Contracting mistakes

29th September 2016

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  • Waste


Ben Tucker

Over the past year, at least four companies have received hefty fines after contractors made errors. How can others manage their contractors to avoid such problems? Alex Marshall reports

In June, United Utilities was fined £600,000 for an incident that left a 1.7 km stretch of a brook near Bolton in Greater Manchester almost devoid of life. With the media attention that followed, the size of the fine was hard to miss.

But one thing could have been missed by anyone reading that coverage: the fact United Utilities was not behind the incident. Instead, the blame lay with one of its contractors, KMI+, a joint venture between four companies – Kier Infrastructure and Overseas, J Murphy & Sons, Interserve and Mouchel.

The pollution occurred when KMI+ staff were removing sodium hypochlorite – the main component of bleach – from a tank at a water treatment works. Rather than pump out the final 300 litres of the chemical, they decided to dilute it with water, letting it overflow into a bunded area overnight. But neither KMI+ nor United Utilities knew there were faults in the drainage system and the chemical seeped into the brook, destroying a trout spawning ground and killing more than 900 fish.

Leading by example

That case is only the most recent example of a firm being prosecuted due to a contractor’s error. In March, Molson Coors Brewery was fined £100,000 after a contractor failed to seal a drain, causing a tributary of the Thames in Hampshire to be polluted. And in September 2015 the Spirit Pub Company was fined £150,000 for a pollution incident due to maintenance failures by a contractor at a sewage plant on Teesside.

Contractors have always made these types of mistakes. However, in 2014 the Sentencing Council revised its guidelines for environmental offences, significantly upping fines and relating their size to an operator’s turnover. As a result, a contractor’s error can now have immense financial consequences.

The string of court cases since the revisions came into force on 1 July 2014 is the first sign of their impact but prompts a question: how should a company manage its contractors so they do not end up in court?

The Environment Agency will not tell firms how to act. In an interview with the environmentalist, Dr Gillian Pratt, its director of regulation, said only: ‘You would hope the revised Sentencing Council guidelines would make people act to better manage contractors. But it is up to the operator to decide how they do that.’

However, the agency does use multiple contractors itself to build and repair assets such as flood defences – projects that carry a significant pollution risk – and how it manages them can provide a template for others. ‘We have a very strict due diligence process for deciding who we work with in the first place,’ says Simon Dawes, the agency’s head of internal environmental management. ‘I’d say that’s the most important way [we manage contractors]. For larger jobs, for instance, we would be looking for firms to have an accredited environmental management system like ISO 14001 as that shows they have processes in place to identify and manage risks.’

The agency also ensures it does not divest itself of all responsibility after a contract is awarded, Dawes says. ‘If we have knowledge of a site that a contractor is working on we often have better awareness of the issues on it than they do, so it’s right for us to take a partnership approach and discuss all the risks and what mitigation is necessary.’

The extent of this depends on the location. Simple jobs could require more collaboration than a multi-million pound project if they are in a sensitive area.

The regulator uses the contract itself to minimise pollution risks, Dawes says. All contractors have to agree to follow the agency’s safety health and environment code of practice that is attached to the contract. This includes a section on ‘pollution prevention planning and provision’, which requires that contractors ensure the site has pollution spill kits and staff are trained in their use. If works are to last longer than 30 days or are happening in an environmentally sensitive area, a mock pollution exercise also has to take place.

Further, the agency requires all contractors to sign up to a red and yellow card system to focus their minds on potential risks. ‘If something doesn’t go well, you get a yellow card and that initiates a review process to ensure measures are put in place so it does not re-occur,’ says Dawes. ‘But a serious incident gets a red card and that means we won’t give the contractor any new work for a defined period, and certainly not until they’ve satisfied us they have a clear plan to improve.’

The regulator’s water and environment management framework for suppliers states that the system is triggered by a number of circumstances, such as:

  • any act or omission by a supplier leading to a prosecution;
  • any act of negligence by a supplier that significantly increases the risk to others or the environment during the execution of the works; and
  • failure to follow the agency’s corporate management systems.

The agency has yet to issue any red or yellow cards for pollution incidents, although it has issued them for health and safety reasons.

Minimising risk

Few businesses, or public sector organisations, can act like the Environment Agency – either because they lack the purchasing power or the environmental expertise. But most leading firms recommend similar measures to minimise contractor risks.

‘The Sentencing Council guidelines made us re-look at risks along our supply chain,’ says Andy Clark, head of procurement and contract management at Yorkshire Water. ‘What used to be a £20,000 fine if a sewage works failed would now be £1m.’ As a result of that review, the firm has become less tolerant of delays in repairing its treatment plants and pumping stations and is prepared to bring work in house if there is a risk of pollution. ‘If someone was repairing a pump and knocked out the whole station there would be no chance for us to intervene,’ he says.

However, the main approach Yorkshire Water takes to reassure itself about its 1,600 contractors – 15 of which undertake the major projects – is the same as the agency’s: the procurement process.

‘When people reply to tenders, we require confirmation they have the appropriate systems in place to identify risks and control them, that they have the right training and management, and evidence that it’s all working,’ Clark says. A certified management system does that. ISO 14001 is not a mandatory requirement, but it does give Yorkshire Water extra confidence.

Yorkshire Water eschews the red and yellow card system, but it does use the contract with a supplier to limit liability should a pollution incident occur. ‘There is a clause [in contracts] saying that if a firm acts wilfully or negligibly and causes an incident – and we can evidence that – then we can go after them for any loss,’ Clark says. ‘We haven’t had to use it yet, but if anyone refused to sign up that we would raise questions with us.’

Dealing with waste

Water firms may seem at the most risk of contractor mistakes because they work in sensitive environments – any pollution incident could kill fish and lead to major fines. However, Sarah Holmes, legal director at law firm Bond Dickinson, says the riskiest area for all companies when they use contractors is waste: ‘People often think “I’ve handed waste on and so don’t need to think about it any more”. But there are so many opportunities for offences to be committed as waste changes a lot of hands.’

Any firm can limit those issues through the contract, she says. They can write into it a requirement to be notified whenever waste is handed on, for example, or to be notified if it is passed on to a firm that has been fined or had enforcement action taken against it. ‘That shows you’re taking all reasonable steps to limit problems, and any court would look for that,’ she adds.

Several of the UK’s major construction firms agree with Holmes’s view that waste is the biggest issue. ‘Having evidence to demonstrate we’re managing waste in line with our duty of care is an ongoing challenge,’ says Martin Ballard, group environment manager at Willmott Dixon, which itself hires multiple contractors. ‘We’re very reliant on our supply chain to understand their duty of care and manage it.’

Willmott Dixon does much to help its contractors understand their waste obligations, Ballard says. It requires any managerial staff to undergo by October 2018 a one-day site environmental awareness training course certified by the Construction Industry Training Board. The construction giant is an ambassador for several industry education initiatives, such as the Environmental Service Association’s Right Waste, Right Place campaign to spread the duty-of-care message to small and medium-sized enterprises.

Ballard says: ‘SMEs get an awful lot of information given to them – including by us. Do they read all that? Do they understand it? Probably not, so a campaign like this, which is clear and easy to understand, helps a lot.’

Purchasing decisions

Willmott Dixon also uses the procurement process to try to limit pollution risks, and prefers to work with firms that have accredited environmental management systems. Skanska UK follows a largely similar approach. Its sustainable procurement policy helps the firm achieve its goal of ‘five zeros’ in the supply chain covering. accidents, ethical breaches, environmental incidents, losses and defects. However, Skanska UK is also a prime example of a business that uses audits to ensure contractors adhere to its environmental standards.

Skanska UK has 70 environmental staff whose principal duty is to ensure compliance on sites, says Nigel Sagar, senior environmental compliance manager. Several recent additions to this team were previously with the Environment Agency. To pre-empt waste problems, the environment team has a wide remit, from checking environmental permits to visiting waste disposal facilities to ensure they meet Skanska UK’s standards.

‘On some projects they even follow waste trucks to ensure they go to the right place,’ Sagar says.

He concedes that such measures may seem excessive. ‘When I speak to people and say we have 70 environment staff, they think I’m off my head. They ask why we have so many. The answer is because we need them. Our green brand is one of our top selling points and, if we have an incident, it won’t just cost us the fine, it’ll impact our marketing value. One of the questions you are always asked in a tender is “Have you been fined in the past five years?”. If you start ticking that box, it’s an issue.’

Sagar insists not everyone has to follow his company’s example. His advice to any business seeking to manage its contractors better is the same as Yorkshire Water’s: evaluate your own management system first. ‘If a firm has a robust management system, it shows you they have all the checks and balances to ensure a project doesn’t have problems,’ he says.

Skanska UK itself has ISO 14001: 2015, the international standard for environment management systems, and requires all its contractors to comply with the requirements.

Risk management

Organisations cannot eliminate all risk no matter the demands placed on contractors or the systems in place, as some of the recent fines show. In May, house builder Miller Homes was fined £100,000 for a pollution incident in Huddersfield in November 2013 when one of the firm’s contractors removed some straw bales from a water storage lagoon that was close to overflowing. The contractor did not realise the bales were being used to prevent silt leaving the site and the move polluted a nearby watercourse.

In a statement, Miller Homes insisted the incident was a one-off and stressed that both it and the contractor had since acted to try to ensure a re-occurrence was impossible. ‘We have modified our surface water planning to include more detail and to ensure greater clarity in terms of responsibility for all aspects of its implementation,’ the statement said.

Although that sounds very specific, it gets to the heart of one of the key requirements businesses and public sector bodies should keep in mind when working with contractors: if a pollution incident does occur, you must learn from it – and you must ensure they do too.

Deepwater Horizon

BP announced in July that the total cumulative pre-tax charge relating to the Deepwater Horizon disaster in 2010 would be $61.6bn, or $44bn after tax. The UK-based multinational was also barred from tendering for lucrative new US government oil and gas exploration contracts between 2012 and 2014 as a result of the incident.

The explosion on the Deepwater Horizon rig in April 2010 killed 11 people and resulted in the release of 4.9 million barrels of oil into the Gulf of Mexico, triggering one of the worst marine oil spills in the history of the petroleum industry. The pollution spread over more than 965 km, from Louisiana to Florida, and by July 2010 all five states on the Gulf coast were badly affected. US energy adviser Carol Browner described the spill as probably the biggest environmental disaster the country had ever faced. After the accident, a six-month moratorium was imposed on all drilling operations in the area.

BP blamed its contractor, the Swiss offshore drilling firm Transocean, which owned and operated the rig. Lamar McKay, then chair of BP America, told a congressional hearing in May 2010 that, although the oil and gas firm was ultimately responsible for the clean-up costs, just seven of the 126 workers onboard the rig were BP employees. ‘BP only has some of the story,’ he said. However, Steve Newman, chief executive of Transocean, blamed BP and Halliburton. The Houston-based company had produced the cement pumped down the production casing the day before the incident to prevent hydrocarbons from the reservoir entering the wellbore.

A report published in September 2010 from the incident investigation team at BP, also identified problems with contractors. Its conclusions included:

  • there were weaknesses in cement design and testing, quality assurance and risk assessment;
  • the Transocean rig crew and BP well site leaders had incorrectly concluded that the test for well integrity was successful;
  • the rig crew did not recognise the influx and did not act to control the well until hydrocarbons had passed through the blowout preventer and into the riser;
  • Transocean’s shut-in protocols did not fully address how to respond in high-flow emergencies after well control had been lost; and
  • the maintenance records did not substantiate that Transocean had complied with its own five-year replacement policy for high-pressure hoses.

However, in September 2014, US district Judge Carl Barbier ruled that responsibility for the disaster was mainly BP’s. He apportioned fault as 67% for BP, 30% for Transocean and 3% for Halliburton. He described the energy company’s conduct as reckless and said it had acted with gross negligence. In May 2015, the three firms settled all claims relating to the incident.

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