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This assignment we were asked to write a case study on a recent, reasonably large project from the aspect of the commercial success of the project. I will be discussing the persona of the main parties to the project and what the drivers were. Will look into the form of contract that was used and how it was allocated. I will look to give my opinion of what went well and what went badly in the project together with a view of how these were affected by the chosen procurement strategy.
For this assignment I researched and looked into a number of projects including, the 02 arena, Windsor & maidenhead flood defence system, the M25 widening and Heathrow Terminal 5. Looking into the contract and procurement side of things I knuckled it down to the M25 and Heathrow terminal with both construction projects different in their own ways. The M25 was built with public money whilst terminal 5 was owned by BAA. In the end I decided to choose Terminal 5 as my project to investigate about.
BAA Terminal 5 was one of Europe's most complex and largest construction projects. On the 20th November 2001 the Secretary of State approved T5 after a 46 month public enquiry, which was the longest in British History. T5 will provide an impressive gateway into London and provide an extra 50% capacity at Heathrow. T5 boasts nine new tunnels, new spur road connecting to the M25 and a vast new tunnel. It had a peak monthly spend of 80 million pounds with up to 8,000 workers on site. T5 consisted of 18 main projects divided into 140 sub projects and 1500 work packages, which was on a 260 hectare site.
The project management approach was based on the Rethinking Construction (Egan,1998 and Constructing the Tea,(Latham 1994). Looking at these reports the project looked at two underlying principles.
Partners are worth more than suppliers, BAA has developed an included project team approach
Client always bears the risk, no matter what procurement selection is selected.
In previous UK construction projects if BAA had followed a traditional route T5 would have cost 40% over budget, ended up two years over schedule and had six fatalities (Riley, 2005). BAA funding is determined by five yearly reviews and this would have not been acceptable to BAA. In order to satisfy shareholders BAA are required to beat a set rate of return. 'Massive cost overruns would have wrecked the company's reputation and sent the share price plummeting'
(Riley, M. quoted in Wolmar, 2005).
On such a complex project as T5, early freezing of the design solution was not practical. BAA thought tirelessly and decided they had to rethink the client's role and therefore decided to take the total risk of the contracts on the project. Traditional contracts such as ICE and JCT the parties are reactive and manage the effect, which resulted in claims where up to 40% of the total cost of the claims, could be paid to lawyers and quantity surveyors. BAA managed the cause through integrated teams which BAA had thought of differently. The T5 agreement was used in which the client takes on legal liability for the projects risk. This resulted in and envisaged that all suppliers working on the project should function as a fundamental company. BAA had an aim which was to create one team, executives were asked to lose their company allegiances and share information with colleagues in other professions. The one team alliance set out to work to a common set of objectives by some setting objectives which included the following:
160 highly experienced and capable professionals, which BAA has selected as the best people
Key information such as the timetable and the risk reports, the work scope is freely available to the integrated project team.
The T5 agreement with suppliers do not identify the work necessary, they are a obligation from the partners and statements of capability and scope to be provided
In the earliest stages of the planning process, many of the suppliers were brought in early for the T5 construction. This was mainly to integrate teams that would work together to find likely troubles and issues. The suppliers and consultants had a good arrangement in which they could add value to designing safe resolutions, which had to be in the safety, quality targets and within the time. BAA did not want any pitfalls with other projects like the jubilee extension that was £1bn over budget and two years late.
Risk Management - BAA's approach
The key factor in why the project had been keeping on budget and ahead of schedule was due to BAA's approach to risk management. Terminal 5 was constructed under the T5 Agreement which meant that BAA acted as the prime client and accepts most of the risk. This proved to remove the burden on suppliers and contractors. With this in mind this enabled everyone working on T5 to focus proactively managing risk rather. This also helped in focusing on managing the cause of the problems, not the effects if they should happen. Source: BAA T5 fact sheet, Risk Management
Below shows the contracting approach played out by BAA:
Usual Contracting T5 Contracting
Transfer of risk Can not transfer risk
Price in advance Remain Flexible
Profit at risk Integrated teams
Penalties BAA manages the risk
Employers Team Profit levels pre-agreed
The T5 agreement:
The T5 agreement is not like your original construction contract, it is unique with suppliers profits ring fenced and the client retains the risk. The main heart of the contract studies on non-adversarial style on the causes of risk management. The contract allows that there are no claims for additional expense. With the move away from a lump sum contract, an vital level of risk transfers to the client, which requires client driven and client-owned organisation to supervise risk.
With the T5 Agreement, it looks and focuses to handle the cause and not the effect and ensure great success in an uncertain environment. Parties require high performance and high benchmarking. Within the supply chain, teams are expectant to look at innovation and problem solving. "The idea is to have the best brains in all companies working out solutions to problems not working how best to defend their own corner". (T5's commercial director Matthew Riley quoted inBroughton, 2004).
An example on how BAA benefited from the T5 agreement was that equipment suppliers were able to pool their purchasing influence at a discounted rate, which resulted in savings of up to 30% in some areas. (Broughton 2004). BAA was clever in that they used cost information from other projects, authorise separately, to set target costs. Savings are shared with applicable partners if the turn out costs is lower than the target. Teams work collectively and innovate, from the incentive. This is the only way that can improve profitability, other costs are on a open book basis. T5 agreement gives great incentives, this included that if T5 was completed on time, a third would go to BAA, another third to the project wide pot, and the last third to the contractors, all to be paid only at the end (Douglas 2005). There was a ring-fenced profit to suppliers and any payment was dependant on meeting milestones.
The last part to the T5 agreement was the insurance policy. BAA had a single premium, which advantaged all the suppliers, which provided one insurance plan for the major risk. Some of the features of the T5 agreement included the following:
lawfully binding contract connecting Heathrow Airport and its key contractors
BAA holds the on the whole the main risk, it shows risk and reward. Suppliers take their divide of financial importance.
All key projects had been insured, including, property damage and death or injury.
The project is allowed to adopt a more fundamental approach to the management of risk, which the T5 agreement allows to do. Conditions were set for each supplier in the legally binding contract of a 250-page handbook.
BAA had operated a five-stage agreement method, which was based on the changing levels of risk during the expansion of the project. One of the significant sort of this process is that BAA is ready to go forward into the next phase without having concluded construction design.
The use of the NEC:
Under NEC contracts, around 10% of the T5 value was procured. Suppliers, contractors and consultants in the first 70 first-tier, were contracted under BAA's bespoke T5 agreement. Each first-tier supplier, under this agreement was accountable for developing their supply chain to distribute the work. With the second -tier suppliers, BAA advised that they use its version of the NEC Engineering and Construction Contract, the only form suggested.
With this approach to risk, the project had an early test with a wet winter, works got behind schedule, which lost around 14 weeks, which could have meant a two year delay. Significant claims would have been huge, but the fact that BAA had assumed the risk, this supposed that over the next 7-8 months the setback was fixed back.
Comparing T5 to London underground refurbishment where it was contracted out to two infrastructure companies. The London Underground is still publicly owned, but the projects for it are undertaken by private companies.
In the original case, the idea was close to that of the T5 contract, but the Jubilee Line Extension, led to massive cost overruns and consequently it would be better off to hand the management of the project to private companies. Tube PPP, makes the contractors contain a vested interest, as with conventional contracts, they would still receive a guaranteed income, even if little work was done. With this process claims and counterclaims would fly between parties. With delays in the underground, it shows to the public that penalties are not strong enough to the contractors. With the BAA contract, it is that there is no facade that the risk has been passed on. This makes the suppliers charge less as well.
What was learnt from this project?
Looking at this project it is clear that the client always carriers the risk. The main importance of managing the risk and the proactive role taken by BAA. This would develop the T5 Agreement, which in turn would take all the risk. Technology made a huge difference, which in turn cut off 10% of the overall cost through a single 3D model. With integrated supply teams, this helped with joint innovation and problem solving. On the actual construction site, the project was managed with an open plan approach. Management teams integrated superbly in this manner. Materials for the project were stored close to site in centres, this allowed the implantation of a just-in-time plan. When managing the risk, it is best to put it in the hands of those who are most able. This was also helped with approving forms of agreement that would sustain up a risk management approach. BAA was very clever in their approach and looked at it from all corners. One was to standardise and simplify, i.e. have only a certain type of light bulb, or fitting. BAA learned that they should be a good neighbour, with local consultations and public exhibitions. From experience the public like to be informed on what is going on, and like to feel that they are involved. T5 learned that the time and money spent on planning was time and money well spent (Douglas 2005). Health and safety was a top priority for the project, with an accredited health and safety test centre. Health awareness and free medicals were supplied. Last but not least, was to seek experienced and well skilled people to work on such a project.
The T5 project was not like no other, the culture and mindset of the participants was a complete change. The project success was mainly due to the client. BAA was clever in that instead of writing into contracts penalties for malfunctions, they accepted all the risk from the start and agreed margins before, pleasing and setting out a constructive message to the whole project group. As watched in lecture, if you compare this to UK Governments PFI/PPP model which the risk is put on mostly onto the contractors, this showed that BAA used a completely different approach. BAA has experience with airports so knew how to build a leadership role. BAA wanted to get the job done, instead of hammering over contracts to find excuses. BAA insisted absolute transparency in the books of its suppliers, this was to minimise waste (Douglas). With BAA's make clear approach, this produced a combined setting which leads to the execution of industry best practices.
This approach to project management was obviously like no other project. Andrew Wolstenholme, BAA's project Director believed that " The new approach for project management as set out in the T5 Agreement will help the industry change for the better".
One of the downfalls I feel was the time on the public enquiry. With two years of preparation and over four years of evidence heard it cost, BAA, local government and LA objectors over £100m, even though the decision was widely expected to get the go ahead. Was good as previously mentioned was the risk factor. For example if a contractor had to replace a ceiling then the work would be carried out with no blame. If the contractor, had not doen it properly the second time then the team would pay the cost with no profit, hence making the contractors work to high specification. Even BAA had to learn lessons as they underestimated the number of mangers needed on site, in which the needed over three times the amount they had planned for.
What this project shows is that BAA knew that there was no defined approach on successfully delivering a project of this scale. They took a brave decision to allow suppliers to focus on delivery. The project on a whole showed the construction industry a new form of procurement route.