Since its introduction fifteen years ago the NEC Engineering and Construction Contract (ECC) has been successfully used across all sectors in the UK, and elsewhere in the world such as South Africa, Dubai and Australasia. Beginning in the 1970s, tunnelling personnel in North America have evolved the concept of Geotechnical Baseline Reports (GBRs) for application to underground works. The combination of these two best practice tools offers real benefits to all parties to a construction contract involving significant excavation and or groundworks (tunnels, shafts, soil stabilisation, ground remediation, deep excavations, etc.). This article explains in more detail how the NEC and the GBR concept can be combined to more clearly allocate ground risk.

The article follows an excellent, more general article entitled ‘Managing Ground Risk’

NEC contracts and risk
The NEC contracts are specifically designed for clarity and flexibility, and to stimulate good management. This is one reason why they are specifically endorsed by the UK’s Office of Government Commerce as meeting its ‘Achieving Excellence in Procurement’ guidelines and are also endorsed for use by the South African Government. The NEC was used for the Channel Tunnel Rail Link in the UK and is to be used for Crossrail. While other forms of contract have continued to be used successfully, the NEC contracts address risk allocation and risk management particularly well.

It should be noted that NEC contracts are very different from traditional contracts. They are effectively a series of processes to actively manage a project. Adjustments in training, systems, and culture are required to make them work well.

The main project contract within the NEC family is the NEC ECC. This is modular in structure and provides options for lump sum, remeasurement (bill of quantities), target cost and reimbursable contracts. All specific events that a bidder is not required to price because they are to be at the risk of the employer are identified as ‘compensation events.’ These items are managed through a process whereby the forecast cost or schedule impact, if any, is agreed and then compensation is made.

Where the employer’s requirements are difficult to define or cannot be defined it is good practice to include in the ‘Works Information’—the document that sets out requirements for the works and constraints on how the work is to be performed—stated assumptions upon which bidders should base their price and programme. These assumptions act as baselines. If an assumption later proves to be incorrect then the Works Information will be corrected to reflect the actual circumstances. This change then triggers a compensation event.

Previous experience with GBRs
Dating back to the 1970s, tunneling professionals in North America recognized the importance and value of including an interpretive geological/geotechnical report in construction contracts involving underground works. The desire to create such documents grew from an increasing trend toward disputes and litigation. Previous practice involved the preparation of one or more reports containing factual and interpretive information, and making those reports available to the bidders ‘for information purposes only.’ Bidders were warned that they were not to rely on such information, but at the same time, were to make their own interpretations of the site and subsurface conditions in a low-bid environment. Such practices generated ambiguity under the construction contract, with an increasing tendency toward protracted litigation that extended years beyond construction completion. The only entities to benefit were the parties’ legal representatives.

The content and focus of contractual interpretive reports have evolved over the years. The North American tunnelling industry now refers to this document as a GBR. As stated in an ASCE (American Society of Civil Engineers) Guidelines Publication on GBRs, the aims of the GBR are to provide:
? a concise overview of the project;
? the anticipated relevant physical conditions to be encountered with reference to details contained in a Geotechnical Data Report (GDR);
? and the anticipated ground behaviour consistent with certain assumed construction approaches, means, and methods.

The GBR addresses the range of uncertainty demonstrated by the available data, but then states, for contracting purposes, the baseline averages and ranges that are contractually binding. This eliminates a substantial degree of the ambiguity that existed when it was left to bidders to make their own interpretations. Under a traditional design-bid-build framework, the GBR is prepared on behalf of the owner (often the ‘employer’ under the contract). Under a design-build framework, a collaborative process can be employed that incorporates input from the design-build team as well as the owner in advance of signing the final contract.

In North America, the clause typically invoked is known as the ‘Differing Site Conditions (DSC) Clause,’ whereby the contractor is entitled to additional compensation if:
? it reasonably relied on an indication in the Contract, and,
? as a result of encountering a condition more adverse than indicated in the contract, it has experienced an increase in the cost or time of the work.

Under the ‘old’ method, if the geological /geotechnical reports were specifically excluded from the contract (i.e., for information only), and bidders were to make their own interpretations of the anticipated ground conditions, the administration of the DSC clause was fraught with ambiguity, conflict and protracted disputes. Clause 12 of the ICE (Institution of Civil Engineers) Conditions of Contract invokes a somewhat different standard, that is, what an experienced contractor might have foreseen. Despite the different tests, there have been a number of infamous Clause 12 dispute. The ICE has now withdrawn support for its own ‘ICE Contracts.’

From a contractual perspective, if the contract says that the contractor is entitled to additional compensation if the encountered conditions are different than those indicated in the contract, the content of a GBR is intended to answer the question: Different from what?

Some owners have expressed that they believe they are entitled to a credit if the actual conditions encountered are more favourable (and therefore less costly) than the contractual baselines. However, the bidder takes on additional risk if it bases its bid on conditions more favourable than those indicated in the baselines. If the baseline conditions are encountered, the contractor is not entitled to any additional compensation. Similarly, if the conditions encountered are more favourable than those portrayed in the baselines, neither party is entitled to a renegotiation, whether the contractor had assumed more favourable conditions or not. In a competitive bidding environment, the contractor assumes the risks, and the owner realizes the benefits. If the conditions are comparable to or more favourable than the stated baselines, risk and reward both accrue to the contractor.

To avoid contractual ‘gamesmanship,’ the ASCE Guidelines recommend that baselines be prepared that are realistic and not overly conservative. From an owner’s perspective, the less onerous the assumed baseline conditions, the more likely it will benefit financially if better conditions are realised. Viewed from another perspective, overly adverse baselines will serve to raise the cost of construction whether the adverse conditions are encountered or not, but will not necessarily eliminate the potential for disputes.

Given the inherent uncertainties involved with underground construction, it is not uncommon for disputes to develop that require resolution by an adjudication panel. The parties have generally accepted the rulings of such panels, which has served to remove protracted legal battles from the contracting landscape. Thus, the use of GBRs, in conjunction with adjudication panels, is achieving the desired goal. Under the philosophy of continuous improvement however, the industry can always do better. An underlying premise for the second edition of the ASCE Guidelines Publication was to capture and share lessons learned from past practices. It is hoped that through this process better, clearer GBRs are written, construction risks are more effectively identified and priced, contractors are paid fairly for the work they must perform and disputes in the underground industry are reduced.

GBRs outside of North America
Since its initial use in North America, the concept of a GBR has spread worldwide and has successfully proved its value on projects in Hong Kong, Singapore, Australia, New Zealand, Europe and the UK. The ASCE Guidelines Publication has recently been translated into Japanese, and a similar effort is underway for translation into German. In the UK, a GBR is being used on Thames Water’s Lee Tunnel contract and GBRs will be prepared for the Crossrail underground contracts. Many clients and contractors are now insistent on the use of a GBR, having seen the benefits in terms of surety of cost on behalf of the former, and contractual fairness on behalf of the latter.

Insurance industry and risk
In association with the British Tunnelling Society, the Association of British Insurers developed and published ‘The Joint Code of Practice for Risk Management of Tunnel Works in the UK’ in 2003, and an international version in 2006.

Recognising the importance of properly managing the risks associated with underground works, these codes feature two fundamental approaches to improved identification, minimisation, allocation and management of risk:
? the implementation of risk registers, to facilitate the identification, allocation, and management of risks during project planning, design and construction in a pre-emptive manner; and
? the preparation and implementation of a ‘Ground Reference Conditions’ Report or ‘Geotechnical Baseline Conditions’ Report that sets out the employer’s understanding of the anticipated conditions.

The UK and international code versions give additional details relative to the development and implementation of the risk register process. Of relevance here are the codes’ explicit endorsement of a process whereby the employer carries the responsibility of completing a thorough site exploration program prior to tender, presents the results of the exploration in a geotechnical data report that is included in the contract and then takes contractual and financial responsibility if the conditions encountered are more adverse than those documented as the ground reference conditions. The 2003 UK code cites the first edition of the ASCE Guidelines Publication on GBRs (published in 1997) as one example of a Ground Reference Conditions Report approach. The insurers and the British Tunnelling Society recognised the merit in using a GBR as a key tool in the overall approach to allocating and sharing risks between the contracting parties.

Standard physical condition risk allocation
The contracts in the NEC family strive to be precise on the matter of risk allocation. For example the default risk allocation in the NEC ECC relating to weather has the employer taking the risk if certain defined weather measurements are more adverse than the 1 in 10 year event. This is a great improvement on the vague ‘exceptionally adverse weather conditions’ clauses in many contracts.

Being precise regarding physical conditions is a bit more challenging. The default risk allocation in the ECC is set in clauses 60.1(12), 60.2 and 60.3. The following three tests have to be passed in clause 60.1(12) for physical conditions to be a compensation event:
“The Contractor encounters physical conditions which
? are within the Site
? are not weather conditions and
? an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for them.
Only the difference between the physical conditions encountered and those for which it would have been reasonable to have allowed is taken into account in assessing a compensation event.”

Clause 60.2 then states:
“In judging the physical conditions for the purpose of assessing a compensation event, the Contractor is assumed to have taken into account:
? the Site Information
? publicly available information referred to in the Site Information
? information available from a visual inspection of the Site and
? other information which an experienced Contractor could reasonably be expected to have or to obtain.”
The ‘Site Information’ (defined in Clause 11.2 (16)) is “information which
?describes the Site and its surroundings
?is in the documents which the Contract Data states it is in.”

Hence Clause 60.2 requires the bidder (and later the contractor) to take into account the ‘Site Information’ in judging the physical conditions. As is the case with any contract where physical conditions are important, and in consideration of the Joint Code of Practice discussed above, the employer is well advised to invest at least in quality factual information about—for example, ground conditions and existing services—to allow all parties to assess the risks associated with physical conditions. The appropriate place for this information in an ECC contract is very clearly in the part entitled ‘Site Information.’ Indeed the only references in the contract to this Site Information relate to physical conditions and hence, ultimately to the decision as to whether a certain occurrence is a compensation event.

Clause 60.3 is the last of the clauses to refer to Site Information. It states:

“If there is an ambiguity or inconsistency within the Site Information (including the information referred to in it), the Contractor is assumed to have taken into account the physical condition more favourable to doing the work.”

This is effectively the ‘contra preferentem’ rule: the owner/employer has (normally) prepared the Site Information and takes the risk of ambiguities or inconsistencies within it.

Importantly, with respect to time, compensation events can lead only to a delay to the required ‘Completion Date’ – they cannot bring the Completion Date forward (Clause 63.3). Also only certain stated compensation events can result in a reduction to the ‘Prices’ (the ECC equivalent to the ‘contract price’). The physical conditions compensation event is not one of them . So, if the contractor encounters conditions better than expected, the Prices are not reduced.

Unfortunately, the interpretation of the phrase ‘physical conditions which…an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for them’ is overly subjective and more appealing to lawyers than to tunnelling and geotechnical engineers. For a project involving significant excavation, there must be a better way.

Combining GBR with NEC ECC
The standard ECC clauses for physical conditions may be appropriate for most projects. If underground works are a significant part of the project however, it may be appropriate to make more direct reference to a GBR in the contract.

If the GBR is included in the Site Information and if it states certain assumptions to be made (baseline statements), then those assumptions will, because of Clauses 60.2 and 60.1 (12), logically form the agreed baseline for pricing by the bidder.

It is suggested that if the bidder were told in the Site Information to make a certain assumption, then given the last sentence in 60.1(12), it would be difficult for an employer to later suggest that the contractor should have allowed for something else.

The challenge is how to clearly link the compensation event definition to the baseline statements. To match the ECC provisions in Clause 60.1(12) (physical conditions) and 60.1(13) (weather) a sentence regarding the assessment of such an event should also be included.

The simple result in Option Z (additional conditions of contract) might be along the lines of:
“Add as Clause 60.1(12A):
? The Contractor encounters conditions that are the subject of a baseline statement in the GBR included in the Site Information that are more adverse than the baseline statement
? Only the difference between the conditions encountered and the baseline statement is taken into account in assessing a compensation event.”

It would also be sensible to amend Clause 60.1(12) to start with: “The Contractor encounters physical conditions other than those which are the subject of a baseline statement in the GBR.” In this way the risk allocation for issues not specifically addressed by GBR baselines would remain as per the standard ECC risk allocation. It might, however, also be necessary to consider the last bullet point in Clause 60.2 . Having gone to the trouble of preparing a GBR, is it really appropriate to ‘reasonably’ expect the bidder to have or to obtain other information?

The risk allocation relating to a certain parameter or condition would depend on how the parameter or condition was baselined in the GBR, e.g., a specific value, a range in values or a range in likely behaviours.

For example, the baseline statements in the GBR might include:
? Assume parameter A is value X or less
? Assume ground condition M occurs at a frequency Y between locations P and Q.

The contractor then takes the risk of:
? The parameter A being less than or equal to X and
? the occurrence of ground condition M up to frequency Y within locations P and Q;

If more favourable conditions make things easier for the contractor, then he will get all the benefit in a priced contract, as discussed earlier in this paper (if this reduced the contractor’s costs, the ‘Prices’ would not be reduced [because of Clause 63.2 as described above]). With a target contract, the benefit will be shared. If the employer did want the Prices to be reduced for ‘better than assumed’ parameters, it could do so under Option Z, though quantifying the benefits would be difficult.

In all cases, it is beneficial to be clear in the contract (the Works Information in the ECC) on how, where, when and by whom the actual conditions encountered will be verified. If this is the case, the occurrence or otherwise of a compensation event will be most easily identified and agreed. However, the ‘burden of proof’ will still be with the contractor to demonstrate the ‘adverse effect’.

Exactly how these risks are allocated and the parameters selected will need to be discussed between the employer and his specialist geotechnical advisors and, in some cases, with pre-qualified bidders.

Figure 1 from Mott MacDonald illustrates the various information about physical conditions discussed in this article and those parts that could be included in the ECC’s Site Information.

Summary
Where used, the GBR has become a key contract document for a project including major excavation or underground works. It is often the first document to be read by bidders and, in the event of a dispute, the first to be revisited by the client’s representative or adjudication panel. As a result, the preparation of a GBR requires specialist experience and skill in its preparation.

Numerous heavy civil and underground projects are due to be constructed worldwide. It is believed that for these projects, a properly thought-through GBR is a beneficial investment for a client to give surety of costs. Similarly, potential bidders may be more inclined to tender the work if they perceive that the GBR lends an added degree of fairness under the contract.

As a ground reference report is called for under the Joint Code of Practice9, the insurance industry demands that such a document is prepared and included in the contract as a condition for making insurance available to the project’s contractor (All-Risk Policy or Performance Bond) or owner (Owner Controlled Insurance Programs).

Making sure that the baseline statements set out in the GBR are realistic, and link directly into the contract and associated payment provisions provides for more sensible and comparable bids from interested and competent contractors. It also provides for greater clarity in risk management and risk allocation. This in turn leads to an increased likelihood of a successful outcome for all involved. The same principles might also be applied, for example, to environmental aspects of a project with a potentially significant effect on a bid price.

The NEC ECC is increasingly being favoured by many clients worldwide. The clarity of the compensation events for risk allocation and management, linking to the appropriate use of the principles of the GBR, represents an evolving best practice in the contractual allocation and management of geotechnical risk.


Figure 1 – Information about particular aspects of physical conditions for contractual purposes (schematic only) [Mott MacDonald]