Risk allocation has been a hot topic within the construction sector for as long as I’ve been in the industry.
Over the past decade, this issue has climbed the ranks of the hot topic list and is now often cited as a top three issue within the construction industry. This isn’t just local to North America — it is a top issue globally.
The overarching position is that owners often impose too much risk on construction contractors and design consultants through a design-build delivery model. As evidence of this position, several studies have been conducted over the past 10 years that clearly show the delivery models (and contracts) currently being used in much of the world’s construction projects are not delivering when it comes to budget, schedule and expected benefits.
For example, in a recent Harvard Business Review article, Bent Flyvbjerg and Dan Gardner cite that a recent study looked at 16,000 major projects, and only 8.5% of all these projects were done on time and on budget. What’s worse is only 0.5% of all these projects delivered the expected benefit. Basically, 99.5% of all projects failed to deliver the expected outcome of the owner. Granted, the construction industry has to deal with more unknown unknowns than most industries, but it is still seriously flawed that 99.5% of construction industry clients feel they did not receive what they had expected. There is clearly room for improvement here.
So, given this, what is being done to improve customer satisfaction within the construction sector? Well, another hot topic (often in the top 5) is the growing use of new delivery models. Several of these new delivery models are being brought forward with a much greater degree of collaboration between the three key stakeholders of the construction project: 1) the owner, 2) the contractor and 3) the designer. Many in the construction sector have often used the term “siloed” to describe the current state of the industry, and these new collaborative delivery models propose to de-silo the industry through collaboration.
The following graphic illustrates the spectrum of delivery models and the degree to which each model brings collaboration into the contract:
Using a more collaborative, all-stakeholder, early-involvement delivery model (and contract) is a great idea. However, there is only one problem — these models are not being adopted at a very rapid pace globally. The overwhelming majority of project delivery models utilize either a bid-build or design-build framework, which are the two main delivery models that drive lower collaboration (or more siloes).
What can be done to grow the use of these delivery models? Well, clearly the owner community needs to educate themselves about these delivery models to become more comfortable with them and thus adopt them at a more rapid pace. Education does take time, but perhaps a better path is digging deeper into these models to see if any of the collaborative practices housed within these collaborative contracts can be applied to traditional bid-build or design-build delivery models. The idea is to use select practices or clauses from these collaborative models to allow the owner to “dip their toe” into the collaborative project delivery model pool.
To that end, the following are some of the top practices/clauses that could conceptually be ported to the more traditional delivery models, which should allow the owner a more measured approach to experimenting with collaboration within their contracts:
- Collaborative Behavioural Assessments. In the bid stage, utilize these collaborative behavioural assessments of potential bidders (utilized in alliance contracts) to determine which team will work best with the owner.
- Co-locating of Stakeholders. Require the key stakeholders to the contract to physically work together as the project is being carried out. Physical proximity breeds collaboration.
- Contingency Sharing. Open contingencies up to major construction stakeholders using “skin in the game” or a “carrot in the game” to drive better collaboration and alignment.
- Conflict Avoidance Procedures. Establish procedures that avoid conflict and bring out the issues in a solutions-oriented manner.
- Alternative Dispute Resolution. Utilize the power of less adversarial dispute resolution techniques to drive better collaboration.
The above are only fi ve examples of practices or clauses that could be utilized in traditional contractual models to allow owners to “test drive” collaborative practices within their contracts. There are several others, and all construction stakeholders should be encouraged to seek out the entire inventory of collaborative practices/clauses that they can bring to their projects. In addition, all stakeholders should utilize performance metrics as they increase the project’s collaborative ingredients to evidence the impact on productivity and risk. Early signs from the insurance sector indicate that these collaborative practices are reducing insured losses. By capturing and collating other performance metrics, owners could compile the necessary evidence to embrace collaborative contracting practices more fully.
Written by David Bowcott, Managing Director, Construction Specialty Division.Download Full PDF