Major structural projects in the north of England present risks of overruns and contract disputes.
In his Autumn Statement, George Osborne committed to a £6 billion investment in science, the arts and transport in the north of England. He has also said he would support a £15 billion investment plan proposed by the ‘One North’ alliance of Leeds, Liverpool, Manchester, Newcastle and Sheffield, although no specific funding commitment has been made.
In November 2014, the Chancellor also announced that Greater Manchester will have a directly elected mayor backed by £1 billion in devolved funds, while in June he said a high-speed rail link between Manchester and Leeds could help to create a ‘northern global powerhouse’. Other One North proposals include a faster link to Newcastle and improved access to Manchester Airport.
In Manchester, the extension of the Metrolink tram/light rail system has already boosted the redevelopment of Salford Quays and facilitated the development of MediaCity.
Meanwhile the extension of the Tyne and Wear network to Sunderland has widened the local labour market, according to industry group UK Tram.
“In Europe, attention is now turning away from the growth potential of big hubs to the idea of ‘metro-regions’ where smaller cities, linked together through high-quality transport and strong intercity institutions, are the major drivers of growth,” explains Ed Cox, Northern Director of the Institute for Public Policy Research (IPPR). “The idea of a northern powerhouse is built upon this notion.”
Disputes, overruns and policy change
Yet obtaining funding is just the first step. In addition to good planning, effective risk management is vital if the benefits of infrastructural investment are to be fully realised.
It is not uncommon for cost overruns to occur on major infrastructure projects, particularly where the physical environment is challenging or where new or unproven technology is being deployed.
Additional factors that can lead to additional costs include contract disputes, delays caused by severe weather or archaeological finds, and changes in government policies and funding, which can result from a change of administration or a review of spending priorities.
“Most companies are well equipped to take advantage of opportunities created by infrastructure investment,” says Ged Smith, Partner at JLT Specialty’s Manchester Risk Practice.
“But it is good practice for any business to avoid becoming over-reliant on a small number of clients or contracts, no matter how lucrative they might be.”
Check the small print
Contractors involved in these infrastructure projects should also check contract wordings very closely, suggests Smith, to ensure that they are not responsible for either delays in the project or cost overruns caused by factors beyond their control, such as wage inflation.
“Constant vigilance is required to ensure standards are maintained – observance of health and safety guidelines can easily suffer in busy times. And businesses should ensure that their insurance programme remains adequate and robust by reviewing it on a regular basis.”
Insurance is the final element of the risk transfer process for a major project, says Charlie Wenborn, Partner at JLT Specialty’s Leeds Risk Practice. “The company needs to understand whether there is a risk register that is regularly reviewed and updated and to which all parties subscribe.
“It should consider its risk management strategy, the efficacy of its mitigation processes and whether they have been fully tested, and the extent to which residual risks have been allocated to the party best able to bear that risk.”
Companies also need to understand that not all risk is insurable and there are no specific products that cover cost overruns from involvement in a major infrastructure project, adds Wenborn.
“It is therefore vital to review existing standard covers before and during each project,” Wenborn concludes.
Top tips when involved in major infrastructure projects
Recent and proposed investments in the north of England
- Avoid over-reliance on a small number of clients or contracts
- Ensure you cannot be held liable for project delays or cost overruns
- Maintain operational standards even during the busiest periods
- Regularly review your insurance Programme
- £800m – Airport City, an office, hotel, advanced manufacturing, logistics and warehousing development at Manchester Airport
- £575m – BT digital communications infrastructure investment in Manchester
- £300m – Peel Ports Liverpool deep-water container terminal
- £235m – Materials science institutes in Liverpool, Manchester, Leeds and Sheffield
- £78m – New performance space in Manchester New franchises for Northern Rail and the TransPennine Express
For more information, please contact Ged Smith, Partner, Risk Practice on +44 (0)161 957 8015