TNAG-0424-FCO40-470-Construction-of-an-underground-railway-system-in-Hong-Kong-1973 — Page 213

SECRET

F

9

XCS(73)8

taking into account cost escalation and other variations, is below $5,000 million. It is essential to achieve agreement on an absolute ceiling price before the commencement of construction, even if a price has to be paid for the safeguard which this provides, This safeguard would be impossible to achieve under a multi-contract approach because contracts would be let progressively over a period of years. On the other hand, there is already one proposal (Annex B) for a lumpsum fixed price single contract, although the maximum price at present indicated is well above the $5,000 million limit.

15

Secondly, because of the complexity of the project and the importance, from a financial point of view, of completing it on time, there is also a need for overall project liability to be appropriately defined, There must, in other words, be an entity to assume full responsibility and liability for the successful completion of the project. Under the multi-contract approach, the overall project liability will necessarily fall on the client (i. e. the MTR Corporation and, ultimately, the Government), with all the serious economic and fiscal consequences that that entails. A single-contract approach would result in this liability being placed largely on the contractor, and, provided suitable conditions of contract were drawn up, should result in the client's position being satisfactorily safeguarded.

16

Having regard to these needs, and given the additional disadvantage of complexity of management from the client's point of view, it is considered that the multi-contract approach would lead to wholly unacceptable risks and should not be adopted. The question is whether, under the single- contract approach, a viable ceiling price (defined as being below $5,000 million) can be obtained and circum- scribed by suitable conditions of contract.

17

Following evaluation of the consortia's latest proposals, the Steering Group has drawn up a set of requirements which it regards to be the essential (or, in some cases, desirable) elements of a single contract which would ensure not only the system's financial viability but also the successful completion of the project. These requirements are set out at Annex F together with brief notes on the extent to which they have, on present indications, been met by each consortium.

18

Although no consortium has yet fully satisfied these requirements, particularly as regards the limit on the ceiling price, present information would seem to suggest that it should be possible to negotiate a single contract on the basis defined. This view is based particularly on the following considerations:

(a)

Generally, the present assumptions as to the maximum contract price under each consortium's proposals contain substantial provisions for contingencies as well as for unforeseen factors, largely as a result of the lack of definition of underground geological conditions. The degree of uncertainty should diminish progressively as the results of the present extensive soils investigations become available, and it would be unlikely that all the worst assumptions would be confirmed.

SECRET