This document discusses managing risks in the procurement process for mega projects. It outlines some common mistakes made that can negatively impact project success, such as rushing procurement documents before they are fully defined, using poor evaluation criteria, and not allowing enough time for feedback. It also discusses particular legal issues that require consideration for mega projects, such as how to allocate risks related to site conditions, delays, access and permits between the owner and contractor. Overall, the document emphasizes the importance of a thorough procurement process to selecting the right contractor and establishing a balanced legal framework for managing risks over the life of complex mega projects.

1. Building an Effective Legal Framework for the Mega Project Transaction Judy Wilson Blake, Cassels & Graydon LLP in association with Dr. Saud Al Ammari Law Firm

2. Outline
1.Managing within rigid procurement processes
2.Particular legal issues (related to technical and commercial risks) that have been significant challenges/innovations for mega projects

3. Managing within Rigid Procurement Processes

4. Managing the Rigid Procurement Risk
General Comments
–Poor execution of mega project procurement is a risk for BOTH the Owner and the bidders
–Owners and Bidders often underestimate the degree to which the procurement can influence the transaction for years after the procurement is complete
–Poor choices made during the procurement process impact both the commercial “partnership” of the owner and the successful bidder AND the success of the project implementation
–Parties rarely acknowledge the value of a meticulous (but lengthy) procurement process

5. Managing the Rigid Procurement Risk
Rush to Issuance of the Procurement Documents and the Hurried Procurement
–The failure of projects, including mega projects, (for example, projects that exceed budget and/or schedule, or that provide a product that does not meet the owner’s expectations) is often traceable to a “poor” procurement process
–Most common mistakes include poor scope of work definition in the technical specifications (or ambiguous scope of work) often because the procurement documents are rushed into the market
–Governments all over the world often share a desire to demonstrate progress on a project by issuing the procurement documents prematurely
–Best solution is (i) patience before a rush to issuance, (ii) if patience is not possible, then an in-market period that allows progressive issuance of key documents (i.e. not all documents need to be issued with the initial package)

6. Managing the Rigid Procurement Risk
Poor Design of Evaluation Criteria
–One of the most common mistakes that runs the risk of “mis-matching” the successful bidder to the project and owner
–Often the owner will emphasize price without taking into account its significant concerns over project schedule, strategic importance of the project, or complexity of the project
–Inappropriate use of past precedent documents is often the cause of this problem and it often relates to the “race to issuance”
–Best solution is (i) clear identification of owner’s priorities for the project, (ii) a conscious matching of evaluation criteria to the priorities and (iii) setting the submission requirements to reflect the owner’s priorities and the associated evaluation criteria

7. Managing the Rigid Procurement Risk
Poor Design and Execution of a Complex Procurement Process (and the risk of bid failure)
–Procurement documents (RFPs etc.) must be specifically designed for mega project procurements and include such features as technical bilateral consultation, commercially confidential meetings, commercially confidential requests for information and similar tools
–Procurement processes should not be fishing expeditions (with the attendant reputational risk)
–Pursuit costs for these transactions are high and therefore the procurement process is scrutinized more carefully

8. Managing the Rigid Procurement Risk
Failing to Achieve “Commercial Balance” (and the risk of bid failure)
–The old style of one-sided government contracts presents genuine risk to the owner in mega project procurements
–Mega projects involve such significant risk that a failed project can ruin even the largest international company. These are “bet the company” transactions
–Company boards will withdraw from competitive procurements if the lack of reasonable commercial terms makes the transaction a risk to the well being of the company
–It is genuinely a possibility that an unreasonable commercial deal will cause either bid failure or a lack of interest in the market
–The two best tools for an owner to avoid these risks are (i) listen to the bidders, and (ii) ensure that the advisory tem has a good sense of what is “market”

9. Managing the Rigid Procurement Risk
Responsiveness During the “In Market” Period (and the risk of bid failure)
–Mega project procurements should learn from PPP transactions and include a “feedback loop” from bidders to owner
–This is intended to drive the procurement toward “best value” and the appropriate and most efficient allocation of risk in the project agreement
–Best practice requires (i) owners to be responsive to serious concerns raised by bidders and (ii) bidders to make the effort to participate and to effect change to the commercial documents during the in market period

10. Managing the Rigid Procurement Risk
Poor Resourcing
–Mega project transactions require a greater commitment of resources to complete the procurement process than other procurements
–Owners often underestimate the resources they will need to get the transaction to commercial close

11. Particular Legal Issues – Challenges and Opportunities

12. Particular Legal Issues – Challenges/Opportunities
“Off-market” Transactions
–Owners (particularly in their first mega project or their first in a particular asset class/sector) tend to underestimate the extent to which there are “accepted” approaches to mega projects (including “accepted” allocations of risk) that have to be understood and addressed
–A different allocation of risk can be acceptable to the market, but it usually must be justified based on project specific concerns
–Owners and bidders should make significant effort to understand the global markets and commonly accepted allocations of risk

13. Particular Legal Issues – Challenges/Opportunities
Reliance on Information Provided by the Owner During the Procurement Process
–Owner must decide whether bidders will be permitted to rely on information provided (for example, soils information, various pre-project studies)
–Generally, bidders are required to conduct their own due diligence and NOT rely on information provided by the owner
–In some circumstances bidders are permitted to rely on certain portions of the information and given “reliance” letters by various firms
–Note that a reliance letter is only as good as the insurance or assets that stand behind the reliance letter
–Note that there is an increasing trend for owners to take greater responsibility for owner information in order to avoid the pricing of a significant contingency
–Example: contamination and transit files.

14. Particular Legal Issues – Challenges/Opportunities
Compliance with/Changes to Applicable Law
–Project Co/Contractor normally obliged to comply with the applicable law at all times when carrying out its obligations under the Project Agreement and applicable law is usually defined broadly
–The sharing of risk arises in the determination of whether Project Co/Contractor will get a variation/change order (or a right to a delay in hitting substantial completion) if the applicable law changes
–This risk was once a straight “flow through” to the owner in most cases (i.e. the owners risk). More often now this risk is shared, with some “changes in law” being regarded as a cost of doing business. For example, changes in the general law are often regarded as a cost of doing business in the jurisdiction and, therefore, are often risks borne by Project Co/Contractor
–There is significant variability in the allocation of this risk but there are some “lessons learned” from P3 transactions

15. Particular Legal Issues – Challenges/Opportunities
Site Conditions
–Project Co/Contractor often obliged to take the site on an “as is, where is” basis subject only to contamination that was not disclosed to or readily inferable by Project Co/Contractor
–Geotechnical risks usually stay with Project Co/Contractor (subject to reliance letters and contamination or fossils and artifacts)
–However, some of these risks are now being tailored to asset classes so the owner can avoid contingencies. For example, it may not be possible for bidders to do proper due diligence on municipal road allowances in linear projects (transit, highways)

16. Particular Legal Issues – Challenges/Opportunities
Major Delays in Construction
–Often, any delay that does not cause a delay in the critical path is at Project Co/Contractor’s risk, irrespective of the cause of the delay
–Delays that impact the critical path are a shared risk usually depending on the cause of the delay
–Agreements often enumerate specific events that will give Project Co/Contractor a right to claim relief (for example, a breach of contract by the Owner)
–The enumeration of these events is often revised to be project specific. For example, events for which relief is given could include contamination, force majeure events, discriminatory changes in law, and discovery of artifacts, fossils or species at risk.
–One major trends in mega projects (and, for example, in P3 projects) is the extent to which the risk of “unpredictable events” is a shared risk rather than a risk absorbed by the owner. This is certainly the case in P3s and may spill over to the mega project.

17. Particular Legal Issues - Challenges/Opportunities
Access to the Site
–Owner is obliged to provide a non-exclusive right to access the site to Project Co/Contractor
–Owner has a right to allow other contractors on the site to carry out work provided the other contractors do not interfere with Project Co/Contractor’s work
–A failure to provide access or a delay in providing access is at the owners risk
–However, as “sites” become more complex, providing access may also be more complex.
–For example, in the United States and Canada, providing guaranteed access to a municipal road allowance for transit can be very complex, particularly in the presence of a non-municipal/regional transit authority

18. Particular Legal Issues - Challenges/Opportunities
Permits, Licenses and Approvals
–Normally these are Project Co/Contractor’s risk and responsibility, subject to specific permits, licenses and approvals to be obtained by the owner
–Risk that licensing or approval bodies will be slow is Project Co/Contractor’s risk
–For mega projects, the inherent controversial nature of the project (they can be “high impact” projects) introduces the concept of “political risk” that will often have to be accounted for in provisions related to permits, licences and approvals

19. Particular Legal Issues - Challenges/Opportunities
Subcontractors
–Project Co/Contractor’s risk, subject in some circumstances to force majeure and similar events that affect subcontractors
–However, the ability of Project Co/Contractor to manage its subcontractors is often in conflict with the owner’s right to approve subcontractors
–The usual compromise is the owners right to approve “Key Subcontractors” but in a mega project even “minor” subcontractors can be carried out significant work valued in the tens of millions

20. Particular Legal Issues - Challenges/Opportunities
Interference by Third Party Contractors Engaged by the Owner
–Normally the owner’s risk, subject to Project Co/Contractor’s obligation to cooperate
–The nature of the project and the site impacts this significantly
–Transit projects, for example, may have significant risk over a very large/long site

21. Particular Legal Issues - Challenges/Opportunities
Force Majeure Events (remote and uninsurable risks)
–Project Co/Contractor normally would get relief to the extent that such events delay the achievement of substantial completion or interfere with Project Co/Contractor’s ability to carry out maintenance and rehabilitation
–Note that this is not the traditional (very broad) definition of force majeure
–Force majeure events are usually a enumerated list of events.

22. Particular Legal Issues - Challenges/Opportunities
Insurable Events Beyond the Control of Project Co/Contractor
–Usually an enumerated list
–Note that the relief is not extensive because of Project Co/Contractor’s ability to insure against these risks
–Note the increasing importance of project insurance in determining allocation of risk