dominate the infrastructure sector. Our team of advisors has a proven track record of providing professional services to the public sector, private sector, and financial investors of infrastructure projects. We successfully guide clients from the early stages of preparing feasibility and business cases, along the procurement, evaluation and negotiation phase, to successful financial close and post-contract operation, maintenance, and compliance.

For advice on your infrastructure project, contact:

Chetan Sehgal, Partner, Forensic Disputes & Investigations, Construction Claims Advisory
Jordan Rosenfield, Senior Manager, Valuations & Modelling
Armand Capisciolto, Partner, National Accounting Standards
Hetal Kotecha, Partner, International Tax
Ian Brennan, Vice President, Procurement

Thornton Grout Finnigan contact and contributor:

Daniel Schwartz, Partner, Thornton Grout Finnigan

Thornton Grout Finnigan LLP is one of Canada's premiere litigation firms. TGF lawyers have an unparalleled depth of practice successfully litigating and resolving complex construction and infrastructure disputes. The firm's lawyers are all trial lawyers. They aren't afraid to take cases through to completion. That sets TGF apart from firms with more traditional construction law practices.


Sources:

[1] Arcadis. (2020, 2021) Global Construction Disputes Report. Available at: https://www.arcadis.com/en/knowledge-hub/perspectives/global/global-construction-disputes-report

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