Understanding and implementing contract resets 5 min read
A new year often brings with it an opportunity to review, reflect and….reset? The infrastructure sector has been subject to significant and unpredictable pressures in the last five years, resulting in contracts that were once fit for purpose are no longer responding to risks appropriately. Against this backdrop, we have seen a rise in parties agreeing to contract 'resets' to realign and steer projects back on track.
In this Insight, we take you through:
- what a contract reset is and why you might consider one;
- our top five tips for securing a successful reset; and
- the alternatives to undertaking a reset, including how you can best lay the groundwork during the procurement phase to avoid one altogether.
Key takeaways
- A contract reset might be appropriate if a project is facing material time and cost claims but there remains faith in the contractor's ability to deliver the project.
- There is no one-size-fits-all approach and the spectrum of what constitutes a reset can be anything from a commercial settlement of outstanding claims to a complete renegotiation of the commercial model underpinning a contract.
- Getting your strategy, approvals, project management and advisors organised prior to commencing a reset is key to setting yourself up for success.
- Taking steps during the procurement phase and when negotiating your contract terms may assist in future-proofing your project against the need for a reset.
Why would you consider a reset?
As we discussed in a previous Insight, after a period of phenomenal growth, the last few years have seen the infrastructure industry reckon with challenges on a variety of fronts including supply chain constraints, labour shortages, rising construction costs and geopolitical tensions.
Against this backdrop, the market is seeing some major infrastructure projects suffering from:
- material cost and program blowouts
- cash flow difficulties
- contractor insolvencies
- ambit claims
- delayed dispute resolution processes.
These pressures are forcing principals and contractors to come back to the table, consider whether their contracts provide an adequate framework to address these unanticipated challenges, and agree a contract reset to realign and refocus on delivery success.
What is a reset?
Contract resets occur on a broad spectrum and can include anything from a commercial settlement of outstanding claims to a complete renegotiation of the commercial model underpinning a contract.
At its most basic, a reset necessarily requires a preparedness by all parties to reach a settlement and a focus on compromise and contribution from all parties.
What this usually involves is:
- the settlement of outstanding claims;
- payment of a settlement sum; and
- some amendment to the original contract terms to introduce new items of value to either party. For example, incentive structures tied to positive behaviour eg health and safety outcomes and collaboration.
A reset may also include:
- a change to the contract price;
- a new program which may, but is not always, accompanied by an extension to the dates for completion;
- the creation of a new incentive regime;
- payments (including settlement payments) linked to future milestones; or
- new deliverables for the contractor, for example works to be delivered early, new milestones or other factors of value.
Ultimately, the terms for the reset will turn on the behaviours sought to be incentivised and outcomes desired to be achieved by each of the parties.
Our top four tips for undertaking a reset
The key to a successful reset for all parties is preparedness. If you are considering a reset, we suggest the following:
- From the outset, be clear on your deal drivers, and what you want to achieve from the reset. You should aim to link your key commercial points and try, so far as possible, giving away your commercial positions iteratively until all of your (or at least related) important commercial positions are fully resolved.
- Go into any negotiations with a stress-tested, pre-approved strategy. Identify your worst alternative to a negotiated agreement and best alternative to a negotiated agreement. Leverage these throughout negotiations and don't be afraid to walk away from the reset if you do not think it is delivering value.
- Before you engage with your counterpart, make sure you have clarity on your internal approval processes – what approvals you will need, what documentation you will require to obtain those approvals, and how long that process will take. This will not only inform your commercial positions but also the timeline for the rest.
- Prioritise project management. As your team will be focused on continued project delivery while you pursue a reset, consider appointing a project management officer to manage and oversee the reset.
Alternative options to resets
Bear in mind that a reset is not the only option available to address project challenges. Other options, which are not mutually exclusive to each other, and some of which may be able to be pursued in parallel to a rests include:
- running a dual track process, in which claims are continued to be pursued or defended while reset negotiations are underway;
- narrowing the matters in issue, by consolidating outstanding claims and referring them to arbitration for final determination, providing targeted offers for certain claims or determining lower quantum claims;
- considering options to descope the works or exercise step-in rights; or
- considering options to terminate.
Things to consider in procurement
Taking steps during the procurement phase and when negotiating your contract terms may assist in future proofing your project against the need for a reset.
In a previous Insight, we investigated the following three ways to avoid construction project disputes:
- be realistic about costs, so that the contractor is less likely to face significant cost pressures later down the line;
- engage the delivery team, to ensure the negotiators and project delivery team are on the same page, and that negotiations reflect what the contractor can realistically deliver; and
- address specific risks with bespoke risk-sharing mechanisms from the outset so these do not need to be created half-way through the project.
These are equally relevant considerations to bear in mind to negate the need for a future settlement, renegotiation and reset. We also discussed in this Insight how collaborative contracting models can be a mitigation strategy for project disputes, and therefore the need for a reset.
Consider, for example, whether collaborative contracting models should be adopted. These may enable you to secure a more balanced risk allocation that will be attractive to the market, while simultaneously providing greater cost transparency, encouraging a more collaborative style of contracting, driving certain behaviour through key results areas and key performance indicators, and incentivising cost management.
Getting it right up front is, of course, the best way to secure project success.
If you would like more information on contract resets, please contact our team below.