History Of The Contracting Strategy Construction Essay

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Modern contract thinking endorses the adoption of a partnering approach to attain mutual objectives. The concept involves trust and teamwork between client, designers, contractors, suppliers, etc. working cooperatively with mutual or aligned objectives. The Construction Industry Institute (CII, 1991) in their report 'In Search of Partnering Excellence' and put forward by the National Economic Development Office (NEDO, 1991) described partnering as "a long term commitment between two or more organisations for the purpose of achieving specific business objectives by maximising the effectiveness of each participants resources. This requires changing traditional relationships to a shared culture without regard to organisational boundaries. The relationship is based on trust, dedication to common goals, and an understanding of each others individual expectations and values. Expected benefits include improved efficiency and cost effectiveness, increased opportunity for innovation, and the continuous improvement of quality products and services." The Latham Report (1995) advocated adoption of partnering in the construction industry, a point reiterated by the Egan Report (1998), stressing that competitive tendering should be replaced with long term relationships complete with performance measurement, and sustained improvements in quality and efficiency.

"Firm duties of teamwork, with shared financial motivation to pursue those objectives. These should involve a general presumption to achieve "win- win" solutions to problems which may arise during the course of the project Latham (1994:37)".

Mutual objectives must include a successfully completed project aided by gain-share returning mutual benefits to all parties. There must be a commitment to the philosophy and mutual trust, hence open book incentivised target cost mechanisms and cash neutral payment arrangements should be used. All parties should be measured and evaluated by benchmarking techniques or the inclusion of KPIs (Key Performance Indicators) and alternative dispute resolution measures such adjudication is imperative. IKB Plc must seek to gain a "win-win" situation as a direct result of both Client and Contractor having a stake in the success of the project.

In general, emphasis should be on stakeholder involvement rather than exclusion, so regardless of the procurement route, IKB Plc must appoint a 'partnership manager' to manage communications, partner liaison, public relations and stakeholder management and implement initiatives including, partnering events, best practice forums and supply chain workshops; involving all stakeholders/partners focussing on roles, mutual objectives, key issues and processes culminating in agreement and signing of a 'partnering charter'. IKB Plc must consider that to be successful, partnering must be the driving force behind delivery and not merely a philosophy but central to the procurement route and contracting strategy, removing the "them and us" master/servant client/contractor arrangements previously incumbent. The contractor as a partner must have an equal stake in the success of the project.

The impact of this vision is potentially immense for our industry. We need to abandon our existing business models that reward short-term thinking. Instead, we should incentivise suppliers to deliver quality and sustainability by taking a stake in the long-term performance of a built asset. 'Never Waste a Good Crisis'

Supply Chain Relationships

Modern procurement methods are moving to the appointment of integrated supply chains where the parties in the supply chain have a long term objective to work together to deliver added value to the client. These long term relationships enable the power of the supply chain management to be fully realised.

IKB Plc should consider introducing specialist framework consultants and contractors with specialist skills to assist and supplement resource on specific tasks but also mandatory use of kit frameworks. The appropriate procurement option must be arrived at by carefully considering all alternatives and realising different consultants / contractors may be required for different projects. This will allow IKB Plc and the partner companies to reap the benefits of economies of scale and influence in the market through bulk discounts and surety of supply as a major and valued client.

Output Focus

Whilst there must be an importance placed on reducing costs and maintaining outturn costs within budget, (delivering "more for less"), another important driver for IKB Plc should be the delivery of outputs. The contracting strategy must allow fast-track process from inception design to commencement and completion of construction. Therefore IKB Plc must utilise its expertise to create fast-track contracting systems based on incentivised target cost contracting to move the process swiftly from inception to completion.

Planning and Visibility of Forward Programme

Cost savings must be emphasised through visibility and clarity of work. From the earliest assessments, programmes must be put in place detailing consultant / contractor allocation with anticipated output and budget. Also binding deliverable programmes for all consultants and contractors throughout the preconstruction and construction periods.

Transaction Costs

In any procurement activity careful consideration must be given to transaction costs, these being the cost of contract administration and contract formulation, as they form a significant part of the cost of the contracting equation when added to the cost of contracting goods and services plus whole life costs. IKB Plc should consider commercial models using incentivised target cost contracting with pre-qualified partner consultants and contractors. This could be are more cost effective in terms of transaction cost, staff commitment, user friendliness and speed to market than the traditional competitive methods previously employed.

Value Engineering and Risk

Sufficient time for value engineering and risk management exercises that allow the consultants and contractors to help iron out inappropriate costs and unaffordable or unbuildable designs. An inclusion of value engineering and examination of specifications and processes to eliminate waste through over-specification and preference engineering should assist with the efficiency drive and commercial focus. Project risks must be identified, addressed and dealt with either by transference, acceptance, avoidance or insurance, with the risks minimised and apportioned to the party best suited to manage them. Risk apportionment can be dealt with through the various procurement options i.e. fixed price (mostly contractor risk) to reimbursable (mostly client risk).

"A choice of allocation of risks, to be decided as appropriate to each project but then allocated to the party best able to manage, estimate and carry the risk.", Latham (1994:37).

Consultant and Contractor Performance Mechanisms

Good partnering practice involves mutually agreed objectives and goals; trust; mechanism for problem dispute resolution; and measured continuous improvement to achieve best practice. IKB should put in place a consultant / contractor performance mechanism i.e. KPIs. On the financial side project prices should be benchmarked against a 'cost based solution' (budget) and there should be an analysis of the consultants /contractors efficiency performance on an operations level, which should include issues such as quality and safety.

The Commercial Model

Historically companies have adopted and adhered to traditional forms of contractual arrangements using for example ICE 5th/6th 7th Ed for Civil Engineering works or JCT for building works; generally re-measurable sequential contracts or fixed term framework contracts. Such forms whilst straightforward to operate tended to rely on complete design, and where inadequate lead to conflict, submission of claims and amplification of construction costs. IKB Plc must seek to overcome this by adopting a modern approach to contract selection which maintains a synergy of consistent terms and conditions across the full range of project contractual arrangements and agreeable with a partnering approach to overcome the 'dominant paradigm of opportunism' prevalent in the industry of tendermanship and claimsmanship. Crucially, The Egan Report (1998) stressed that competitive tendering should be replaced with long term relationships complete with performance measurement, and sustained improvements in quality and efficiency. The Latham Report, 'Constructing the Team' (1994) listed key features which should be present in all modern construction contracts and said that the NEC contains 'virtually all these assumptions of best practice'. IKB Plc must take a policy decision to endorse advice from the Latham Report (1994) Executive Summary; "A set of basic principles is required on which modern contracts can be based. A complete family of interlocking documents is also required. The New Engineering contract (NEC) fulfils many of these principles and requirements".

The NEC3 suite of contracts is comprehensive and effective; there is a version suitable for each procurement route, each work package, design package and consultancy necessary for the project. A consistent approach and contractual synergy is therefore possible in compliance with Latham's "Interrelated package of contract documents". Contractual synergy will reduce transaction costs by following a consistent approach to the basic contractual terms. The NEC3 suite includes the NEC PSC (Professional Services Contract) which can be used to engage the Designers, Construction Manager, or in fact any/all Consultants on a variety of risk apportionment, managerial and reimbursement bases. Correspondingly, the NEC ECC (Engineering and Construction Contract) has a full range of procurement route cover and capability using six Main Options namely:

Option A. Priced contract with activity schedule

Option B. Priced contract with bill of quantities

Option C. Target contract with activity schedule

Option D. Target contract with bill of quantities

Option E. Cost reimbursable contract

Option F. Management contract

These main options cover essential obligations and procedures, and are then expanded by Secondary Option Clauses including "Z" Clauses which can be selected to cover any site specific needs or client requested inclusions. Scope is included within the works information and specification sections as well as main requirements being formalised in the employers and contractors data sections of the contract document. In terms of partnering, the secondary option clauses can be "cherry picked" for suitability. The "Z" clauses provide scope for incorporation of partnering initiatives, and even the ability to introduce innovations from other standard forms of contract. For example, open book cash neutral payment methods and incentive clauses can be introduced, delay damages suspended, etc. Incentives introduced using KPIs as a method of measuring and benchmarking against CSFs (Critical Success Factors), which in turn can be rewarded / penalised against the gain / pain share pot created from the financial driver of incentivised target cost performance. ADR processes are catered for within the Contract Conditions for both the PSC and EEC Contracts and subcontracts with provision for Adjudication. An Adjudicators contract is included within the suite, but use is not mandatory. Partnering and trust based cash-neutral certification can be introduced to obviate contractor finance charges, hence reduce project costs.

The NEC is "as much a manual of project management as a set of conditions of contract". As such partnering is a natural part of their use, as involvement by all parties and the application of common sense in contract interpretation is an assumed necessity. Guidance notes and procedures follow a system of flow charts for ease of use. The NEC is written in non-technical language and designed to be user friendly. The contract can be used for both design & build or sequential contract formats, or hybrids thereof and the inherent flexibility allows inclusion of almost any other reasonable requirement associated with procurement route or partnering approach.

Cost control and monitoring on cost and price based projects is achieved by incorporation of a strictly controlled priced activity schedule. This schedule will incorporate also the included financial agreements regarding apportionment of risk between the parties from the integral risk register. The incumbent NEC3 early warning procedure provides visibility of potential delays, disruption and additional costs, providing the project manager with an opportunity to act to overcome problems or adjust budget accordingly, under appropriate change control mechanisms, rather than the traditional post notification and claim contracts.

In summary to ensure that the IKB Plc business stands out from competitors, embraces best practise, maximises its strengths through modern contracting strategies while being wholly consistent with the partnering ethos and the recommendations of both Latham and Egan, the Engineering and Construction Contract (NEC3) should be adopted. The key points and advantages can be summarised as follows:

Flexibility of contract type to suit specific circumstances whilst maintaining contractual synergy through consistent contract terms.

Contract format limits claimsmanship and tendermanship possibilities.

Risk register integral with contract.

Cost monitoring and control through priced activity schedules.

ADR techniques adopted.

Change control modernised by new techniques giving early warning of contract problems, and opportunity for remedial action rather than former measure and claim strategies.

Speed of delivery from inception to award.

Lower transaction costs per contract.

Efficiencies through programmed workload visibility, value engineering techniques, cash neutral payments, etc.

Contractor and client are partners and have a stake in the success of the project, the classic "win-win" scenario.

Transparency of cost information and outturn cost for reporting.

User friendly.