When I initially thought about writing this piece, I had a title ‘Why Do Construction Projects Fail?’ in mind. But after careful consideration I decided that if I had a negative mindset I’d never achieve what I was hoping for. I wanted to look for successes and see how construction projects in the UK were successful and link that back to my own experiences and see if it correlates.
It’s a well-known fact that construction projects are abundant with risks and managing those risks can even be a full time role for someone on larger projects. The types of risks that are frequently found on construction projects can be as follows:
- Time risks - through over-run of programme
- Procurement and contractual risks - gaps in documents, speed of placing contracts - leading to errors, lack of understanding by teams administering the contract
- Quality risks - correct specification of materials, right people for the right job
- Safety risks - 43 deaths in the Construction Industry last year, 2.2 million working days lost through illness or injury
- Scope and change management - what levels of change expected post-contract? Are there processes in place?
- Design process and ownership - is it a client design, or Contractor, or both? Will the design be novated at a later stage? What is the level of responsibility for the designer ‘reasonable care & skill’ or ‘fitness for purpose’?
- People management - do you have sufficient skilled resources?
- Cost Management - every party has a budget - is it at risk? Are you covered?
- Interface risk - who is aligning designs and contracts to ensure all bases are covered?
As mentioned above, managing those risks can be a full time role, but ignore those risks at your peril. If you neglect the management of risks on a construction project, then this can lead to one or more of the following:
- Increased costs
- Loss or reduction in profit
- Damage to brand or reputation, and at worst...
- Disposal of the business or insolvency
- Legal disputes
One way to overcome this is to ensure a suitable operable Risk Management process is in operation throughout the lifetime of the project, that isn’t cumbersome post-contract. Risk management doesn’t start the day you arrive on site; it has to happen well in advance of that date in the planning stages.
Risk management involves the identification, mitigation and evaluation of risks. Part of the risk management process is done through the procurement process, which can alleviate large portions of risk just by ensuring the right form of procurement and contract is used. The main drivers in choice of procurement come down to the simplistic triangle model of time, cost and quality.
When deciding on a procurement strategy, you need to ask which of the drivers are the most important. It is easy to think that the answer should be all 3, but that isn’t always achievable, something has to give. If it is considered that quality and price are the most important, then a traditional lump sum procurement method with a form of pricing schedule (e.g Bill of quantities) would be suitable. If, on the other hand time is more of the essence then Design and build would be a more favourable route.
Selecting a procurement route alone will not solve all of your risk problems; the next step is to ensure that you are using the right form of contract. There are many standard forms of contract out there produced by organisations closely linked to the construction and engineering industries, revised and amended over decades of experience. One of the reasons that risks increase is that the standard forms are amended by clients and/or their lawyers. I’ve also seen amendments due to a lack of understanding of a form of contract, been modified into a more familiar form and end up with a hybrid of the two that doesn’t actually work and only increases risk for the parties involved.
When researching for this paper, I looked into the project that I remember as being successful in the past 20 years, which was Heathrow Airport Terminal 5 (T5) and wanted to understand more how it was considered to be successful. British Airports Authorities (BAA) thought outside of the box when it came to procuring and managing T5. At the time it was the largest construction project in Europe with Naysayers saying that it would be: late, £1bn over budget and have 2 deaths on site. BAA reviewed a number of large UK construction projects as a lessons learned exercise, particularly in relation to what went wrong on those projects. They decided to move away from traditional styles of procurement and contracts and drafted their own focusing on a number of areas to aid them achieving their targets of finishing on programme and within budget:
- Trusting and co-operative relationships
- Partnering approach
- Highly integrated teams
- Risk ownership by BAA
- Proactive Risk Management & sharing of cost savings to incentivise the supply chain
- First and second tier packages let on the same terms
- Trust between all parties
- Transparency of costs
The T5 Contract aimed at minimising conflict, by creating incentives for the positive problem solving behaviours that would not allow things to go wrong in the first place. BAA moved away from choosing lowest bid suppliers, who looked to recover monies post contract, as this promotes fallouts and disputes, an expensive and negative process that leads to delays to the programme.
As mentioned above, BAA held all of the risk provisions, so contractor prices were reduced and they were then incentivised to minimise the impact of risks should they occur. This process led to the formation of project teams that promoted project wide levels of trust not seen before. These forward thinking principles meant that the contracting parties delivered the project under budget and on programme; something you don’t see very often nowadays on large projects.
I was therefore pleased to see with the launch of NEC4 last week that one of the changes is Contractor’s Proposals (clause 16) where a Contractor is allowed to propose a change and take a share of the savings that the change generates. NEC as a form of contract covers a number of the items that BAA required, and is probably a reason that they have since used it to procure more recent projects at Heathrow. In fact 10% (by value) of the T5 projects were let on NEC3 contracts and they have since used NEC3 to procure other large contracts (Terminal 2 & T5C) which were completed in 2014. BAA saw the benefits of NEC3 as follows:
- It provided BAA with maximum control over costs, schedule and risk on large, complex, multi-disciplinary construction projects
- It improves working relationships by engendering a spirit of mutual trust and co-operation throughout the supply chain
- Is a proven procurement method which follows best practice methods
The construction industry has changed over the years, there has been a transition away from the traditional style of procurement, moving more towards design & build with main contractors sub-contracting large portions of the work down the supply chain. This initial transition is a transfer of risk in itself, then passing risk further down the supply chain to the smaller companies that are often the least able to manage it, surely is a recipe for disaster. At least when using an NEC form of contract, there is some management of the risk by promoting the use of NEC through the supply chain, so proactively managing risks.
I personally like what T5 did as a project, that’s the construction industry I want to work for. I love buildings, all shapes and sizes, so to get them built for the cheapest cost, in the least time possible, to the best quality and with as little disruption and disputes as possible is surely the outcome we want. From my experience the best form of contract to do that is the NEC3 suite of contracts (hopefully NEC4 will be even better!), but even for this to work, it needs a number of things in place:
- Clear lines of communication between the parties
- All parties working pro-actively to minimise and mitigate risks where possible
- Clear understanding of the principles, clauses and administration of the contract and not people attempting to operate it like another form of contract
- Selecting the right form and main option for the project and sub-contract packages
- A properly prepared and maintained programme that reflects the work to be executed, by a planner who understands the particular construction activities and processes
- The parties to actually use the contract as it was written; as an aid to project management
We will never eliminate all of the risks in a construction project, but for it to be successful surely working with one another, than against one another is a better solution.