The risk of having your cake and eating it: take care when drafting PCSAs

For several years now, two stage tendering – and with it the use of Pre-Construction Services Agreements (PCSAs) – has been the normal procurement route for major building projects, at least in the London commercial market. The June 2016 referendum vote was widely expected to mark a watershed and to herald a shift back towards a single stage approach, but in our experience that simply has not happened. Main contractors continue to be risk averse and will routinely decline to bid on a single stage basis, other than for “most favoured” clients. Carillion’s recent collapse has only brought the problem into sharper focus and has highlighted the dangers of bidding for work without a full appreciation of the risks involved.

Although widely used, there has until now been little judicial consideration of PCSAs and how they operate in practice. So Jefford J’s recent decision in Almacantar (Centre Point) Ltd v Sir Robert McAlpine Ltd is both welcome and of particular interest.

PCSAs in the market

The use of PCSAs has pros and cons for both parties. For the developer, as Jefford J noted, a properly-managed PCSA can put it:

“… in a position to proceed with a well-planned… build[ing] contract with developed Contractor’s Proposals and a robust Contract Sum”.

However, there is a price to pay in the loss of competitive tension at the point when the contract sum comes to be agreed. Many developers (and their advisers) can cite examples where the contractor has sought to demand a much higher price than originally envisaged, claiming that the PCSA period has exposed risks and challenges of which it was not initially aware. In other words, exactly the opposite of what the PCSA was trying to achieve; namely, risk mitigation leading to a lower contract sum.

For this reason, developers typically see two stage procurement as a necessary evil, to be used only when market capacity and appetite are constrained. While it can lead to more robust prices, developers generally prefer the “old fashioned” approach of single stage competitive tendering where market conditions allow.

On the flip side, contractors typically find PCSAs attractive. They see them as an opportunity to embed themselves with the developer and its team, to become familiar with the project and its associated risks and opportunities, and ultimately to price the job realistically based on actual knowledge, without the “race to the bottom” that single stage tendering can drive.

Background to the Almacantar case

Putting all these factors together, and in particular recognising the benefits of two stage tendering for contractors, it is unsurprising that the fee payable under a PCSA will typically not cover the full cost of providing the pre-construction services. The contractor will only recover all its costs if it is ultimately appointed to deliver the project. In other words, there is an incentive for the contractor to come to the table and be sensible when agreeing the contract sum; it cannot simply demand what it likes.

Equally, from the developer’s perspective, the services may be of little value if the contractor is not ultimately appointed. So the developer may see it as unreasonable for the contractor to be able to walk away and claim full reimbursement for work done.
It is against that background that Jefford J was asked to consider the terms of the PCSA entered into by Almacantar and Sir Robert McAlpine (SRM) for the redevelopment of Centre Point, one of London’s prime landmarks.

The issue in Almacantar

The specific issue at stake was whether SRM was entitled to payment of the balance of 50% of the fee due under the PCSA following the consensual termination of the PCSA.

The parties had entered into the PCSA in September 2012, with the aim of subsequently agreeing a design and build contract for the full project. However, by June 2014 and before moving to the main contract stage, SRM advised that it would only proceed on a construction management basis, a less “risky” option reflecting a shift in its attitude to contracting generally, after well-publicised losses on several “fixed price” jobs. This was unacceptable to Almacantar and the PCSA was terminated by consent, with Almacantar appointing Multiplex as the main contractor in December 2014.

The parties’ arguments

SRM contended that, under the terms of the PCSA, it was entitled to payment of the remaining 50% of the fee when any main contractor was appointed. Almacantar argued that the terms providing for release of the remaining fee only applied if a main contract was agreed with SRM, not any other contractor.

Although similar in many respects to other PCSAs that we commonly see and to the JCT PCSA (General Contractor) 2016 Edition, the Almacantar PCSA included some less conventional wording, including a reference to the employer “holding back” part of the fee which would only be “released … subsequent to commencement on site under the main contract.” Having grappled with the somewhat woolly language of the PSCA, Jefford J decided that what the parties must (objectively) have meant was that the balance of the fee would only be payable if SRM was appointed as main contractor. She therefore reversed the adjudicator’s decision, finding in favour of Almacantar and ordering SRM to repay the £1.1 million fee and interest.

Commercial reality

Although Jefford J relied heavily on the termination provision in the PCSA, which entitled the contractor only to a “fair and reasonable proportion” of the remaining fee, she also stressed the “element of commercial reality” that needed to be borne in mind and the fundamental purpose of the PCSA. She noted that, in most circumstances, termination would mean that Almacantar would lose the benefits achieved under the PCSA and would have to go “back to the drawing board with another contractor”.

Despite the Court’s focus on the particular wording of the PCSA, there does seem to be an underlying proposition here; namely that, at least in cases where the main contractor walks away from the contract (rather than the employer doing so unreasonably), it cannot expect to be paid in full for the services it has performed. In effect, reimbursement of its costs depends on the parties agreeing a sensible contract sum during the PCSA period.

Final thoughts

In the end, common sense may be said to have prevailed. Developers will feel that this decision strikes a proper balance between the need for early engagement with the contracting market and the desire to retain an element of commercial tension at the second stage.

However, in another sense Almacantar was lucky. Based on the words used in the PCSA, the decision could easily have gone the other way. And, of course, it had to incur time and expense in fighting the claim and justifying its entitlement.

As always, the final message is clear. The parties should ensure that the drafting of their agreement reflects their (subjective) intentions. In other words, write what you mean! It is never worth taking a risk on ambiguous wording.

Berwin Leighton Paisner LLP Helena Savva

One thought on “The risk of having your cake and eating it: take care when drafting PCSAs

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