CONSTRUCTION JOURNAL

How to make collaborative procurement work

Complex infrastructure projects demand collaboration – so choosing the right procurement option is critical. The second of three articles on the subject offers some advice

Author: Andrew Dixon

07 July 2021

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Public-sector owners worldwide have been slow to accept collaborative procurement as a viable option for contracting complex infrastructure, as the first article in this series discussed. But increasing complexity and uncertainty are forcing them to accept that traditional approaches are no longer sustainable, opening the door to more collaborative options.

To collaborate successfully, public-sector owners need the organisational capability to select, establish and administer suitable contracts. This needs the right skills, governance processes, partners, agreements – and, importantly, the right culture. Presently, owners' capabilities in these areas are aligned to the traditional approach.

Collaborative capability

Without this specific organisational capability, though, owners adopting collaborative approaches to procurement are likely to find that the outcome falls considerably short of what was anticipated.

The following are some examples of this.

  • Adopting a target cost contract with a 50–50 pain share/gain share in circumstances where the delivery environments will be dominated by changes in scope. The effect of these changes typically become indistinguishable from the contractors' performance issues leading to disputes over time and money.
  • Selecting an alliance or enterprise type contract when the partners have only limited reliance on each other. For example, the project requires only some key programme activities to be coordinated between the participants – rather than a deep integration of their activities – resulting in an integrated team being created when it is not needed, inevitably complicating the decision-making process.
  • A lack of organisational commitment and understanding of collaboration at senior management level, so when the contracting parties need to pull together at tough times management instead encourages self-interest which pulls them apart and a blame game ensues.

These are hard lessons to learn – particularly when the public sector turns to collaboration to improve its poor record of successfully completing complex infrastructure projects, only to suffer the same or worse outcomes. It is no wonder some clients go straight back to the comfort of what they know so well, the traditional approach.

Yet the need for collaboration on complex projects remains; the lesson that should be learned is that collaborative procurement works, but only when it is properly implemented and supported. Obtaining advice from those who have successfully taken this approach could benefit owners before they set off down this path.

What are the options?

With the necessary organisational capability in place, the next step is to select a collaborative procurement approach appropriate to the qualities of the complex projects.

With traditional procurement, the parties' relationship develops directly from the risk allocation philosophy, which on complex projects is invariably adversarial. With collaborative procurement, the opposite is usually true: establishing a relationship for working effectively on the project becomes the primary aim, so the procurement process and contracts are structured to support this.

There are many other dynamics to consider too, some of which may hold the desired relationship back. For example, contractors with the necessary collaborative skills and processes may not exist in the construction industry where the project is located – for example, most contractors in West Asia have very limited experience of collaborative procurement. In such cases it still makes sense to identify the optimal relationship for successful project delivery, this allows the effect of any necessary constraint to that optimal relationship to be understood, planned for and managed.

Flexible, collaborative contract options have been developed allowing for the procurement route to be adapted to the particular circumstances. However, caution is still necessary because the options, although labelled as collaborative, may not achieve what is advertised.

The range of collaborative procurement options, frequently ranked low to high in literature in terms of the degree of collaboration they can generate, are commonly as follows.

  • A lump-sum contract or bill of quantities with partnering or collaborative clauses, which is essentially a fixed price or series of fixed prices for a defined scope of work or outcomes.
  • Target cost for a defined scope of work or outcomes, in which case the actual cost is compared to the target and any underspend or overspend is shared on a pre-determined basis between the owner and contractor.
  • Cost reimbursement, with an incentivised fee either for a defined scope or outcomes in which case the owner pays the contractor the cost and a pre-determined variable fee is added depending on outcomes or key performance indicators.
  • A delivery partner, usually for outcomes or as a service, where the appointed delivery organisation acting on behalf of the owner is paid a management fee, which will typically vary based on the outcomes achieved.
  • Enterprise approaches including alliancing, integrated project delivery and integrated project insurance where the owner and contractors enter into one contract, share the risks and deliver the project together through a single team.

Creating an efficient project delivery environment must be a primary objective of any owner's procurement strategy, so the degree to which each of these options best facilitates this should be the basis for its selection. For complex projects this efficiency becomes a function of the speed and quality of the decision-making process.

The record of the traditional approach shows that the parties' failure to align themselves commercially restricts this decision-making because it promotes self-interest when decisions need to be made. Therefore, selecting a lump-sum contract with a partnering or collaborative clause for a complex project, while better than nothing, is likely to change little in a transactional relationship if trouble arises, because there is no incentive to solve issues jointly.

'Establishing a relationship for working effectively on the project is the primary aim'
More in this series
Procuring infrastructure collaboratively

Collaboration has clear advantages in procuring complex public projects – so why do traditional approaches prevail? Andrew Dixon explores why the transition is so slow

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Selecting the right approach

Not all projects require collaborative relationships. Where parts of a project can be worked on discretely, without the involvement of the owner or related stakeholders, most decisions can be taken unilaterally by the contractor.

The project may well be a complex one with considerable uncertainty, but this can be dealt with using the appropriate commercial model; for example, cost reimbursement with a fee that varies based on the measurement of key performance indicators, or similar.

However, one distinctive feature of complex infrastructure is that there are multiple parties at every stage of a project, all of whom are essential. Given that the project life cycle includes design, methodology, installation, construction, assurance, operations and maintenance, decisions about the approach taken in any one stage will affect the others.

A recent report by the Institution of Civil Engineers highlighted that infrastructure and its construction have become so complex that conventional project management techniques are becoming obsolete. This is because infrastructure now typically represents a system that combines human, digital and physical components, demanding an integrated approach to projects, often called systems integration.

The presence of these multiple parties – including the owner, operator, maintainer, regulator, funder, users, adjacent asset owners, contractors, designers, suppliers and subcontractors – all of whom have their own objectives to fulfil at various stages in the project life-cycle, creates a high degree of complexity and uncertainty. Therefore the owner, when procuring a contractor to operate at the centre of the design and delivery of this system needs to select an organisation that has the best people with the skills, the processes, systems and culture to lead and perform efficiently in these challenging circumstances.

Collaboration among these parties occurs in the form of constant decision-making, problem solving and innovating with the exclusive aim of achieving the best outcome for the project. When this team is operating at its most effective, it does not matter which organisation people belong to, because the project team itself becomes an organisation of its own.

The life-cycle approach requires the team to be formed as early as possible if it is to develop robust plans and work effectively throughout. Involving contractors this early in the project can be challenging for owners, because their processes and accountability are aligned to the traditional model of preparing a reference design, holding a competitive tender process and selecting based on the lowest price. Procuring contractors through qualitative-led assessments – measuring the desired collaborative behaviours, culture and processes – is clearly more subjective, and therefore more demanding. But when this is done correctly, it can add tremendous value to the project.

In this type of environment, when the right organisations – and their people – are selected at the right time and the team is appropriately incentivised to achieve clear and realistic project objectives there is a solid basis for the team to perform well. But as with all projects, effective leadership, governance and processes will always remain prerequisites for success.

'When the team is appropriately incentivised to achieve clear and realistic project objectives, there is a solid basis for it to perform well'
The option for complex infrastructure

Drafting contracts for certainty when certainty is largely absent is not realistic, but that has not deterred attempts to do so, evidenced by the continued use of risk allocation contracts for highly complex infrastructure projects. Instead, we must ensure flexibility is provided by drawing up a contract that offers guiding principles to keep the parties on track.

As for the collaborative procurement options for complex infrastructure, it is difficult to imagine successful outcomes unless there is an integrated team that is able to make decisions in the best interests of the project. There are a number of ways this can be contracted, but they key is to remove risk allocation which always creates commercial misalignment, the very reason why the traditional approach does not lead to positive results for complex projects.

Such complex projects bring together thousands of people from multiple organisations; it is therefore extremely difficult for an owner to create a joined-up decision-making unit. The more integrated the team, therefore, the more likely it is the project can be completed on time and to budget, even amid so much uncertainty.

Andrew Dixon FRICS is commercial director at STRABAG
Contact Andrew: Email | LinkedIn

Related competencies include: Leading projects, people and teams, Procurement and tendering

More in this series
Drafting contracts to cope with the unknown

Contracts for complex infrastructure projects in the UK tread a challenging path between prescription and pragmatism. As a result, the industry is moving towards more collaborative arrangements, as Shy Jackson explains

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