The Construction Commercial Legacy Construction Essay

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This paper looks at the Heathrow Terminal 5 project surrounding three specific commercial management issues; Procurement, performance measurement and strategic project and supply chain management. BAA introduced a new procurement system, taking all the project risk, building a partnering approach and relational style with suppliers. Using integrated teams to deliver sub-projects allowed for efficiency and collaboration benefits, concentrating goals. Performance Measurement was conducted using a project control system to ensure time, cost and quality were continually reviewed. The earned-value analysis allowed management to address time and costs simultaneously and take action appropriately. Lean thinking was adopted through the supply chain using integrated teams to deliver products efficiently. By adopting the principles of supply chain management and the ideals set by the Latham (1994) and Egan (1998) reports, BAA created a truely proactive approach. This procurement and supply chain arrangement offers a true alternative for future large scale public construction works.

Key words: Supply Chain Management; Partnering; Proactive; Relational; Integrated teams, Risk; Collaboration; Procurement; Performance measurement; Lean Thinking

Introduction

Heathrow Terminal 5 was one of the largest ever construction projects undertaken in Britain, consisting of new roads, hotels, diverting two rivers and over 13km of tunnelling (Caldwell et al 2009). The project took some 20 years to plan and 6 years to build (Deakin and Koukiadaki 2009). It was a megaproject in every sense, involving 18 major projects and 147 sub projects and employing 60,000 people throughout its lifetime (Deakin and Koukiadaki 2009). It cost a total of £4.2 billion and was considered a success in terms of cost, time and quality (Hampton, year unknown). Along with such a major project come serious commercial management requirements. The author seeks to outline the commercial management in three main areas; procurement, performance measurement and strategic project and supply chain management. The Heathrow Terminal 5 left a lasting legacy for the procurement of public works, showing a radical new approach could bring success.

External milieu - Procurement

Through procurement, Clients seek to achieve the optimum combination of resources to enable them to fulfil their objectives (Langford and Murray 2004 cited in Lowe and Leringer 2008). Ward et al (1991) cited in Lowe and Leringer (2008) state that Clients have expectations of procurement methods based on previous experience with past projects and their associated procurement routes. This is particularly relevant for the government in constructing major works such as the Heathrow Terminal 5 project. Public projects come under heavy scrutiny because they are generally large scale costly ventures which are funded, ultimately, by the taxpayer. The government has a vast array of experience in construction procurement to draw upon in deciding the best approach for a given project. The current government approach seems to ignore the outlines in the Latham (1994) and Egan(1998) reports proposing a move towards partnering. There are also vastly contrasting goals of private and public bodies outlined by Reijners (1994), with corporate aims of private firms compared to social aims of public bodies.

Most clients will change their procurement system because they are unhappy with their most recent project and believe the procurement route can solve this (Hibberd and Djebarni 1996).Langford and Murray (2004) cited in Lowe and Leringer (2008) argue that procurement options hide the best value to Clients because they work based on the reverse auction where the lowest price is successful in tendering, this often turns out to be the most costly because of claims, delays and quality problems associated with the tender. BAA found this on a number of previous large scale public projects, such as the Scottish Parliament, The Millennium Dome, the Channel tunnel and the British Library all coming in over budget and late.

BAA found that major public construction projects in the past highlighted two key areas which undermined them: cultural confusion and risk adversity. Therefore they set out to radically adapt the procurement system defining an integrated approach to partnering and risk management (NBS RIBA, April 2008). The procurement route openly sought to adopt the principles of partnering outlined by Latham (1994) and Egan (1998) and promoted by the Movement for Innovation (M4I). The procurement strategy became known as the T5 Agreement and was designed to be based around behaviours and relationships with the supply chain (Anonymous 2012). The principle idea of the system is to prevent risk being passed down the supply chain to those parties least able to manage it. BAA accepted all of the risk and its financial consequences. "T5 sought to identify and expose risk, and then to incentivise those parties best qualified to manage the risk to take innovative approaches, comfortable with the knowledge that their work load and margin would be acknowledged and protected" (Caldwell et al 2009 pp185).

The procurement route was essentially a cost reimbursement approach with incentives to promote exceptional performance (Caldwell et al 2009). If risk is passed down the contractual chain it will ultimately lead to legal claims and issues (Woolmer 2005). Pearce (2003) cited in Lowe and Leringer (2008) furthers this stating that the fragmented structure whereby risk is passed down the supply chain precludes the exploitation of economies of scale and hence cost reductions.

Figure 1: BAA's T5 Project Organisation (Caldwell et al. 2009 pp184)

The other parties contracted into the procurement would form integrated teams to work towards the successful completion of the project mitigating against the risks (NBS RIBA, April 2008). These integrated teams were able to focus on solving problems and working positively and innovatively rather than trying to apportion blame (Prior 2009). The suppliers were guaranteed a margin between 5 and 15% for delivering to at least industry best practice and an incentive plan was established so that suppliers could be rewarded for exceptional performance (Doherty 2008). These incentives were to promote the teams acting in an integrated manner to provide the facility to high standards. The integrated teams headed up each sub-project as a single commercial entity reducing the compiling of profits through the supply chain.

Figure 2: T5 Agreement Approach (Doherty 2008 pp238)

The second element to the procurement system adopted for Terminal 5 is that of the partnering ideals through the supply chain emphasised previously by Egan (1998). Egan referred to this as 'Supply Chain Management' and BAA adopted a framework agreement by reusing the members of the supply chain for the (Turner and Townsend 2011). The approach sought to deliver time and cost benefits associated with repeated works as well as taking advantage of expertise early on in the planning stages of the works before having completely integrated teams for fabrication and construction (NBS RIBA, April 2008). The informal structure with a lack of emphasis on contracts and strong emphasis on behavioural standards allowed for early start ups in the integrated teams, especially with risk owned by the Client. The whole procurement route promoting collaboration rather than hierarchy (Caldwell et al 2009).

For suppliers not performing to the standards required, improvement plans and time frames were put in place, individuals may be trained or removed but ultimately suppliers could not be removed and profits were protected unless repeat offences occurred. It therefore adopts a no blame culture in lieu of the conventional adversarial approach. In 2003 BAA adapted the incentives to the supply chain as well, if exceptional performance was delivered on the works then a third of the incentive went to the supplier, a third to BAA and the final third held as contingency for the programme (Doherty 2008). Disputes only went to adjudication if all informal methods of reconciling the differences failed, with particular emphasis on parties resolving differences with an amicable agreement between themselves. This partnering approach has adopted the principles of Latham's report Constructing the Team (Latham 1994) to adopt a less adversarial culture adopting more co-operative and trusting relationships as well as the Supply Chain Management principles of Egan's report, Rethinking Construction (Egan 1998) with long term partnerships.

Projects Milieu - Performance Measurement

Performance measurement is essential for all construction firms and their projects. Without seeking to measure performance it is difficult to assess how well objectives are being achieved in the realisation of works, central to control on construction projects. The performance measurement therefore is required to be 'fit for purpose' and suit the needs of the project; client desires, frequency of measuring, statutory requirements etc. The essential considerations at the project level are that customer's goals and organisational goals are met. The performance measurement provides control, planning what is to be achieved and monitoring what is actually achieved then mitigating any differences (Horner 2001 cited in Lowe and Leringer 2008).

At the project scale the major constituents of performance measurement are the project management success factors, often displayed in the project management triangle; Time- Cost- Quality (Horner 2001 cited in Lowe and Leringer 2008).

Figure 3: Project Management TriangleTime

Quality

Cost

Horner (2001) cited in Lowe and Leringer (2008) suggests this is a crude method of measuring performance and there are emerging issues to be considered, such as; client satisfaction, functional performance, productivity & waste and Health & Safety. Hethrow Terminal 5 was successful in addressing some of these measures and less successful in others.

The programme management employed upon the Terminal 5 was complex allowing integrated teams to manage their own projects, allow trade-offs across sub projects and accurately track the progress of projects in a consistent framework. The 'earned -value' methodology with an integrated schedule was adopted through Artemis, a customised project control system. The system allows users to evaluate the time and costs incurred on the project whilst also looking at the value accumulated against the original plan. Cost Performance Indicators (CPIs) and Schedule Performance Indicators (SPIs) could then be extracted from the analysis for easy to understand figures on expenditure and time making the project's status clear. The management could review this information and take action. The Integrated Baseline Review allowed for a stand back review of the whole programme of all 147 sub projects combined, held every six months. Keeping the time and cost together became essential part to the management of Terminal 5's build. At the beginning emphasis was on driving down costs and towards completion, the emphasis swung towards time and productivity. The baseline reviews would highlight cost problems in the works and then the integrated teams could work together to get on top of issues (Doherty 2008).

Lean thinking was implemented on Terminal 5 with a great deal of success. The idea of removing all of the waste from the processes in the build was encouraged and developed on the project by the leaders, such as Egan. The principle idea being not to do work that does not add value for the customer (Horner 2001 cited in Lowe and Leringer 2008). This was processed through the integrated project teams undertaking the works, rather than using standard pricing whereby profit is added to the cost of the work, a lean pricing approach was used. The market price is found and the integrated teams seek to produce at a cost allowing everyone in the supply chain to share a profit. This was done through the incentive stimulus from BAA.

The performance from the view of time cost and quality was generally very good. The works were built on time and to budget. No days were lost to industrial action owing to the partnerships established in the procurement, around 88% of staff on site and 60% of Client staff felt that productivity was improved by the Agreement (Deakin and Koukiadaki 2009).

Figure 4: Performance Measurement Statistics (Deakin and Koukiadaki 2009)

Terminal 5 being on time and to budget suggests there was a failure in quality for the ensuing problems after opening. There was considerable effort placed on the quality control however quality assurance was not considered as carefully. The control allows for the product to be of the right quality in the end but assurance will monitor the quality to ensure they are correct first time (Brady 2010). It was mainly a failure of the logistics aspects as opposed to the structure which caused the delays at the opening of the new terminal to business, this would suggest that functional performance of the build was overlooked. Doherty (2009) points out that the quality management process was attained from the car industry. Simple Key Performance Indicators (KPIs) were developed to measure the performance of 18 projects (Doherty 2009). Benchmarking of work was used across the sub projects to display quality expectations for the final project. This is in line with Horner's (2001)(cited in Lowe and Leringer (2008)) recommendation for post-project evaluation, measuring the performance of one site so that it is valuable for the next to spark improvements. This is also supported by the fact that key learning has been adopted from the Terminal 5 experience stating that an earlier approach should be used for the next major works, Heathrow East. "Setting benchmarks and samples is being moved into the design phase, so that before construction starts Client and supplier are clear on what good looks like" stated by Millard (Doherty 2009 pp106).

Health and safety was made paramount on site and it was strictly adhered to. The staff were encouraged to inform management if they felt work was unsafe and the approach was not to down tools but rather to get works, management and trade unions to work together to develop safer methods of working. 'On T5 safety was positioned as a value not a priority, so it always came first' (Doherty 2009 pp100). In delivery terminal 5 killed two individuals, seriously injured 200 (3 times better than industry standard) and caused minor injuries to 6000. The team had developed a true emphasis that nobody should be killed on the project no matter the scale of the work (Doherty 2009). The project left a legacy of always talking and listening to the workforce, never becoming complacent and building health and safety as a value.

Project Milieu - Purchasing, logistics and supply; strategic project and supply chain management in projects

Effective supply chain management encompasses a wide range of commercial issues. Government and industry reports have called upon everyone in construction to undertake works using proactive sourcing approaches. These approaches seek to look ahead to future works rather than to the immediate future when appointing suppliers. This has been particularly highlighted by the reports by Latham (1994) and Egan (1998) (Cox and Ireland 2002 cited in Lowe and Leringer 2008). Generally speaking, the construction industry is very ad hoc with one off projects sporadically emerging, there are very few serial clients providing works of a repetitive nature. This makes it nearly impossible for the adoption of proactive supply chains in construction unlike manufacturing industries were demand is secure and stable. When a project comes to fruition it has a unique and power regime to manage (Cox and Ireland 2002 cited in Lowe and Leringer 2008). Therefore it requires clients to provide a regular demand, high in volume and capable of some standardisation to create and use supply chain management techniques (Cox and Ireland 2002 cited in Lowe and Leringer 2008). This is the approach which terminal 5 sought to adopt.

Cox and Ireland (2002) cited in Lowe and Leringer (2008) set out that buyers and suppliers come together with their own very distinct objectives, often in conflict. The buyer will try to maximise value for money while the supplier is seeking to maximise their returns. To overcome these problems on terminal 5 the integrated teams were adopted whereby the suppliers were assembled into teams to undertake each of the sub projects. This would remove any of these competing objectives and the teams would work together towards the same goals. The annual OGSM (Objectives, Goals, Strategies and Measures) meetings chaired with the senior supply chain present set the targets for the whole terminal 5 'team', everyone involved in the project (Doherty 2008).

Through the supply chain terminal 5 openly sought to adopt the lean principles and partnering ideals that were shown argued by Latham (1994) and Egan (1998). They pursued a transparent and trusting approach, building a long term relationship with suppliers to create a physically efficient supply chain where waste can be reduced in processes (Cox and Ireland 2002 cited in Lowe and Leringer 2008). Under Egan's guidance, BAA's senior managers applied the principles of the Egan report (2008) to improvie the project processes and the relationships with suppliers (Pryke 2009). Though it is difficult to apply it to the project based industry of construction, Terminal 5 drew on its vast scope and scale of work to develop a lean approach in the supply chain ensuring that the same suppliers would be used for works and everyone was focused to the same target. The partnering approach developed lead to a collaborative working team to focus towards efficiencies and remove waste to reap the benefits for all those involved. The Terms of the T5 Agreement set out values of 'teamwork, trust and commitment' (Pryke 2009 pp171) to be assumed by all parties in the works. The partnering approach engaged 80 of BAA's first tier suppliers in the Agreement and with the BAA acting as project manager in the integrated teams, so as to create equality in the team. Therefore all of the unnecessary costs could be driven out, e.g. claims and disputes, as well as increasing productivity (Pryke 2009).

Critics of the lean approach look towards the agile approach to managing the supply chain. This approach seeks to take more of an account of the dynamic marketplace, allowing for changes in demand, requirements for variety, and low volumes of work. The main focus of both of the approaches has been to develop collaborative relationships between buyers and the suppliers based upon trust, transparency and coordination in an integrated supply chain(Cox and Ireland 2002 cited in Lowe and Leringer 2008). This can be clearly seen through the integrated teams introduced for the Terminal 5 build. 'The contractors valued the openness and clear structure, and that there were places where information would be shared and genuine debate could take place' (Doherty 2008 pp 253). The approach saw the rejection of the traditional adversarial relationships for an approach which added value through collaboration and integration, providing cost savings to the project.

Figure 5: Collaborative Cost Management Model (Pryke 2009 pp172)

Supply Chain Management was used in a scaled down form. The project team took advantage of so many projects combining to form the mega-project of Terminal 5. This meant that there were a number of following sub-projects taking place under the same project allowing scope to provide the frameworks established. The BAA could link the buyers and suppliers in the chain to focus their supply strategies on delivering functionality improvements and lower costs as per Supply Chain Management (Cox and Ireland 2002 cited in Lowe and Leringer 2008). Collaboration is fundamental to the success and this was adopted by ensuring follow on works were retained in the same supply chain, to develop cost improvements as works progressed and rely on the team as a whole to provide the value engineering. With the capability of standardising much of the works and especially the requirements, T5 organisers could benefit greatly from the implementation of a proactive approach. It required BAA to have both the internal resources and capabilities to develop the supply chain at the first-tier (Cox and Ireland 2002 cited in Lowe and Leringer 2008). By ring-fencing the profits of the supply chain, BAA made sure external factors were limited and allowed the integrated teams to work proactively to achieve savings and efficiencies, as shown in Pryke's (2009) Cost Management Model above. The BAA could supply a regular supply of work and relationship with the suppliers. By providing the incentives for exceptional work and future works on the project, BAA encouraged the supply chain to work more proactively and harmoniously to achieve the realisation of the whole project.

Conclusion

The Terminal 5 project has left a lasting legacy for major public procurement in the UK. The project switched the emphasis that only traditional adversarial relationships can provide sufficient protection to the Client. Taking on a relational approach and developing integrated teams with the supply chain through partnering and Supply Chain Management reaped rewards for the BAA. By taking all of the risk, BAA enabled the integrated teams of suppliers to work collaboratively towards common goals. Successful performance measurement, through Artemis, concentrated on Time, Cost and Quality ensured that the Client maintained performance of the suppliers given their limited risk. This lead to a forward thinking approach to fix the problem at hand rather than protect parties own interests. In the words of Riley, commercial director of the project, the traditional procurement for public works would have made the project ""1-2 years late in completing, been 40 per cent above original cost estimates and we would have killed six people" (Wolmar 2005 pp1). Terminal 5 has provided a successful alternative for future Major projects with plentiful workloads to consider.

Word Count: 3,300 not including titles, abstract or referencing

References:

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