Consortium bidding in construction projects

Francis Ho, head of construction at Olswang, explores consortium bidding, including the benefits of consortium bidding, when it is most commonly encountered and the issues to be aware of.

What is consortium bidding?

This is when a consortium jointly tenders for a project. A consortium comprises two or more partners who combine resources and strive towards a common goal. Each consortium member operates independently within the structure and key matters such as the scope of each member’s commitment, its rights and responsibilities, and how profits and costs are to be allocated, or decisions made are dealt with through a consortium agreement signed by the members.

Consortium members frequently set up a special purpose vehicle (SPV) to enter into the contract with the client but this is not always necessary—the consortium members could alternatively contract as a partnership with the project forming part of each member’s usual business. Where an SPV is used, often the members will generally wait until a point when they are likely to be awarded the contract before establishing and resourcing it up properly.

While using an SPV can often be associated with a joint venture rather than a consortium, strictly-speaking the difference between the two is that a consortium retains assets and decision-making across its members, whereas a joint venture will place both within the SPV and have each member contribute capital to and share profits from the joint venture. It’s not unusual to find people using the terms consortium and joint venture interchangeably, though, and their boundaries are often blurred.

What are the benefits of it?

The chief advantage of a consortium is that it can exploit and highlight the particular strengths, experiences and competences of its members. This can be highly attractive to a client, especially at tender evaluation stage. Even so, consortia are often created by their members through necessity rather than choice.

By way of example, a consortium established to pitch for a hospital private finance initiative (PFI) project might include the differing disciplines of a Tier 1 contractor, investors, funders, a facilities management company and several service providers and other key sub-contractors, which can provide soft services such as catering and cleaning as well as maintenance and any other hard services. Those members can contribute their expertise to the tender and, subsequently, service delivery. For clients or new players in a market, there can be the reassurance of working alongside a renowned name in that field as part of the consortium.

Geographic reach can be another benefit—clients can have providers from different parts of the country combining with regard to a national framework. In addition, a consortium can tender for a project which its members would not have the size to service by themselves or because of technical, financial, reputational or other limitations. If there are members with overlapping expertise, then there’s the possibility of added innovation through pooling ideas and know-how. There should also be efficiencies because, with the members collaborating effectively, there should be less duplication of the work of others through monitoring and checking.

There’s scope for members to share project risks as well as tendering costs, which can often be substantial. For potential consortium members, the structures are also relatively straightforward to establish and maintain. There’s flexibility as to how involved members choose to be. Some members might provide direct services while others may prefer to be less active but contribute equity. Indeed, key members of the construction team do not need to be consortium members at all. Consortium members may also be able to exit during the lifetime of the project provided a suitable replacement can be found.

In the absence of an SPV, consortium members are taxed individually in the usual manner.

Are there any particular types of project where it is more common?

Consortia are often encountered in more significant public-private partnerships (PPPs) for central government procurement or larger local authority projects with the preference being for the authority to contract with an SPV. They also often feature for important infrastructure projects, such as HS2, Crossrail and the Thames Tideway Tunnel, where a single party is unlikely to have the resources or capacity available or sufficient appetite to bear the project risks by itself.

They are also used for large international projects where the grouping of a sophisticated international contractor and a local contractor with a strong understanding of local market conditions and access to workers usually works well. In fact, this combination is sometimes necessary in particular jurisdictions due to client or legal requirements demanding a minimum amount of local content for the project or the mandatory participation of a local partner.

What issues does it give rise to?

Funders occasionally number among the consortium members but otherwise third party debt finance can be harder to obtain without an SPV being established. Banks prefer the ease of dealing with a single entity, which they can directly provide financing to and which can then hold and charge project assets (assets in a consortium are retained by its members). Clients can also find this a distraction which is why the majority of authorities in PPPs require the contract to be entered into by an SPV rather than all the consortium members.

A fundamental question is the extent to which the consortium members are liable to the client, to third parties and even to each other for their own non-performance or the non-performance of the consortium. The last point is a particular issue where each consortium member agrees to joint and several liability under the consortium’s contract with the client. The allocation of liability and indemnification between members is an issue that should be addressed early on. A member should also be aware of any reputational consequences in the event the consortium performs badly in the project and it becomes associated with such failure even where its culpability is minimal.

When competitors or potential competitors team up in a consortium, there is the risk that competition can be distorted because, in theory, rivals are being taken out of the market. Consortium members should ideally pre-empt any such concerns by assessing those dangers themselves early on and confirming how the benefits that the consortium arrangement brings to the client outweigh the possible risks, including whether or not any consortium member would have been capable of tendering for the contract by itself.

Are there any common pitfalls?

Because a consortium is based on collaboration between its participants, a major factor in its success will be whether they all share a similar vision for the project and can work together well. A substantial amount of trust and open-mindedness to new approaches is necessary. That makes it less likely that a consortium can be easily put together between organisations that are insular, have weak knowledge of each other or possess greatly contrasting cultures. Moreover, strong and clear leadership is important to help make choices and drive matters forward. Sadly, decisions are frequently made ad hoc rather than in an organised manner. To reduce this prospect, a steering committee should be formed in which each member is represented which is charged with delivering a successful project and which can convey information and approve day-to-day decisions on the members’ behalf.

The members ought to establish what each member’s role and responsibilities are and deal with governance and management of the consortium. For example, in a PPP framework, it’s common for the contractor to remain in the structure only until construction of the facility is completed.

It’s strongly advisable for members to take legal advice early on regarding the consortium agreement and other documentation. This will help flush out any possible problems and misunderstandings and oblige the members to come to terms with how the consortium structure will operate and what resources are necessary to be committed at each stage.

What concerns will the procuring entity have where dealing with a consortium bidder?

Some of the issues that will concern clients have already been mentioned. In addition to these, clients may wish to consider whether a consortium is really the best arrangement for their project. A notable alternative is using an alliancing or partnering structure, which may help to deliver better client value. It could also overcome a potential difficulty with joint bidding where the consortium’s presence makes the supply chain aspects become less transparent to clients. It was similar concerns, as well as the suspicion that equity investors were profiting unduly as a result, that led to the government overhauling its PFI model to devise ‘PF2’. Including provisions for client-consortium collaboration would help build greater trust between the parties.

Clients will be keen that the consortium agreement and any other contracts between consortium members (such as the shareholders’ agreement) do not cut across the provisions in their own agreements with the consortium, for example, in relation to ownership and licensing of intellectual property.

A further concern that clients may have is over communication with a consortium since this may already be weak among the members. It is therefore prudent for them to set out in their agreement with consortia protocols for project reporting.

How is confidential information protected?

Naturally, consortium members are likely to come into and share commercially-sensitive information about each other’s operations. Sensitive commercial information should only be disclosed to the extent necessary. It’s common for members to enter into binding non-disclosure agreements at an early stage dealing with how commercial data and financial and technical information are to be protected and retained. Alternatively, confidentiality could be addressed as legally binding obligations in the letter of intent or memorandum of understanding that serves as the heads of terms for what will eventually become the finalised consortium agreement. In addition, members may either be asked to get their suppliers and sub-contractors to sign up to equivalent obligations or to otherwise guarantee their compliance.

When the consortium agreement is executed, those confidentiality duties will generally be subsumed into it. Further requirements may be added in relation to publicity matters, such as the co-ordinated issue of press releases and the conduct of any media interviews.

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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Filed Under: Construction

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