Construction in Qatar: What are the Moral and Bottom Line Risks of Oppressive Labor Practices? How do we Account for These Risks?

The Guardian Newspaper has a report this week about abusive working conditions on Qatar construction projects.  Here is Bloomberg Business Week:

Should American construction and engineering groups () be called to account for worker mistreatment at offshore projects they manage?  Britain’s Guardian newspaper reports that immigrant workers on a massive construction project in Qatar are being treated inhumanely and dying at a rate of almost one per day from on-the-job accidents and heart failure.   

Parsons Corp., in Pasadena, Calif., is managing construction of the $45 billion Lusail City project near the capital city, Doha, that’s being built by Qatar’s sovereign-wealth fund to accommodate the 2022 soccer World Cup. A British unit of CH2M Hill, in Meridian, Colo., is listed on Lusail City’s website as one of three key contractors on the project. The two others are Hyder Consulting (HYC:LN) of Britain and Denmark’s Cowi.

Sitting in tall buildings in New York, London, Chicago, or San Francisco, the labor practices on the ground, far away, are not apparent when we negotiate construction and CM services contracts for projects like the Qatar World Cup stadiums.  Do local abusive labor practices present a risk factor for our clients working abroad?  How do we mitigate against this risk?  In this case, Parsons, CH2MHill, and Hyder Consulting seem to convey a see no evil, hear no evil, speak no evil approach ....  Is it enough to say "we don't have control over, and are not responsible for the labor practices of local contractors?"

The Guardian:

[C]ritics of a system that has been likened to modern-day slavery point out that Qatar already has more robust labour laws than many other countries in the region, but they are often not adhered to by the web of contractors and subcontractors in a huge construction boom with tens of thousands of migrant labourers who are tied to their employer by law.

What are the risks for companies like Parsons and CH2MHill?  There is, of course, risk that a company's reputation and image will be adversely affected, there is heightened risk of sabotage or insurrection with an oppressed workforce, and there is increased risk of high rates of accident and death.  Abusive labor conditions can disrupt work progress, impact the quality of work, and expose Western general contractors and construction managers to possible legal action by human rights groups, or labor groups.   Finally, there is the moral hazard:  do we as individuals, or as companies, want to be associated with abusive labor practices?  These risk factors should be considered when we negotiate these contracts.

Here is a link to the Guardian's Video.

New Design Build Best Practices Guide

The Design Build Institute of America has a new "Best Practices Guide" for design-build procurement, contracting, and implementation.  They are seeking comments through November 15, 2013.

Submit any comments to BestPractices@DBIA.org.

The Practice guide provides bullet point guidance on:

I.   Procurement:

1. Assessing unique program characteristics
2. Implementing a procurement plan to enhance collaboration
3. Fair, open and transparent processes for competitive procurement. 

II.  Contracting:

1. Fair, balanced, and clear contracts
2. Spelling out of expected standards 
3. Addressing each party's performance at each stage

III.  Implementation:

1. Educating all participants about the process
2. Establishing logistics and processes for integrated project delivery
3. Effective communication, collaboration, issue resolution
4. Design management processes and alignment of teams

Take a look at the guide and help make it the best it can be by submitting your comments.  

Farella Braun + Martel's Focus on P3 in California.

Scott Douglass and Jeffrey Sykes of Farella Braun + Martel in San Francisco have a useful series looking at public private partnerships.  It's worth a read.  Here are some highlights from Part1:

The amount of private funds available for investment in P3s is difficult to pinpoint, but some estimate that  over $250 billion is currently available and that as much as $2.5 trillion may become available globally by 2030 to support well-implemented P3 programs as investor appetite for infrastructure investment increases.  The number of investment funds dedicated to infrastructure has doubled between 2006 and 2009, and  capital in those funds has increased threefold over the same period.  Further, many large pension funds and institutional investors, including insurance companies, are interested in P3s to tap into long-term revenue streams and to diversify their holdings, thereby increasing the amount of private capital potentially available for P3 projects by another $38 billion. Infrastructure assets are attractive to such private investors because they tend to be countercyclical, they generate quality cash-flows backed by long-term revenue contracts, and they have reasonably stable regulatory environments. 

 ***

Detailed designs for construction work to be undertaken by the private partner are not typically specified in P3 agreements ....  For example, in the context of a wastewater treatment plant, the P3 agreement may require influent to a certain level.  Additionally, it may also require that the plant maintain certain odor controls, meet certain energy efficiencies, and be capable of future expansion. In the longer term, and while the short-term improvements are being designed and built in the case of an existing facility, the private partner would operate and maintain the facility (usually through a private O&M provider hired by the private partner) for the term of the P3 agreement. During a facility’s operation phase, the private partner typically assumes the risk of operating and maintaining the facility, which in the context of a wastewater treatment plant would include the risk that fines could be levied for the unauthorized release of untreated or undertreated wastewater. At the end of a P3 agreement, the infrastructure facility is returned to the public entity in a contractually predetermined condition, and the public entity can then operate and/or maintain the facility itself or outsource this work to the private sector.

***

[T]wo primary payment models ... can be used to provide the private partner with a reasonable return on investment. The first is called a “user fee” payment model. Under this model, like its name suggests, the private partner is paid a return on investment through fees paid by users of the particular public infrastructure project. Usually, a rate-setting mechanism or formula is contractually set to establish a rate ceiling to ensure that the private partner does not receive a windfall. Sometimes, the rate-setting mechanism also ensures that the private partner makes a threshold rate of return, but where no floor is established for rates, the private partner assumes the risk that there will be an adequate number of users and that user fees generated by the facility will be sufficient to cover the cost to operate and maintain the facility, the service of debt, and a reasonable return on investment. ...The other payment model is called an “availability” payment scheme. Under this second model, the public entity pays contractually pre-determined amounts to the private partner during the term of the P3 agreement. These payments are similar to lease payments, but are subject to performance-driven deductions if the facility, in whole or in part, is under-performing. For example, if the infrastructure project is not “available” for use or if the facility fails to meet certain performance standards during the P3 agreement’s term, the “availability” payments to the private partner will be reduced.

 Significantly, under either the “user fee” or “availability” payment models, P3 agreements generally do not call for the private partner to receive significant payments until the construction work called for under the particular P3 agreement has been satisfactorily completed and the infrastructure facility has become operational. 

For reasons they explain, Scott and Jeff are pessimistic about the prospects of developing transportation infrastructure in California with P3, but they are hopeful for P3 as a tool for development by local entities:

[S]ince 1996, local government agencies have been able to pursue the following types of “fee-producing” infrastructure projects on a P3 basis: irrigation; drainage; energy or power production; water supply treatment, and distribution; flood control; inland waterways; harbors; municipal improvements; commuter and light rail; highways or bridges; tunnels; airports and runways; purification of water; sewage treatment, disposal, and water recycling; refuse disposal; and structures or buildings, except those that are to be utilized primarily for sporting or entertainment events.  Additionally, these enabling statutes for local government agencies are flexible and allow for many forms of P3s that can last for as long as thirty-five years. They even allow local government agencies to transfer ownership of constructed facilities to private partners, though ownership must revert back to the local government agency at the conclusion of the P3 agreement.  As explained in the enabling statutes: “It is the intent of the Legislature that local governmental agencies have the authority and flexibility to utilize private investment capital to study, plan, design, construct, develop, finance, maintain, rebuild, improve, repair, or  operate, or any combination thereof, fee producing infrastructure facilities.”  [See Cal Gov't Code Section 5956 et seq.]

However, they caution, the California enabling legislation is focused on "fee producing" projects.  In order to have private entities develop projects that ultimately rely on general tax revenues or user fees may require additional tweaks of the enabling legislation.  In addition, the California constitution was amended by voters in 1996 in a manner that makes it difficult for California's nearly 7,000 cities, counties, special districts, schools, community college districts, redevelopment agencies, and regional organizations to raise user fees and taxes that could form the basis of availability payments for a P3 project.

Guarding Against Construction Contingency Overruns; or, Asking Architects and Contractors to Put Their Money Where Their Mouth Is.

Take a traditional delivery model where the owner hires the architect to prepare construction documents, and separately hires a contractor to implement the construction documents to build the project...

Owners are often faced with change orders resulting from required clarifications and corrections of the construction documents during construction, and this cost cannot be recovered from the architect unless the architect's services fell below the standard of care.  Architect agreements, take the AIA B103 as an example, will usually include language that the drawings and specifications should be fully and completely coordinated.  In reality, however, this is never the case--and the standard of care does not require it.  Owners should expect some number of changes during construction resulting from clarifications and corrections in the plans and specifications. 

The contracts usually make the Architect responsible for his errors and omissions.  Damage resulting from E&O is insurable, and the cost of insurance is covered by the fee and included in the owner's budget.  But changes and clarifications in plans that don't exceed the E&O threshold must be carried in the owner's construction contingency.  The construction consultants and the architect should be able to advise the owner what is a reasonable contingency for such changes, and the owner should build that contingency into its budget.

How does the owner guard against overruns in this construction contingency?

Once the architect has advised on a reasonable contingency number for construction changes resulting from anticipated clarifications and corrections during construction, an owner should be able to ask the architect to put his money where his mouth is, i.e. to accept some risk if this contingency amount is exceeded. 

Here is some language that an owner might propose in a traditional procurement owner/architect agreement. This asks the Architect to share in the increased costs if the clarifications and corrections contingency is exceeded. 

To the extent that changes to the Contract Documents are required because of conflicts, or lack of detail in the information provided by Architect, and that could not have been avoided with the exercise of due diligence and care in accordance with the requirements of this Agreement and the professional standard of care (“Clarifications and Corrections”), Architect will work proactively with the Contractor throughout construction to avoid or mitigate any increased costs.  The Project will carry a construction contingency of $___________ to cover change orders to the Contractor relating to increased costs resulting from Clarifications and Corrections.   To the extent that there are any cost increases resulting from Clarifications and Corrections in excess of this Clarifications and Corrections contingency, the Architect’s fee will be reduced in the amount of 50% of any such additional compensation issued to Contractor by change order.   

If this idea, which is not contained in the available form agreements, is pursued, an owner can also raise the concept with the Architect and Contractor together.  If an owner enters into a traditional GMP agreement with a contractor, the owner might include a mirror image provision in his agreement with the contractor that would require the contractor to a) be involved during the design to assure the plans are constructable and complete, b) agree to the Clarifications and Corrections contingency, c) to work proactively with the Architect to avoid increased costs on account of Clarifications and Corrections, and d) to bear 50% of any increased cost in excess of the Clarifications and Corrections contingency amount. 

Negotiating such a term should be approached from a conceptual level first.  If both the Architect and Contractor can be persuaded to buy into the concept, the owner, architect and contractor should then be able to establish an appropriate contingency amount together.  Some additional terms might be required to provide some input by everyone in how the contingency is spent.