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Terms of Contract
CONFIDENTIAL
3.
The Lantau Fixed Crossing tender requires consortia to
submit a fixed price bid, ie. with no opportunity to increase prices. This is not unprecedented for large contracts but may be for a contract of this size and duration (five years). It has the effect of throwing all
the risks on to the contractor: from inflation in the cost
of labour/materials, to geological hazards and even
typhoons.
4. There have long been complaints from the industry about
the rigorous terms of the contract. Hong Kong's telegram
shows that they are aware of the anxieties, but puts the
other side of the story: in particular the benefit to Hong
Kong of having the assurance of a fixed cost for the Airport
Project. They are constrained by their need to have HK$25 billion left in the reserves in 1997. They are also
mindful of what must be an uncertain economic climate in the
run-up to 1997. They would rather have a fixed price even
if a high one, than the prospect of Channel Tunnel-type cost escalation in the sensitive pre-1997 period.
5.
In principle the contract conditions are the same for
But in two ways, British firms may conceivably be at a
disadvantage:
all.
(i) The fixed price contract could affect British companies
worse than others. Japanese companies may be large enough
to accept such big risks. They and for example the Koreans, may believe that their governments would provide help in
extremis. British companies are on the whole smaller, and
hence more vulnerable in the worst case. Furthermore, it is
clear that HMG will not be prepared to bail out UK firms.
Nonetheless Trafalgar House (our main hope for the Bridge
Contract) will clearly be bidding.
CHAAFT/2
CONFIDENTIAL