Ground and risk in NEC: using geotechnical baseline reports

Ground and risk in NEC: using geotechnical baseline reports
KEY POINTS
  • NEC clients of projects involving significant excavations or underground works should prepare a geotechnical baseline report (GBR) for tenderers.
  • For UK tunnelling contracts, a GBR is required by project insurers. Guidance on preparation is available from BTS, Ciria and ASCE.
  • A good GBR makes ground risk allocation clear and gives contractors the reassurance of an added degree of clarity under the contract.

UK construction and research organisation Ciria published Geotechnical baseline reports: a guide to good practice in January 2023 (Davis et al.,2023). This article, written by two members of the Mott MacDonald team that developed the guide, explains in more detail how NEC contracts and geotechnical baseline reports (GBR) can be combined to allocate ground risk more clearly.

Background


GBRs have been used in various forms by the north American tunnelling industry since the 1970s. The purpose of a GBR is to provide a concise overview of the project and the anticipated relevant physical conditions to be encountered, with reference to details contained in a geotechnical data report or ground investigation factual report.

A GBR typically addresses the range of uncertainty demonstrated by the available geotechnical data, but then states, for contracting purposes, the baseline conditions that are intended to be contractually binding. This eliminates a substantial degree of the ambiguity that existed when it was left to bidders to make their own interpretations.

Under a traditional design-bid-build framework, the GBR is prepared by, or on behalf of, the client. Under a design-build framework, a collaborative process can be employed that incorporates input from the design-build team as well as the client in advance of signing the final contract. Since their initial use in north America, GBRs have spread worldwide and have successfully proved their value on projects in Hong Kong, Singapore, Australia, New Zealand, Europe and the UK. In the UK, GBRs were used for example on Thames Water’s Lee Tunnel contract and Crossrail’s Elizabeth line underground contracts. Many clients and contractors now insist on the use of a GBR, having seen the benefits in terms of clarity of risk allocation.

UK code of practice


In the UK, the Association of British Insurers (ABI) and British Tunnelling Society (BTS) developed and published The Joint Code of Practice for Risk Management of Tunnel Works in the UK in 2003 (ABI and BTS, 2003) and an international version in 2006 that was updated in 2012 (The International Tunnelling Insurance Group (ITIG) and International Tunnelling Association (ITA), 2012).

Recognising the importance of properly managing the risks associated with underground works, the codes feature two fundamental approaches to improved identification,minimisation, allocation and management of risk. One is the implementation of risk registers, to facilitate the identification, allocation and management of risks during project planning, design and construction in a preemptive manner. The other is the preparation and implementation of a ‘ground reference conditions’ or ‘geotechnical baseline conditions’ report that sets out the client’s understanding of the anticipated conditions.

The British and international versions of the code give additional details relative to the development and implementation of the risk register process. Of relevance here are the codes’ explicit endorsement of a process whereby the client carries the responsibility of completing a thorough site investigation programme pretender, presents the results of the investigation in a ground reference or geotechnical baseline conditions report that is included in the contract, and then takes contractual and financial responsibility if the conditions encountered are more adverse than those documented as the reference or baseline conditions.

The 2003 UK code cites the original 1997 American Society of Civil Engineers’ guidelines for GBRs (now updated as Essex, 2022) as an example of how to prepare reference or baseline conditions reports. Insurers and the BTS recognised the merit in utilising such reports as a key tool in the overall approach to allocating and sharing risks between the contracting parties.

Physical condition risk in NEC


NEC contracts strive to be precise on the matter of risk allocation. For example, the default risk allocation in the NEC4 Engineering and Construction Contract (ECC) relating to weather has the client taking the risk if certain defined weather measurements are more adverse than the 1-in-10-year event. This is a great improvement on the vague ‘exceptionally adverse weather conditions’ clauses in many contracts.

Being precise regarding physical conditions is a bit more challenging. The default risk allocation in the NEC4 ECC is set in clauses 60.1(12), 60.2 and 60.3. The following three tests have to be passed in clause 60.1(12) for physical conditions to be a compensation event: ‘The Contractor encounters physical conditions which are within the Site, are not weather conditions and an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable to have allowed for them. Only the difference between the physical conditions encountered and those for which it would have been reasonable to have allowed is taken into account in assessing a compensation event’.

Clause 60.2 then states, ‘In judging the physical conditions for the purpose of assessing a compensation event, the Contractor is assumed to have taken into account the Site Information, publicly available information referred to in the Site Information, information available from a visual inspection of the Site and other information which an experienced Contractor could reasonably be expected to have or to obtain'. 

Site information is defined in clause 11.2 (18)as, ‘information which describes the Site and its surroundings and is in the documents which the Contract Data states it is in,’. Hence clause 60.2 requires the bidder (and later the contractor) to take into account the site information in judging the physical conditions.

As is the case with any contract where physical conditions are important, and in consideration of the BTS and ABI code of practice, an NEC client is well advised to invest at least in quality factual information about, for example, ground conditions and existing services, to allow all parties to assess the risks associated with physical conditions. The appropriate place for this information in NEC4 ECC is very clearly in the site information. Indeed, the only references in the contract to the site information relate to physical conditions and hence, ultimately, to the decision as to whether a certain occurrence is a compensation event.

Clause 60.3 is the last of the clauses to refer to site information. It states, ‘If there is an ambiguity or inconsistency within the Site Information (including the information referred to in it), the Contractor is assumed to have taken into account the physical condition more favourable to doing the work.’ This effectively means the client takes the risk of ambiguities or inconsistencies within the site information. 

Importantly, with respect to time, compensation events can lead only to a delay to the required completion date – they cannot bring the completion date forward (clause 63.5). Also, as made clear in clause 63.3 in the core clauses, clause 63.12 in the priced contract options and in clause 63.13 in the target contract options, a physical conditions compensation event cannot result in a reduction to the prices. So, if the contractor encounters conditions better than might have been expected, the prices are not reduced.

Unfortunately, interpretation of the phrase, ‘physical conditions which...an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable to have allowed for them,’ is rather subjective and more appealing to lawyers than to tunnelling and geotechnical engineers. For a project involving significant excavation, there is a better way.

Combining a GBR with NEC


The standard NEC clauses for physical conditions may be appropriate for most projects. However, if underground or ground engineering works are a significant part of the project, it is likely to be appropriate to make more direct reference to a GBR in the contract. This can be done with an additional compensation event in the contract data: ‘Add as Clause 60.1(12A): “The Contractor encounters conditions that are more adverse than a baseline stated in the Geotechnical Baseline Report. Only the difference between the conditions encountered and the baseline statement is taken into account in assessing a compensation event.”’

The effect is to make the exceedance of the baseline condition a clear compensation event. If the client wants to give the contractor a wider indemnity, the difference could be stated instead as a client liability (clause 80.1). Note also that ‘conditions encountered’ can include both physical and behavioural ground conditions.

It would also be sensible to amend clause 60.1(12) to start with: ‘The Contractor encounters physical conditions other than those which are the subject of a baseline statement in the GBR’, (amendment in bold). Lastly, it would be appropriate to modify 60.2 to, ‘In judging the physical conditions for the purpose of assessing a compensation event, other than an event related to a baseline in the GBR’, (amendment in bold). In this way the risk allocation for issues not specifically addressed by GBR baselines would remain as per the standard NEC risk allocation. This is illustrated in the figure below.

It might, however, also be necessary to consider the last bullet point in clause 60.2, ‘other information which an experience contractor could reasonably be expected to have or obtain.’ Having gone to the trouble of preparing a GBR, is it really appropriate to ‘reasonably’ expect the bidder to have or to obtain other information? The risk allocation relating to a certain parameter or condition would depend on how the parameter or condition was baselined in the GBR, such as a specific value, a range in values, or a range in likely behaviours.

For example, the baseline statements in the GBR might include: ‘parameter A is value X or less’, or, ‘ground condition M occurs at a frequency Y between locations P and Q’. The contractor then takes the risk of parameter A being less than or equal to X, and the occurrence of ground condition M up to frequency Y between locations P and Q.

Note ‘takes the risk’ means ‘there will be no compensation event’ if the risk event happens. The contractor then takes the risk regarding cost and time: if there is no compensation event, there can be no delay to the contractually required completion date. However, the flexibility of NEC allows for a choice of different payment options to be selected for a particular contract, including lump sum, remeasurement, target and reimbursable. The choice will affect the level of the financial consequences on the client of the actual conditions encountered, the costs to the contractor and the amount to be paid by the client.

If there is no compensation event, then there can be no increase in the lump sum or target price. In this case, if the contract is lump sum, the full financial risk is with the contractor. If the contract is a target contract, then, although the target will not be changed, the client will still be obliged to pay the contractor’s costs of dealing with the occurrence. The result for both contractor and client is that the opportunity to share in savings compared with the target is reduced. The target contract gives a commercial incentive to the client to collaborate.

So, if more favourable conditions make things easier for the contractor, then it will get all the benefit in a priced contract. With a target contract, the benefit will be shared. If the client did want the prices to be reduced for ‘better than assumed’ parameters, it could do so under option Z, though quantifying the benefits would be difficult.

In all cases, it is critical to be clear in the scope on how, where, when and by whom the actual conditions encountered will be verified. If this is the case, the occurrence or otherwise of a compensation event will be most easily identified and agreed. However, the burden of proof will still be with the contractor to demonstrate the ‘adverse effect’. Exactly how these risks are allocated and the parameters selected will need to be discussed between the client and its specialist geotechnical advisor and, in some cases, with pre-qualified bidders. It is suggested that the baseline statements and measurement rules in the GBR are included as an appendix to the additional conditions of contract.

Summary


Where used, the GBR is a key contract document for a project including significant ground engineering or underground works. It is often the first document to be read by bidders and, in the event of a dispute, the first to be revisited by the client’s representative or adjudication panel. As a result, the preparation of a GBR requires specialist experience and skill in its preparation.

Many large NEC projects have a substantial ground engineering or underground element. For these projects, a properly thought-through GBR will be a beneficial investment for a client to give clarity of risk allocation. Similarly, potential bidders may be more inclined to tender the work if they perceive that the GBR lends an added degree of fairness under the contract. As a ground reference report is called for under the ABI and BTS code of practice, the insurance industry demands that such a document is prepared and included in the contract as a condition for making insurance available to a tunnelling project’s contractor (e.g. all-risk policy or performance bond) or client (e.g. client- controlled insurance programmes).

Making sure that the baseline statements set out in the GBR are realistic, and link directly into the relevant NEC contract and associated payment provisions, provides for more sensible and comparable bids from interested and competent contractors and for greater clarity in risk allocation. This in turn leads to an increased likelihood of a successful outcome for all involved. The same principles might also be applied, for example, to environmental aspects of a project with a potentially significant effect of a project with a potentially significant effect on a bid price.

NEC risk allocation for physical events in relation to a geotechnical baseline report (GBR)

   Conditions covered             Conditions NOT covered
   by baselines in the GBR      by baselines in the GBR                             

 More adverse than baseline – Client risk

 Something that an experienced contractor 
 would have judged at the contract date
 to have such a small chance of occurring
 that it would have been unreasonable to
 have allowed for them

 – Client risk

 


 

 Within baseline Contractor risk

 
 

 Something other than the above – Contractor risk

 

References

ABI and BTS (2003) The Joint Code of Practice for Risk Management of Tunnel Works in the UK, BTS, britishtunnelling.com/pages/riskmanagement-of-tunnel-works-in-the-uk
Davis J, Essex R, Farooq I, Drake A (2023) Geotechnical baseline reports: a guide to good practice, C807D, Ciria, ciria.org/itemdetail?iproductcode=C807D
Essex R (2022) Geotechnical baseline reports for construction: suggested guidelines, MOP154, American Society of Civil Engineers, ascelibrary.org/doi/book/10.1061/9780784416082
ITIG and ITA (2012) A Code of Practice for Risk Management of Tunnel Works, 2nd ed., britishtunnelling.com/pages/risk-managementof-tunnel-works-in-the-uk

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