How collaborative contracting can lead to successful projects

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Amid labor and supply chain challenges, two models of collaborative procurement can result in on-time and on-budget construction projects.



construction

Public works projects are facing tighter schedules, tighter budgets and higher risks than ever before. Up until recent years, a significant increase in competition both locally and internationally has resulted in low bids from contractors and often a misalignment of project understanding and risk. This has led to poor project results in many large projects. Coupled with the current supply chain and labor constraints, it is harder than ever for contractors to ensure the profitability of a construction project.

In a resource-constrained environment such as we are witnessing in the construction industry today, contractors must be selective about the projects they pursue and the contract models they agree to.

Similarly, many projects, driven in part by stakeholders’ impatience, have faced poor project readiness during the planning and pre-construction phases, leading to greater delays and increased setbacks during construction. The associated risk for both contractors and project owners continues to grow exponentially as the size, scope and complexity of public works projects continue to increase.

Because of this, collaboration between contractors and owners becomes even more important – from project planning to delivery – to reduce stress and achieve more predictable results. According to Dodge Data and Analytics91 percent of contractors and owners believe that increased collaboration reduces risk and uncertainty in construction projects.

When done right, a delivery model that allows for a true partnership and risk-sharing approach can transform the very nature of a project, including accelerated timelines, more effective means and methods, and a more successful construction project from concept to completion.

While “hard bid” contracting models will always have a place in the industry, for some types of projects and clients there are two forms of collaborative contracting that could be seen as trendsetting:

1. Two-tier cooperative contract models. Operating with this model, contractors are appointed during the pre-build phase under a service level agreement. This allows contractors to work with the owner to address specific aspects such as design, key challenges, and pricing—all before the main construction contract is signed.

Examples of this approach are:

  • In the well-known construction manager risk model, the contractor works with the owner and design team to define and delineate the project during a pre-construction phase, and the construction manager eventually develops a firm bid to deliver the project on an open-ended basis. This model often involves the use of a maximum guaranteed price (GMP) where the site manager must manage and control costs in order not to exceed the GMP to mitigate liability.
  • Another example of growing interest is the progressive design-build model, which involves a full design-build team (with the contractor-appointed design team) in the early stages of the owner’s project development to provide pre-design and programming services before a Firm decision is made Price is negotiated.

2. Cooperation contract models for relationships. In these models, there are numerous options for sharing project risk between contractor and owner, often resulting in a “paradigm shift” from traditional procurement. Instead of allocating and pricing risk from one party or another, risk is often pooled. The goal of this approach allows for a win-win scenario and helps to avoid disputes and problems between the parties.

These models are very new to North America but are widely used in the UK and Australia. Some of the better examples are:

  • The alliance model, which reverses the competitive approach of the traditional project delivery mode as well as that of public-private partnerships. The coalition model relies on collaboration between the project promoter and private sector participants, with an emphasis on collaboration and often with long-term incentives developed through a program-wide approach.
  • The Delivery Partner model combines elements of the Construction Manager at Risk, Alliance and Engineering, Procurement and Construction Management (EPCM) models. This model allows a client to supplement in-house project management capabilities with experienced contractors acting as supply partners to assist with project planning, programming, design management and construction management services.

While collaborative contracting can work successfully in different types of projects and situations, it’s important to be aware of the pitfalls. It can take a lot of management time and energy for a contractor to coordinate with owners during the pre-construction phase and without a secure future conversion into a definitive construction contract it can be a difficult sale. On the other hand, owners often navigate internal governance and legal constraints, which can make it difficult for them to become deeply involved in the process, and owners must weigh the benefits of securing contractors’ expertise in order to Mitigate risk and design a project up front against the potential loss of competition from a hard bidding model.

Still, it can be very successful when collaborative contracting is used on the right projects (after conducting procurement option analysis and market testing) with the right mindset of both the owner and the contractor. Setting expectations between the owner and contractor is critical as it encourages alignment early on and prevents hiccups down the road.

Overall, the effective use of collaborative delivery models can reduce inefficient pricing, improve risk allocation, reduce project delays and ultimately increase value and improve the likelihood of project success during construction.

Erin Roberts is Global Engineering and Construction Leader for Ernst & Young LLP. Sean Boyd is Senior Manager, US Infrastructure Advisory, at Ernst & Young LLP.




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