Contracting Excellence for Major Capital Projects and Services Projects by Jacquie Bran

Asset owners need absolute certainty that contract selection is best for project in current marketplace

Alliance Contracting IQ and IQPC recently collaborated to research with 50+ asset owners (both public and private sector) to determine trends, challenges and opportunities with infrastructure investment for major and services projects nationally. What transpired from this in-depth industry research were a number of surprising and important trends that demand attention.

The demand for infrastructure development exists across Australia, across both public and private sectors and currently involves projects valued at billions of dollars.

However, a number of factors are currently influencing the funding and procurement of those projects and increasing pricing pressures significantly. External pressures include, but are not confined to; disaster recovery responses, the mining and LNG boom, an impending skills shortage, the release of state budgets, carbon tax and a shift in the policy environment for government towards overt price contestability in a drive to deliver certainty of outcome and value.

Getting procurement right and selecting the most appropriate (best for project) contract model is therefore critical to successful project outcomes for major and services projects.

The pressures listed earlier have lead to an increase in scrutiny and rigor across procurement strategies and a heightened requirement for all asset owners to ensure they select the most appropriate contract and procurement strategy to deliver value against objectives when investing funds into infrastructure.

Responses to the research from asset owners included a variety of challenges; however these challenges were – in the main – grouped across a selection of categories which we will explore later in more depth.

To provide context around the nature of these challenges the following selection of anonymous answers highlight of some of the responses we received when questioning around decision making and investment for major and service projects.

What's inhibiting successful project delivery?

Owner 1: “The Selection process has changed and more and more competition is evident and required – however I’m not sure how to handle this effectively for the best results.”

Owner 2: “We have to completely re-assess our delivery models in the current marketplace which means preparing our strategic capital plan is a real challenge.”

Owner 3: “We have to do more for less. Be more efficient and cut out the waste. This will be achieved by driving lean process management and business process improvement across the whole business – and that starts with contracting and procurement.”

Owner 4: “We have to balance expediency with quality to deliver projects and most of the time that can mean our business case is done on the back of a postage stamp. It’s imperative that we get our business cases right going forward which in turn will mean our procurement is best practice and the right contract models are selected.”

Owner 5: “It’s not about how we do anything – it’s about why. Our challenge is how we can achieve proper analysis and planning to ensure we go through the procurement process properly – otherwise we simply won’t get the desired outcomes for all involved.”

Owner 6:“We’ve just got to focus on getting the job done. It’s that simple. We need to cherry pick the best bespoke design option and follow through to delivery to get the results we want.”

It is a well established fact that the ability to influence cost, value and efficiency can diminish as you progress through project phases and so it is imperative that asset owners spend time early upfront in the planning stage to significantly impact value delivered, performance and the alignment of objectives. With this as a given, for the sake of this research paper, we will now explore the categories of challenges outlined anonymously by the asset owners / clients questioned in the research and thus the opportunities to better influence outcomes.

Category Breakdown

External Variables and Influencers; including skills shortage and Disaster Response 42% respondents cited as a challenge
Budget Constraints, Reduction of Waste and Focus on Efficiency 87% respondents cited as a challenge
Contract Framework Variations and Risk Profiling 63% respondents cited as a challenge
Project Characteristics, business case creation and procurement analysis 70% respondents cited as a challenge
Confusion and uncertainty for the future 37% respondents cited as a challenge

External variables and influencerson decision making included aforementioned challenges such as elections and the setting of state budgets. However, the largest proportion of respondents cited two main external factors as priorities; disaster recovery response & the skills shortage.

With respect to disaster recovery response – most of those surveyed commented on the challenge of delivering new contract prototypes in a short turnaround whilst also ensuring that they are best for project and appropriate. In these instances commentary included the challenge of balancing expediency with quality and the reality that more often than not the business case simply has to be as good as it can be within the time constraints. Not an ideal scenario but a very real one. It’s certainly a balancing act. With a lot of money being spent upfront on disaster efforts agencies have to ensure that they are delivering quality assets that show significant improvement on the original / existing infrastructure and also that they will also deliver value throughout the lifecycle of that asset.

The skills shortage is evidently also a major concern for many agencies and asset owners with many commenting that it is ‘the elephant in the room’ and demands a proactive and longer-term response.

What is clear is that – without any major change – that we will soon be competing for the same resource pool, if we are not already doing so. Collaboration as a form of contracting has become so engrained and successful that the demand on owners and non-owners for talented and experience resources has risen exponentially and continues to rise at an unsustainable rate. The reality is that there simply aren’t enough knowledgeable project team members to go around and the likelihood is that the performance of projects will begin to suffer as the talent is spread more and more thinly. The upshot of this scenario is that ‘c’ and ‘d’ teams are plugged into projects without the level of exposure or experience required to deliver value against outcomes as expected by the owner client. Clients need to demonstrate value for money – but with less and less ‘quality’ talent around to deliver the job…many are questioning the realism of this expectation.

Even the solutions sourced thus far; bringing overseas talent through immigration to deliver on the job, aren’t quite the panacea they might first seem to be. Overseas ‘plug-ins’ to projects are generally exposed only to harder dollar and traditional styles of contracting and so require further / intense training when they arrive.

Next on the list is the all-of-government drive for efficiency gains,reduction of waste, and improved productivity and performance. In a resource constrained environment, everyone has to do more for less whilst retaining quality and managing risk. Some commented that the old ‘win-win’ of alliances past has lost meaning and traction in the current environment. What does success really look like these days? It seems that no-one is really sure. The perceptions of pain and gain share have evolved to both have negative connotations, with a handful of non-owner participants commenting that ‘we are damned if we do and we are damned if we don’t.’ It’s hard to instill and drive high performance in the shadow of this uncertainty. Generally there was agreement that we need to re-frame and re-assess what success looks like and to re-align owner and non-owner expectations.

With regards contract framework variations and risk profiling a large proportion of respondents admitted they would like more exposure to the results and processes from other states in order to better benchmark. However, they freely admitted to a lack of access to this type of insight. Many respondents were in a stage of re-assessment and had a desire to challenge business as usual paradigms in order to select the appropriate contract strategy. This included better comparison around competition, the selection process, contractor incentivisation, governance and more.

It was generally agreed that as an industry we need to better leverage the lessons and principals of collaborative styles of contracting such as alliancing to create bespoke and tailored solutions against business and project objectives. This process of refinement and fine-tuning will ensure that contract and procurement strategies remain relevant in the current marketplace.

As you might then expect, there are more and more examples of where the benefits of alliancing are being captured and deployed in a greater variety of circumstances and cost structures. This brings the accepted benefits to a far wider reaching range of contract strategies and projects. However, there was also commentary that we must be cautious in how we apply these benefits to ensure that the contracts are supporting the required behaviours.

As a final point within this category there were challenges voiced around how to balance ‘enough’ competition with the ‘right’ amount of certainty. As an additional challenge many commented that this might not even be relevant any more. In summary, there was discord around whether we should actually be considering the relevance and impact of competition considering how restrained resources are. Something to mull over.

Many non-owners and owners agreed that there is a need to better consider upfront what is right / best for the project. Owners admit that they need to better balance competing strategy objectives and rationale. Most importantly – they need to remember that it is not about ‘how’ we deliver this project it’s about ‘why’. Human nature leads us to make preferential decisions and somehow we must remove ourselves from the subjectivity of decision making and instead make objective decisions executed on the basis of proper procurement analysis, strategic need and value and contestability. More rigour in this process is critical against the backdrop of the current environment.

Finally, the umbrella challenge facing everyone is the general sense of uncertainty and confusion prevalent in the marketplace around what the future holds. Are we focused on the opportunities or just the ‘work-arounds’?

There are a group of owners who literally don’t know what’s next…which correlates to a group of non-owners who don’t yet know what they will need to be prepared for, resource or respond to.

All agreed that an evolutionary message is suitable to the state of play and that we have to accept that market is evolving and changing and seize the opportunities that this presents despite the challenges I have outlaid.

How the industry does this – remains to be seen – but as we have seen in history and nature time and again – challenges always lead to opportunities, innovation and change. In the famous words of Charles Dickens…

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us.”

All that remains is path that we choose to take.

About your Author: Jacqueline Bran

Jacqueline Bran is the Global Head of Collaborative and Alternative Contracting for IQPC. She has been working in Alliance Contracting for over 5 years and heads up our research and contact arm for this part of the business. This constitutes the coordination of our two annual events, the management of Alliance IQ (www.alliancecontractingiq.com) and also the regular consultation with an industry led alliance innovation and advisory board.

Since 2005 she has been actively researching within the industry and building her knowledge of the contracting environment as regards major and services projects. She continues to work closely with industry to ensure the research, events and industry portal remain dynamic and deliver value for money to our event audiences.

The research shared in this article was specific to the next event in the summit series she directs: www.contractingexcellence.com.au. If you are interested in this subject matter or could benefit from indepth training on the challenges cited in this article please call 02 9229 1000 or email enquiries@iqpc.com.au