Water and Sewage Undertakers to be affected by the newly published Construction Contracts (England) Exclusion Order 2022

On 12 May 2022 a draft Construction Contracts (England) Exclusion Order 2022 was published by the Government. This new exclusion Order will apply to infrastructure project contracts in the sewerage or water sector. If approved, this will come into force/ take effect from 1 October 2022 and note that it will only affect England.

The proposed Order will exclude certain contracts from the adjudication and payment provisions in Part II of the Construction Act. Specifically, the exclusion will apply to contracts where:

  • it is stated in the contract that it is a delivery of a "direct procurement for customers" (DPC) project;
  • a party to the contract is a sewerage or water undertaker;
  • the construction operations are in respect of an infrastructure project designated by the Water Services Regulation Authority (Ofwat) as a direct procurement for customers project in accordance with the conditions of appointment of the sewerage or water undertaker; and
  • the payments made under the contract are regular payments that:
    1. are determined in part by reference to the actual cost of the construction operations; and
    2. become payable after at least one part of the construction operations is completed and capable of performing a sewerage or water service.

The Order also excludes section 110(1A) of the Construction Act from applying where a party to such a contract enters into a subcontract. Section 110(1A) of the Act provides that the requirement that contracts provide an adequate mechanism for establishing what payments become due and when under the contract is not met if payment is conditional on obligations being performed under another contract. As currently drafted, this subcontract exclusion seems to only apply to first tier subcontracts.

This proposed exclusion Order appears to be similar to the 2011 exclusion order which was created for projects procured under the Project Finance Initiative (PFI). A positive difference being that the current draft Order deals expressly with the exclusion from the Act of subcontracts to a DPC main contract, which was always an issue with PFI construction subcontracts.

It is worth noting however that unlike the PFI exclusion from the Construction Act, the conditions that must be satisfied for the relevant contract to be excluded under this draft Order does not refer to the delivery partner having a right to operate the constructed facility.  That arguably provides greater flexibility to the water or sewerage undertakers when using the DPC funding route, although even under the PFI exclusion that right to operate was not an absolute condition.

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