The construction sector accounts for an annual spend of ~US$10 trillion globally (13 percent of global GDP) but productivity improvement has trailed that of other sectors for decades. The sector is at a crossroads with an estimated US$1.6 trillion-dollar global opportunity to close the productivity gap. With so much to gain, the construction industry is on the brink of a productivity revolution and innovating the contracting model has been identified as one of the potential levers with the highest 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 will have the largest impact on building trust and improving owner-contractor relationships and performance. Increased collaboration can help align stakeholders, share risk, inspire innovation, and establish outcome-focused measures of progress.
On 16th October, we hosted a peer-to-peer roundtable discussion with senior leaders serving as owners, contractors, investors and other professionals to explore the latest research and identify tangible steps to increase collaboration across the project lifecycle. Key themes that surfaced from the GII Johannesburg roundtable are summarized below:
- Align on a common understanding of collaborative contracting (CC). CC is a structure where key delivery partners (the owner, the engineer/architect and the contractor) work in concert on the development of the project scope, schedule and budget. Key elements include:
- Single contract between all critical delivery partners
- Joint development of project scope, budget and team members prior to final agreement
- Governance by joint management structure of project team with decisions based on what is best for the project
- “No-fault” clause requiring members to forfeit rights to claims against each other
- Shared risks and incentives among all parties—the contractor and engineer’s profits are fully at risk; the owner agrees to pay for all actual project costs, including overhead
- All costs and other project information are maintained in a transparent manner, with all parties having equivalent access
- Challenge what is possible. The concept and benefits of CC have been known for decades, yet many sectors have been slow to adopt it due to perceived industry barriers (e.g. low levels of trust, tight margins, under estimation of resources required, scope inefficiencies, etc.). Early adopters of CC (e.g. health care and consumer packaged goods) are seeing improvements in performance—20 percent in schedule performance and 15 percent in cost performance.
- Start with a bold vision from the owner. Innovating the contracting model will only be successful if it is led by the owner (as part of the C-suite strategy) and built into the entire project lifecycle and culture. Bringing the project team in early to align on the project scope, schedule and an accurate budget is critical to success. This helps set the rules of engagement, building trust and transparency into the process, and creating a contract that is perceived as a fair deal for all parties.
- Adopt contracts that incorporate risk sharing and clear requirements. There is not a “one size fits all” solution, but changes in procurement and contracting models are vital to achieve a more collaborative and outcomes-based approach to projects. Contracts that include appropriate risk sharing, set clear expectations, establish a problem-solving mentality, and offer financial incentives for each stakeholder will go a long way to building trust and improving performance.
- Shift mindsets from individual goals to project outcomes. Collaborating across the value chain effectively requires that all participants shift their thinking from their own individual goals to holistic project outcomes. Doing so will enable all parties to focus on solving problems and roadblocks in the best interest of the project rather than avoiding and transferring blame. This approach will facilitate best practices being institutionalized by the project team.
- Involve stakeholders throughout the value chain. Moving the industry towards collaborative contracting has tremendous upside but will require action across the full value chain. Siloed solutions have proven to fail in complex supply chains—and construction supply chains are among the most complex. Both the public and private sector will need to work together to rethink the contracting model, focus on outcomes, share risk and incentives, and build trust.
- Learn from Integrated Project Delivery (IPD). IPD has been successfully implemented in over 150 projects around the world, in both the private and public sector. IPD contracts requires a shift in the contracting structure, the project operating system and the culture. One needs to create an environment and ecosystem of stakeholders that say, “If we run into a problem, we will solve it”, with all parties equally incentivized to do so.