By Rupert Sydenham and Annie Lund of Hogan Lovells
Originally published September 20, 2023
Infrastructure projects increasingly involve constructing both physical infrastructure and digital infrastructure works. But the current standard form construction contracts have not been designed to address the risks particular to these kinds of projects. What are the risks particular to projects involving both physical and digital infrastructure? And how might standard form construction contracts need to adapt to address them?
We recently published an article in the July 2023 edition of the International Bar Association's journal Construction Law International titled 'Are standard form construction contracts fit for the 'Smart Infrastructure' of the future?'1.
Here, we summarise the key points of the article. To read the full-length article on the IBA's website, please click here.
In our article we have posed the question whether current standard form construction contracts are fit for the 'Smart Infrastructure' of the future, that is, projects combining both physical infrastructure and digital infrastructure. This is because the current standard forms have not been specifically designed to address the risks particular to projects delivering both these types of infrastructure works under a single contract.
In this article, we identify some of the risks particular to these projects. We then go onto explain the changes to standard forms that might be contemplated to address them. The matters identified are intended to provoke discussion about how the standard forms might be developed.
What are the risks particular to projects involving both physical and digital infrastructure?
Enhanced collaboration risk
While employers, consultants and contractors have to collaborate a lot during physical infrastructure-only projects, they are likely to have to collaborate even more during projects involving both physical and digital infrastructure.
Developing digital infrastructure tends to be a more iterative process than developing physical infrastructure. This means the design phase of a project involving both physical and digital infrastructure is likely to involve more back-and-forth communication between the employer's end users and the contractor's development team than during a physical infrastructure-only project and this extended collaboration phase can be hard to manage.|
Enhanced cost/time risk
Employers, consultants, and contractors may have a good feel for estimating the cost and time risks associated with scope changes on physical infrastructure-only projects. But estimating the cost and time impacts of making changes to software is notoriously difficult, so they may therefore have less feel for the cost and time effects of scope changes on a project deploying technology within physical infrastructure. This in turn heightens the risk of unanticipated cost and time overruns.
Enhanced project continuity risk
There are potentially more threats to the completion of a physical and digital infrastructure project than a physical infrastructure-only project. After terminating its contract for a physical infrastructure-only project, an employer often struggles to find a replacement contractor to pick up where the previous contractor left off. But it might be even harder to find a replacement contractor for a physical and digital infrastructure project due to the candidates being unable and/or unwilling to continue developing a rival's technology.
How should standard form construction contracts be adapted?
To identify how standard form construction contracts should be adapted to mitigate these risks, we compared the relevant provisions of FIDIC Yellow, also known as the Plant and Design-Build Contract 2017, to equivalent clauses commonly found in IT outsourcing and systems implementation contracts. As a result of our analysis, we recommend considering the following initial adaptations for construction contracts with a digital infrastructure element:
The role of the Engineer
The iterative nature of digital technology development and the potential for mismatch between the employer's expectations and the contractor's work mean IT contracts tend to take a more complex and collaborative approach to managing a project as compared to FIDIC Yellow's approach.
Rather than giving ultimate authority to a third party engineer, IT contracts often concentrate on parties discussing and making decisions together via a hierarchy of boards and committees, each comprising party representatives and split into different sub-committees according to the project's needs.
Seasoned employers are unlikely to forgo the role of the engineer entirely. However, parties could provide for a system of management boards to facilitate collaborative working between the parties in the areas where it is required, while maintaining the role of the engineer. They could also appoint a panel of engineers of different technical disciplines or specify that the engineer have particular IT qualifications.
Change control mechanisms
In FIDIC Yellow, the engineer holds the key role in the change control mechanism, determining the scope of any instructed change and the associated time and cost adjustments. By contrast, IT contracts tend have more flexible and balanced change control provisions, with the effect that the parties are more likely to share the cost and time risk of any unanticipated scope changes.
Employers will be uncomfortable about weakening their position when it comes to change management. However, employers may need to revise their views because contractors may be commercially reasonable in arguing that the parties should share novel technology risk. Where the contractors are specialist suppliers, they may have the bargaining power to insist on a more balanced approach to change control too.
The use of IP
FIDIC Yellow's IP clauses are brief whereas IT contracts' provisions are more nuanced. They distinguish between different forms of IP: between that held pre-contract and that developed for the project; and between contractor-owned IP and third party IP licensed in. They also contemplate infringement action, open source software, assignment, transfer and sublicensing comprehensively. IP control following termination is also addressed in "deliver-up" provisions. These compel the supplier to pass its source code to the customer when leaving the project, enabling progress to continue.
Projects involving the delivery of both physical and digital infrastructure works surely require the more detailed and nuanced IP provisions found in IT contracts to be incorporated into construction contracts, given the increased chance of disputes stemming from the blurred lines of IP ownership between employer and contractor.
These proposed changes to standard form construction contracts are just the starting point of the discussion. Performance standards, payment, termination, and warranty clauses, for example, also deserve similar analysis.
Rupert Sydenham is a Partner with Hogan Lovells and heads the firm’s construction and engineering disputes practice in London. He enjoys helping his clients to resolve complex construction and engineering disputes efficiently and effectively. He particularly values the close working with his clients’ legal, commercial, and technical teams that is typically required for successful outcomes. He can be reached at rupert.sydenham@hoganlovells.com.
Annie Lund is an Associate in Hogan Lovells International Arbitration, Construction, and Engineering Disputes team in London. Her practice focuses on cross-border dispute resolution and dispute avoidance for clients in the engineering, construction, and technology sectors. She can be reached at annie.lund@hoganlovells.com.
References
1 Construction Law International Vol 18 No 2, July 2023, 22-28 https://www.ibanet.org/clint-june-2023-feature-1