The prime contract's pains and gains

The Ministry of Defence's Prime Contract - Capital Project Summary (PC-CPS) - should be warmly welcomed by potential prime contractors and their supply chains.

It sets out the general principles to be incorporated in the terms and conditions of prime contracts. The PC-CPS offers contractors an unprecedented opportunity to reconfigure their business processes in ways that will add greatly to the value and worth of their organisations.

However, it will be most unwelcome to construction suppliers that are not interested in prime contracting. If offers them nothing; it denies them access to markets that they may presently depend on for their existence.

It should be made clear that PC-CPS is not some new form of contract. Rather, it can be thought of as a set of rules governing the formation of prime contracts. Prime contracts are designed to evolve over time and comprise a set of 14 common core conditions amended to suit the circumstance and risks of each project.

The main obligation on the prime contractor is to design and construct, or to design, construct, operate and maintain the specified facility, and the PC-CPS allows the Ministry of Defence to change its mind at any time.



If this happens, the prime contractor is paid for any changes, but the basic philosophy is: agree the risk, time and money flowing from any changes before any work is put in hand. Compare this with the old JCT/ICE approach, where the main contractor is obliged to do the work first and get paid later.

The prime contracting process will start with the formation of a Ministry of Defence Integrated Project Team (IPT), which will have all of the skills and functions needed to deliver the project.

The IPT will use a three-stage evaluation process to select the prime contractors. The process will comply with EU public-sector procurement rules. It will include "gates" comprising "hard" and "soft" issues, typically weighted 60:40 towards hard. A hard issue could be a quality assurance system and a soft issue could be an HR system.

Three competing prime contractors will proceed at their own risk and expense. Two will drop out at different points along the way. The third will proceed to the status of preferred bidder and when the Ministry of Defence is clear on both the technical solution and the commercial issues, a contract will be awarded.

That means that the prime contractor must then conclude his contract matrix with his supply chain, preferably at the same time. It is of cardinal importance that prime contractors put in place a contract matrix that, in legal terms, passes on risk, roles and responsibilities in back-to-back fashion across the supply chain.

Consequently, prime contractors should use contracts for the employment of first-tier suppliers, which adopt the same strategy, approach and philosophy as those contained in the PC-CPS. They must also ensure that first-tier suppliers do the same with second-tier suppliers.

It is questionable whether any such contract matrix presently exists.

What prime contractors cannot do is what main contractors do now - that is, to employ subcontractors and suppliers on onerous, unfair, bespoke, heavily amended and above all, misaligned incompatible terms and conditions of contract.

Two scenarios suggest themselves. There may be a series of appaling wrangles between prime contractors and their supply chains as they argue about whether or not contracts are actually concluded, and if so, what were their terms and conditions and when did it happen.

Alternatively the supply side will start to trust each other and learn to work without contracts.

However, there are at least three problem areas built into the PC-CPS, which need to be addressed. Problem areas

l Fit-for-purpose requirement

The Ministry of Defence knows that in the present insurance environment, it cannot have fit-for-purpose and it knows why. Therefore it should drop the requirement in favour of a lesser standard that it knows prime contractors can deliver within the existing environment.



l The proposal for a Dispute Adjudication Board (DAB)

This almost certainly runs counter to the adjudication provisions in the Scheme for Construction Contracts. Therefore it should insert dispute resolution procedures that comply with the scheme, and work towards DABs, if it thinks they will add value.



l The right of the Ministry of Defence to terminate the employment of the prime contractor "at will"

The remedy available to the prime contractor in the event of termination is: "the authority shall pay the reasonable and proper costs incurred by the prime contractor".

When BMW terminated its contract with Rover Cars "at will", the government had a lot to say about the morality and business ethics underlying that decision.

Specifically there was great concern at the impact of BMW's "at will" decision on the future of Rover Cars, its workforce and its supply chain. The same arguments apply here, and that is why an "at will" termination mechanism is inappropriate. In English law, contracts are binding on the parties unless there is a serious breach and both parties are entitled to rely on that.



The importance of the strategic brief and CUP guides

The prime contracting process depends on two main tools: the first is the suite of HM Treasury procurement guides numbered 1-9. These are not exclusive to the prime contracting procurement route, but they are essential to it.

The second tool is the strategic briefing process, which is started by the Ministry of Defence's IPT. The PC-CPS is silent about when it starts, but it should be in existence before the project is advertised for tender.

On the face of it, there will be one strategic brief at the start of stage three, which will generate three different technical and commercial responses from bidders. Logic would dictate that the strategic brief will then develop in three different ways. It would be instructive to know how the MoD proposes to deal fairly, impartially, objectively and in confidence with this issue. Pirating of ideas and innovations will loom large in the minds of all potential prime contractors and their supply chains.

The MoD should also consider the cost falling on the supply side. In the early days, it is likely to be five or six times greater than the cost of traditional lowest-price bidding, and the supply chain will simply not respond without some form of incentive or comfort on cost.

A number of further questions about strategic briefs then arise. What is a strategic brief? What does one look like? What goes into one? Do strategic briefs form part of the contract? Can they be changed? What if the brief is wrong? Who owns the brief, contractually?

The PC-CPS appears to contemplate that the MoD, the prime contractor and the supply chain will develop the strategic brief collaboratively, and therefore they all own it.

The strategic brief must at some point be "frozen". It then forms part of the contract (clause 1.2) and it will set out the requirements for the facility (clause 1.3). Any changes to the brief could be a delay event, carrying an entitlement to extra time and money.

Lawyers will abhor the "silent ownership" approach. It could turn the "rules" of "cause and effect" upside down. Collaborative working may render it impossible to apportion responsibility for individual actions, and if that cannot be done, then breach of contract probably cannot be proven on the balance of probabilities. No breach means no claim and no entitlement to any extra time and money.

Could it be that the drafters of the PC-CPS have finally found a way to kill off the claims game through the strategy of collective responsibility? Maybe, but there is a glimmer of hope for the lawyers. If the client changes the frozen strategic brief, then the normal claims principles apply.



Conclusions

The drafters of PC-CPS have got it right in drawing up a contract that radically changes the roles and responsibilities of the parties to prime contracts, and therefore, the jobs that they do. This will require a radical change of attitude and behaviour throughout the supply side, and that is probably the greatest imposition that the industry faces in responding to the prime contracting challenge.

Can the industry respond to prime contracting? Yes of course it can, and in my opinion it will; not en masse, but in sufficient numbers to ensure its success. It will take time and leadership, which must continue to come from the client side and in particular from the MoD.

Overall, PC-CPS is an excellent document, not in the contractual or legal sense, but in the change management sense. In my opinion, it has got that absolutely right because it does radically change roles, responsibilities and the jobs that people do. It therefore establishes a firm base for changing the way they behave.

But it appears to contain flaws in the legal and contractual environment, some of which are pointed out in this article, which will unravel the impact of the change management provisions.

It is right that prime contracts should be onerous and demanding of the supply side. But as it stands, PC-CPS is too onerous and too much of an employer's contract. It seeks to pass all risk to the supply side. That cannot be right, and should not be attempted. The MoD should think again on the issues identified in this article.