Third party interface management in major infrastructure projects
What is third party interface management for major infrastructure projects?
Third party interface management is the management of project risks regarding the rights and powers of a third party. Third parties may include, for example, adjoining landowners, local councils, rail operators, private developers, toll operators, and roads and utility authorities respectfully. The identification, establishment, formalisation, and management of key stakeholders is critical to managing project risks including delivery scope and potential delays to the design, access, construction, completion, and handover of works during the project life cycle.
To provide the best opportunity for the successful delivery of a major infrastructure project, interfaces should be identified early, through a detailed assessment of the relevant technical and commercial requirements. This can be achieved through early engagement with third parties to collaboratively develop and agree the scope and allocation of risk between each party.
What are the critical success factors to consider?
Identify interfaces early
It is vital to identify at an early stage the physical interfaces between the project works and third party works. This will enable a strategy to be developed during the planning and development phase on how to best manage third party interface risks for delivery of the project.
Eliminate or mitigate third party interface risks
Review if there is an opportunity to eliminate or mitigate the interface risk through updated designs, construction methodologies, or property acquisition. Eliminating or reducing interfaces will help to mitigate risks to the construction program.
In developing its delivery strategy, the principal should also review opportunities to correctly apportion third party works to an appropriate construction package. For example, on a large linear-type tunnelling project, review if there are opportunities to procure an early works contractor to deliver ancillary works such as driveways, site access roads/intersections/traffic control signals, building demolition, utility service relocations/modifications, and provision of power to sites. By having the principal delivering these works in advance of the main works, it provides the opportunity to develop third party relationships at an early stage, accelerate and de-risk the program and focusses the tunnelling contractors scope primarily on tunnelling and bulk excavation.
Understanding third party rights
There are circumstances where third parties have legal rights in relation to the interface works. For example, this may be in the form of statutory approval(s) and/or land ownership and access consent rights. Understanding the rights of the third party will help inform the management strategy.
Collaboration is key
Collaboration is key to achieving better project outcomes through close engagement with stakeholders. It is vital that representatives of the principal act with integrity and authenticity when dealing with third parties to build and maintain respectful and mutually beneficial relationships. Some examples of these are as follows:
Providing parties with an agreed ways of working and engagement model.
Establishing and maintaining good working and trusting relationships for the duration of the project, and into operations.
Monitoring interface related risks or delays to the design, access, construction, completion, and handover of works.
Providing third parties with visibility of the proposed scope of works and the ability to review relevant designs at each review stage in the design development process.
Providing the opportunity for regular structured forums for parties to be consulted on project progress, planned works, and to discuss and resolve any issues that arise.
Governance
Governance arrangements should be established with key third parties to continually monitor the relationship health, ensure all parties are meeting relevant obligations under the respective interface agreements or contractual arrangements, and to expedite the resolution of key issues.
The governance structure may outline a series of working-level and executive-level forums, each with their own terms of reference so the purpose, objectives, membership and escalation pathway are clear and unambiguous. Strong governance arrangements will drive and foster a healthy relationship between the principal, third party and contractor.
Identifying when an interface agreement is required
The scope of the interface with the third party regarding project delivery can vary. Ultimately, it is imperative to understand the technical, commercial, and legal components of the interface to determine the requirement to, or benefit of, entering into an interface agreement.
In some instances, the principal may have the required legal rights and powers to undertake the works, and in others, it may require the legal consent of the third party. In the first case, the principal may proceed with a business-as-usual approach with the third party or even enter into an agreement to maintain relationships. In the second case, the principal would benefit from an interface agreement to obtain, for example, authorisations to carry out the works, access to the site, as well as agreeing protocols and requirements for design review and completion regimes to help mitigate risks to the project program.
Ultimately, the primary reason for entering into an interface agreement is to manage project risks. There are several drivers for entering into an interface agreement. Some include:
Access to a third party’s land,
Legislative requirements or obligations,
Scope authorisations,
Protection, alterations or construction and handover of third party assets,
Third party delivering works on behalf of the principal,
Specific rights or processes to assist delivery, completion and handover (e.g. design review processes, provision of certificates etc.),
Governance and escalation resolution pathways,
Funding arrangements with a third party, or
A combination of some or all the above.
Types of interface agreements
Once the interface has been identified it is important to document the interface, ideally prior to the award of any delivery contracts within the project procurement phase. Dependent on the scope of works and associated risks, documenting the interface agreement may be in the form of:
Commercial principles.
Non-binding memoranda of understanding.
Inter-government department letter exchanges.
Delivery and/or operational interface protocols.
Binding arrangements such as third party agreements, constructions leases or licences, works deeds.
If the interface is one that is repeatable or similar in scope on a large program of works, the principal should consider negotiating and agreeing a standard form of interface agreement with the third party. The benefit to this is that it substantially reduces legal support costs by removing the need to continually renegotiate the provisions, saves time and cost in negotiations, and focuses effort on agreeing the technical and functional elements of the scope with the third party.
There may also be instances where the interface is one of a bespoke nature. For example, two projects being concurrently constructed adjacent to each other, or an operable toll road adjacent to a project site. In these cases, project-specific interface agreements can be beneficial in that specific project commercial or technical requirements can be incorporated that align with the provisions of the main contract, with appropriate allocation of obligations passed down to the contractor.
Commercial and relationship drivers
It is key the principal understands the criticality of the relationship and commercial importance of the interface. These apply to the extent of the interfaces, the third party’s rights, and if these interfaces will be enduring through both delivery and operations. Interface risks should be identified as part of the project definition phase and be continually monitored and managed throughout the delivery of the project. A few key elements to consider:
The reputational impacts if key interfaces are not properly considered and managed. Principals should not simply rely on contractual provisions, but also have suitably skilled personnel (technical, commercial and/or legal) to engage with, and empathetically understand, the third party’s drivers and requirements.
Whether the interface works are on the project’s critical path and if so, what are the potential commercial consequences of delays to the project. Depending on the contract structure, delays to completion could result in significant costs to contractors, particularly under a Public Private Partnership model resulting from the additional costs of finance.
What party is best placed to bear the risk of delays arising from third party interface works. Traditionally, these are risks borne by the contractor, however the principal should consider if it is best placed to manage the risk, whether tenderers would even accept the risk, or if they did, what would be the additional cost premium of accepting the risk.
As aforementioned, whether certain interface risks can be eliminated or mitigated. For example, the delivery strategy should consider whether certain works such as site access or utilities provision could be delivered through early works packages before the main works contractors are on board, thus eliminating these risks at an early stage.
Key issues for negotiation
Once each interface is fully mapped out, the principal should review what its key non-negotiables are with respect to any agreements, and what it would be willing to compromise on, should this be required. Focus should be on what the principal needs from a third party to de-risk its project risks, and what provisions would be fair and reasonable to offer the third party.
An example would be where the principal requires a statutory consent or will handover assets to a third party at construction completion for the third party to operate and maintain. In this instance, it could be considered reasonable that:
The interface agreement stipulates the legal provisions under which any of the works are authorised.
The agreement has relevant processes and gates which satisfy relevant statutory requirements, legislation or the third party’s assurance requirements.
The stakeholder has design review rights on the authorised third party works to provide comments focused on compliance with its technical requirements.
The third party is compensated for its time spent in the design review process.
The design review and completion regimes are aligned with the principal’s head contracts to remove any gap risks with its contractors.
An independent certifier is appointed to review compliance with the interface agreement requirements and certify the design, construction, and completion of the third party works.
Upon issuance of the independent certifier’s completion certificate, the asset is deemed handed over to the third party.
Allocation of obligations
During the procurement phase, it is important for the principal to carefully consider the passing down of obligations of any interface agreement in its contract documentation. Ultimately, the obligations under an interface agreement should be allocated to the party best placed to manage the obligation. The principal should use the procurement phase to test whether proponents are willing to accept certain risks, including how these obligations would be priced.
Typical principal retained obligations include:
Principal provided insurances/payment obligations;
Governance processes and dispute resolution;
Obtaining planning approvals;
Financing of the works;
Appointment of independent certifiers (if relevant);
Certain community engagement activities; and
Provisions where the interface agreement does not specifically align with the main contract terms.
Management and administration of interface agreements in delivery
It is vital the principal’s team manage outcomes from the respective interface agreements, rather than simply administer them. Notwithstanding the allocation of obligations via the contractual pass-down schedules, the principal’s team should proactively support the contractor in discharging its respective obligations to ensure authority approvals are obtained, relationships with third parties are maintained, and completion and handover is achieved in line with project program.
One mechanism in assisting with this is the creation and implementation of a conditions precedent matrix which will summarise each party’s key obligations under the interface agreement. This tool can be utilised for ongoing reporting, lookaheads for key milestones, monitoring of whether obligations have been met, risk management to achieve authority approvals and independent certifications against program.
It is imperative governance remains strong in delivery to maintain relationships, drive project and stakeholder outcomes, and to manage timely and early resolution of any escalated matters.
The principal’s team should have a mindset of management over administration, always proactively supporting and dealing with the contractor and third party. Early resolution of conflict creates great teams.
For more information on our third party interface management services, please contact us at info@bellgroveadvisory.com