The construction industry is at a crossroads. With an annual global spend of ~US$10 trillion (13 percent of global GDP), the decades-long lag in productivity improvement has created a $US1.6 trillion opportunity for improvement. Among the many opportunities to revolutionize productivity, a McKinsey survey showed collaborative contracting and technology to be among those levers with the greatest potential impact.
The relationship between owners and contractors is structurally challenged, often resulting in contentious projects that run over time and over budget. In a GII poll of industry leaders, 33 percent identified poor stakeholder alignment as the biggest cause of project failure and 46 percent said that win-win incentives have the largest impact on building trust and improving performance. Increased collaboration can help align stakeholders, optimize risk-sharing, inspire innovation, transparency and establish results-based measures of progress.
On November 14th, we hosted a peer-to-peer roundtable discussion with senior leaders serving as owners, contractors, and other professionals in the oil, gas and chemical processing sectors. The goal was to explore the latest research and identify tangible steps to increase collaboration across the project lifecycle. The key themes that surfaced from the GII Houston roundtable are summarized below:
- Combine technology with collaboration to get the best results. Significant improvements in technology and tools have been developed in the last decade, but their benefits cannot be fully realized without increased collaboration between owners, contractors and suppliers
- Invest time upfront to select the right partners and build trust. Creating a compatible project team with the capabilities and culture to succeed is a key success factor for collaborative project delivery. Owners can still use a competitive bidding process to select contractors, but pricing should be less important than shared values and a cultural fit. Once the team is established, building trust amongst the project team is paramount. The behavior and mindsets expected on the team should be reflected in the contract which can include clauses that handle conflict resolution. A third party can be helpful in the role of “honest broker” to facilitate selecting the team, building trust, and aligning incentives.
- Establish the total project cost baseline and project plan as a team. Using a transparent process, jointly establish the target cost, execution plan, and schedule. Each party’s objectives need to be clearly stated, and associated performance metrics (KPIs) established. Methods and incentives for sharing risk and the reward for outstanding performance must be congruent with business goals. An example was cited where the economic value of an early project completion to the owner was almost equivalent to getting the facility for free, yet the contract terms emphasized controlling costs. Unrealistic and aggressive cost targets and inappropriate allocation of risks should be avoided.
- Change starts with the owner. The owner must initiate, commit to, and drive the collaboration effort. A collaborative contracting model will only succeed if it is led from the top down and built into the entire project lifecycle and culture. This commitment must be vertically and horizontally integrated, and consistent from executive level down to the project management, engineering, and procurement organizations.
- Recognize and remove the barriers. There are many barriers that constrain a project’s ability to pursue collaboration, including an antagonistic culture, fixed mindsets, lack of transparency, or long-standing procurement practices. For example, in some organizations, procurement has a stronger say in selecting contractors than the project team. Financed projects may be required to use fixed price contracting, and statutory requirements can mandate the selection of the lowest bidder. Such choices may not be in the best interests of collaboration and project outcomes, and experience suggests these predefined approaches can be modified when proactively addressed with stakeholder enrollment and education
- Use the contract as a tool and not as a weapon. Many practitioners see the contract as something to be used when the project is in trouble. Collaborative contracting is the opposite; the contract is used as an essential tool to overcome barriers, capture commitments, and hold each partner accountable. For example, lean principles can improve project performance, but the successful implementation requires appropriate contract terms to define which, who, and how those principles will be implemented on the project.