How do you execute a World Cup construction project?

Published 01 August 2014 | Authored by: John Shenton

Introduction: from World Cup South Africa to Brazil

On 11 June 2010, Steven Pienaar stepped onto the pitch at Soccer City, Johannesburg, for the hosts South Africa in the first game of the 2010 World Cup against Mexico.

The 2010 World Cup was the first World Cup to be hosted on the African continent and, in addition to the USD 1.3 Billion invested by FIFA1 (the world football governing body), required the capital investment of USD 1.1 Billion for the construction of 5 new stadiums, the refurbishment and upgrade of another 5 existing stadiums, and an additional investment of $1.7 billion in the development of South Africa's transport infrastructure by the South African government2.

While the first game marked the beginning of the 2010 World Cup, it additionally marked the culmination of the 'concept design-to-occupation3' phase of a total $3.3 billion capital investment by the South African government that - despite FIFA's official award of the competition to South Africa in 2004 - had begun with South Africa's initial (and ill-fated) candidacy for the 2006 FIFA World Cup in the late 1990's.  Indeed, it seemed fitting that, in light of this construction, Steven Pienaar crouched in the centre circle - amidst the roar of 85,000 jubilant fans and the cacophonous drone of their vuvuzelas - and his teammates placed their hands on his head in a display of simple thanks at the completion of this phase of the momentous project.

On the 12 June, Brazil opened the 2014 World Cup in Sao Paulo against Croatia and the celebrations were no less raucous. Early predictions suggest that the cost of the ‘concept design-to-occupation’ phase has been the most expensive in tournament history, although at this early juncture it is still not possible to assess the total cost.  However, we can say: 5 new stadiums were built; 1 stadium was demolished and rebuilt; and 6 stadiums were refurbished and retrofitted for the tournament.

In the context of the World Cup, specifically 2014, this article examines, in three parts, three common themes for large-scale stadium construction projects:

  1. Procurement: how are large-scale works procured?
  2. Dispute resolution: what is the approach to effective resolution?
  3. Delays: who is liable between the Employer and the Contractor once the construction phase has commenced and what are the consequences? 

In examining the 2014 World Cup, we will also try to identify trends that are likely to apply to the forthcoming World Cups: Russia 2018 and Qatar 2022. 

Procurement: how are large-scale works procured?

The 2014 World Cup witnessed the use of increasingly sophisticated methods to procure the contracts for the necessary works.  Whilst the procuring entity (the “Employer”) varied from the Brazilian national government to local municipalities and football teams, two principle procurement methods were adopted: ‘Design-Bid-Build’ and ‘Design and Build’.

'Design-Bid-Build'

Under a 'Design-Bid-Build' arrangement, the Employer will first procure the design element(s) for the required work from one or more professional consultants (“Consultant”); and then, once the design is procured, issue a tender requesting bids or offers for the construction of the design by a separate contractor (“Contractor”).  

For example, Corinthians FC procured the concept design for Arena de São Paulo from local architects Anibal Coutinho, whom partnered with, amongst others, the German consultancy Werner Sobek4 for the provision of structural engineering services.  Corinthians then separately tendered the construction package to build the design for the stadium, which was won by Odebrecht5.

The issue for the Employer, Corinthians, under this arrangement, however, was that they did not have a single point of contact for the execution of the project.  As is apparent, under 'design-bid-build' arrangements, the Consultant(s) and Contractor do not have privity of contract, and any obligations that one might have toward the other pass through the Employer. 

A ‘Design-Bid-Build’ arrangement adds to the administrative burden of the Consultant, and to the complexity of apportionment of liability for delays between the Employer and the various Contractors.  Accordingly, the risk profile for the Employer is higher.

 

‘Design and Build’

'Design and build’, at its most basic, refers to an arrangement whereby the Employer enters into a sole contract with one party tasked to undertake both the design elements and construction work required for the given project.

For example, the aforementioned Arena de São Paulo contains the world's largest LED stadium screen. This LED screen, and all other lighting, was designed by OSRAM6, a German lighting specialist, and then installed by Siteco7, a subsidiary company of OSRAM’s.

Accordingly, under this ‘Design and Build’ arrangement, the Employer, Corinthians, had a single point of contact for the construction of the LED screen and stadium lighting.  Here, OSRAM assumed full liability for the design and construction work involved in the construction and installation of the LED screen and stadium lighting.  This method of procurement decreases the administrative burden and relative complexity for the Employer, lowering the risk profile.


Where were the skills for the 2014 World Cup works procured?

Due to the complexity of the construction and refurbishment work (owing principally to their volume and value), the 2014 World Cup required the harnessing of considerable technical skills, including substantial international involvement, especially in the form of specialist Consultants.

Each of the 12 stadiums drew significantly on highly specialised foreign expertise, particularly in the provision of design and engineering consultancy services. With regard to the design services Architekten von Gerkan, Marg und Partner8 of Germany delivered the design for the Estadio Nacional in Brasilia and the Arena de Amazonia in Manaus, Schulitz Architekten9 of Germany delivered design services for the Arena Fonta Nova in Salvador, Schlaich Bergermann und Partners of Germany provided design consultancy services for the Maracana, POPULOUS10 of the USA delivered the design for the Arena das Dunas in Natal.

This in turn necessitated more sophisticated procurement contracts than one would usually see for lower value, lower volume domestically procured works.  It is likely that majority of the 2014 World Cup Employers procured a contract with at least one overseas Consultant in one form or another.

Looking forward

FIFA awarded the 2018 and 2022 World Cups to Russia and Qatar respectively on the basis of commitments made by both countries to the construction of new stadiums, the refurbishment of existing stadiums, and the development of hotels, ports of entry, and transport infrastructure.

While 2014 witnessed the World Cup's return to Brazil (albeit to a significantly more developed economy than in the 1950 edition), both Russia and Qatar will represent the first edition of the event to be hosted in Eastern Europe and the Middle East respectively.   Both countries require substantial levels of capital investment channelled through sophisticated procurement contracts to execute the necessary and complex works; and such procurement will no doubt - like the 2014 World Cup - involve the interface between large locally based Contractors and a raft of overseas Consultants.

The 2014 World Cup demonstrated that there is a general preference for 'Design-Bid-Build' contracting, in part due to the readily available capabilities of local Contractors, in part due to the need to source the relevant design expertise and specialty services of Consultants from overseas, and in part due to the specific stadiums risk profile.  However the 2014 World Cup demonstrates that significant scope exists for the adoption of 'design and build' contracting in the procurement of specialist packages of work.

Dispute Resolution:  what is the approach to effective resolution?

The construction of Wembley Stadium in England (a single project and keystone in England's own unsuccessful bid to host the 2018 World Cup) saw a significant number of disputes.  History tells us that any capital-intensive investment in hosting the World Cup will inevitably give rise to disputes. 

Owing to the international expertise called upon, the value of the projects, and the tight deadlines involved, it is probable that such disputes will be both complex (potentially containing cross or multi-jurisdictional dimensions) and in need resolving quickly.  

This section looks at the ways in which the construction industry has adapted to try to make the resolution of such disputes easier. 

Standardised “three-step” procedures

The International Federation of Consulting Engineers11(“FIDIC”) have developed a suite of standard form industry contracts for the procurement of construction works.  The standard form contracts contain within them recommended “three-step” procedures for the resolution of disputes.

Saliently, Brazil, Russia and Qatar’s local construction industries have, to a greater extent, adopted FIDIC’s standard form contracts as the industry standard.  So while there are significant differences in the jurisprudence and the legal reasoning adopted by the local courts, practitioners in all three jurisdictions of Brazil, Russia, and Qatar should be familiar with FIDIC’s three-step standard approach12

The “three-steps” differ depending on whether the contract is between Employer and Contractor or between Employer and Consultant.

Employer and Contractor

Pursuant to the FIDIC Conditions of Contract for Construction (First Edition, 1999) (know as the “Red Book”),13  the standard three-steps for dispute resolution in an Employer and Contractor relationship are:

  1. reference to the consulting Engineer procured by the Employer to provide construction supervision services, then (failing resolution);
  2. reference to a Dispute Adjudication Board, (then, failing resolution);
  3. final arbitration.


In relation to arbitration, sub-clause 20.6 of the Red Book14 states:

Unless settled amicably, any dispute in respect of which the DAB's decision (if any) has not become final and binding shall be finally settled by international arbitration. Unless otherwise agreed by both Parties...

...Arbitration may be commenced prior to or after completion of the Works. The obligations of the Parties, the Engineer and the DAB shall not be altered by reason of any arbitration being conducted during the progress of the Works.

Employer and Consultant

Pursuant to the FIDIC Client/Consultant Model Services Agreement, General Conditions, Fourth Edition 2006 (know as the “White Book”)15, the standard three-steps for dispute resolution in an Employer and Consultant relationship are:

  1. initial notice of the dispute is served on the Consultant; then (failing resolution);
  2. the dispute shall escalate to formal mediation; then (failing resolution);
  3. the dispute is finally referred to arbitration.

In relation to arbitration, clause 8.3 of the White Book16 states:

8.3.1 If the mediation fails then the Parties will attempt jointly to make a written record of those matters (if any) relating to the dispute which have been agreed to by them, for submission in any later arbitration. The mediator's role will cease, at the latest, upon the commencement of any arbitration. The mediator will not be available to appear as a witness in the arbitration, nor to provide any additional evidence obtained during the mediation.

8.3.2 Unless stated otherwise in the Particular Conditions, any arbitration arising out of or in connection with this Agreement shall be undertaken under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.

Comment

Familiarity with FIDIC’s standard dispute resolution procedures and methods (be they related to the Employer / Contractor or Employer / Consultant relationship) provides a degree of legal certainty, confidence and timing to all parties that may not be offered by the local judicial system.

To help promote the adoption and understanding of the standardised dispute resolution processes, the Chartered Institute of Arbitrator's17 hosted a series of workshops in Brazil aimed at developing a new generation of chartered arbitration professionals. A second series of workshops is planned for after the World Cup18.

This action is seen as an important move.  Brazil has been in the midst of a construction boom (even discounting the World Cup), yet its judicial system is often regarded as ill equipped to adjudicate the significant increase in construction related disputes.  Brazil's courts, while generally considered free from the scourge of corruption, are subject to an administrative gridlock that can result in cases taking many years to resolve, which – particularly in the context of large scale, high value construction projects with many moving parts and tight deadlines – can be unworkable for business demands.  In addition the country has yet to pass any kind of mediation laws, and the advances in international commercial arbitration brought about by Brazil's 1996 law on arbitration (Law No. 9301) have yet to be wholeheartedly accepted by the Brazilian judiciary19.

The forecasted increase in the value and volume of disputes in Brazil as a consequence of the tournament's construction works will likely be reflected in Russia and Qatar. Accordingly, an appreciation of the dispute resolution mechanism(s) contained within – or adopted from - the FIDIC standard form contracts will aide Employers, Contractors, and Consultants in the resolution of disputes arising from delay.

It is worth briefly adding that the contracting parties are under no binding obligation to adhere to the “three-step” procedures, and they are free to contract as they wish. For example, where the FIDIC Conditions of Contract for Construction refer to reference to a Dispute Adjudication Board as a condition precedent to final arbitration the contracting Employer and Contractor may choose to dispense with this step entirely. Furthermore, where the FIDIC Client/Consultant Model Services Agreement references mediation as condition precedent to final arbitration, the contracting Employer and Contractor may choose to adopt some mechanism where any arbitration decision is then subject to pre-agreed mediation.  

Project Delays: who is liable and what are the consequences?

A delay event is an occurrence that threatens the completion date of a project or the achievement of some pre-agreed milestone. While some delay events are attributable to the Employer procuring the project, other delay events will be attributable to the Contractor or the Consultant(s).

A series of delay events beset the construction for World Cup 2014, including the deaths of construction workers at the Arena Pantenal, Sao Paulo, Arena Amazonia, and Mane Garrincha20. In addition, heavy rain destroyed part of the roof section at the Arena Fonta Nova21 and work was suspended on the Arena de Baixada following repeated health and safety breaches22. Work was also delayed due to labour strikes23, fire24, and the delayed delivery of materials25.

In the following section, the author uses three examples to examine who would usually be liable for the types of delays that normally arise in the construction of stadiums, and what the possible results of such delays are (although of course liability will ultimately depend upon the precise facts, contractual relationship, and the prevailing laws and jurisdiction).

Fault of the Employer

If a delay event is attributable to the Employer, then the Contractor will typically be entitled to an extension of the time in which it is contractually bound to complete the contract, and the extension is typically equal to the length of the delay. Examples of delay events attributable to the Employer include the failure to provide access to the project site on time, the failure to provide finalized design information for the project’s construction, or the failure to make payment of an invoice within the contractually agreed time period.

For example, a situation may arise in which a delay event attributable to the Employer has delayed the completion of the achievement of a milestone in the construction of a new stadium for the World Cup. In this instance, the Employer has failed to provide access to the stadium site to the Contractor by the contracted date. The Contractor is thereby prevented from executing on-site activities and will typically be entitled under the contract to an extension of time equal to the length of time for which they were denied access to the stadium site, effectively placing the Contractor in the position they would have been in if the delay event attributable had not occurred.

This entitlement to an extension of time is additional to any claim that the Contractor might have to recover the costs associated with the delay, including the costs of storing materials off-site, the cost of idle labour, or the prolongation costs that are associated with remaining on site beyond their contractually agreed term because of the delay.

Fault of the Contractor

Alternatively a situation may arise in which a delay event attributable to the Contractor has delayed the completion of the hand-over by the agreed time for completion of a refurbished and retrofitted stadium for the World Cup. In this instance, the Contractor has failed to resource their on site team adequately and delayed the completion of construction. Therefore, the Employer would be typically entitled to recover delay damages as compensation for the number of days delay. The level of delay damages may be an amount pre-ascertained in the liquidated damages clause or the contract might have provisions for a pre-agreed system of penalties for delay. Both pre-agreed remedies are typically capped at a certain percentage of the Contractor's fee.  Alternatively, if there is no relevant provision included in the contract, the Employer may seek to recover their actual damages at law.

Force majeure

However, there exists a third category of events that are attributable to neither the Contractor nor the Employer. These are ‘neutral’ delay events that are beyond the control of either party, and may include labour disputes or strikes, unforeseeable ground conditions, or errors in the design information provided. Such events are usually legislated for within the contract under the “force majeure” clause, and typically the Contractor will be entitled to an extension of time for the performance of the contractual obligations within the contract equal to the time lost as a result of the neutral delay event. 

A situation may arise in which a neutral delay event, such as a strike, has delayed the completion of the demolition and construction of a new stadium for the World Cup. In this instance the Contractor would be entitled to an extension of time equal to the delay suffered due to the strike. However, they would not usually be entitled to any damages or additional payments.

Ultimately, in view of the critical dates by which the World Cup stadia must be handed over for testing and commissioning, in advance of the tournament, there is a greater order of probability that whilst the Contractor may be entitled to an extension of time in actuality the Employer will instruct the Contractor to accelerate to mitigate the effects of the delay. The apportionment of the costs of acceleration will ultimately depend on the culpability for the delay.

Final thoughts

The Maracana stadium in Rio de Janeiro is a symbol of Brazilian football, and its reconstruction was key to Brazil's successful bid to host the 2014 World Cup. However, due to the vagaries of the tournament’s scheduling the first World Cup game the reconstructed Maracana stadium hosted pitched Brazilian arch-rivals Argentina against first-time qualifiers Bosnia and Herzegovina during the group stages and then again in the final against Germany. In addition to the regional rivalry, the opening game also reserved a certain piquancy due to the absence of one of Argentina's, and the South American continent’s, most heralded stars of the last 20 years: Javier Zanetti. Argentina’s eventual run to the final was widely billed as the last act of a golden generation of Argentine players, but did not, however, include Zanetti, whom, for a number of reasons beyond the scope of this article, having earlier called time on his international career, chose to fully retire at the end of the 2013/14 domestic club season in Italy fully bowing out on a lengthy career for both club and country. However, early on in his career, Zanetti found himself without a club and went to work for his father, a Buenos Aires bricklayer. Zanetti remarked on this time away from the game that ‘I liked my fathers work, but above all I liked the idea of doing something concrete and useful. Building a house is a metaphor that I like, it's at the core of my life philosophy: starting from the bottom and reaching the top.’ The same can be said of the construction of the stadia to the requisite standard for the World Cup.

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About the Author

John Shenton

John Shenton

John Shenton is Consultancy Contract Specialist at Khatib & Alami CEC. This follows an exhaustive few years handling a mix of contentious and non-contentious work arising from construction for the energy sector, the management of claims for a high volume of fast-track fit-out contracts, and the incorporation in 2011 of an offshore consultancy - as sole proprietor - that evolved into a partnership that manages the process groups for an international portfolio of projects that incorporate complex design and engineering works. Highlights include the National Stadium in Addis Ababa.

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