Collaborative contracting strategies and the use of the NEC3 family of contracts

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leading edgeprojects consulting ltd , 2014

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Project contracts & how they support collaborative working :

Collaborative contracting strategies anduse of the NEC3 family of contracts

Presenter :Jon Broome

leading edgeprojects consulting ltd

setting | your | projects

up for | success

[email protected] +44 (0) 7970 428 929 www.leadingedgeprojects.co.uk


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Outline Agenda

� Collaborative working : some models

� Collaborative contract strategies :

o Use of incentives.o Target cost contracts.o Alliances in all their formso Frameworks and Packages

� The NEC3 family : objectives and how it achieves them (briefly)

� Quick introduction to the NEC3 Professional Services Short Contract.


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Raising the Standard of Collaboration

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A virtuous circle of continuous improvement


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Aligned

Objectives

Continuous

Improvement .

Integrated Changing Culture

Processes & Teams & Skills

A simpler project based

Model for Partnering


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Value Planning

Risk Management

Project & Strategic Alliances,

Target and Cost Reimbursable Contracts

Use of Incentives.

Use of NEC family and PPC2000 forms of contract.

Selection by Value : Eligibility & Suitability

Aligned

Objectives

Continuous KPIs, Balanced Scorecard

Improvement Benchmarking, Performance Management .

Integrated Changing Culture

Processes & Teams & Skills Risk Management Facilitated Workshops

Value Engineering throughout Project

Shared Offices & IT Hard & Soft Skills

Process Mapping Training

Collaborative Programming Coaching

A Model for Partnering(with Bells & Whistles)

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A Virtuous Circle of Continuous Improvement

Aligned Objectives

ChangingCulture

& Skills

IntegratedTeams &

Processes

ContinuousImprovement


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Two quotes from Warren Buffet

1. “It is impossible to unsign a contract, so do all your thinking before you sign.”

2. “It is easier to stay out of trouble than get out of trouble.”


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Price (Output) vs.Cost (Input) Based Contracts

� A Price Based Contract is where the basis for payment is what the Provider has offered, regardless of what it costs him to do the work, once he has provided the output.

� An Input Based Contract is where the basis for payment is for the resources that the Provider uses to do the work. The input is often ‘cost’ (a cost based contract), but can be any unit of input e.g. time charge.

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The Role of Incentives.

The Purpose of Incentives is to :

� Align the Motivations of the Contractor with the Client and Vice Versa; or the Subcontractor’s with the Contractors & Vice Versa

� To Stimulate Improved Performance;

� Directed towards the Optimum Achievement of Project Objectives.


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Type of Incentives.

� Cost e.g. Target Cost Contracts.

� Time e.g. Bonus for early Completion.

� Performance In Use e.g.Output or Efficiency compared to benchmark.

� Process Incentives e.g. Key Performance Indicators. Health & Safety Processes.


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Incentive Plan Design.

Business Objectives and Drivers

Project Objectives

Prioritise then Weight Objectives

Balance Incentives and Set so that :

Value to Client > Amount Paid to Contractor > Cost to Contractor

of Achieving Objective.

Communicate

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CSF 1 : Clear objectives

� Abu-Hiljeh and Ibbs found that “incentive plans ……… require owners to define their objectives more clearly. They also encourage owners to communicate their objectives more effectively, both within their own organisation and to their contractors”.

� A summary of Construction Productivity Network event on incentive based contracts stated that “success is dependent upon a high level of trust and openness and everyone having a clear understanding of the project objectives. Agreements underpinning these have to be simple, clear and owned by all parties before the project begins”.


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CSF2 : Simplicity of design

� A CIRIA report, titled Construction Contract Incentive

Schemes 17, states that when multiple incentives are used “these require care in determining priorities, designing the incentive controls and understanding the interaction between them”.

� Stuckhart 14 states “that owners must be careful how they combine cost, schedule, or technical incentives in any one contract, so that incentives do not result in imbalances” and that “such imbalances might motivate the wrong behaviour or over emphasise some objectives at the expense of others”.


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CSF3 : Focus on what mattersIbbs and Abu-Hijleh, in their research in America :

� recommended clients incentivise “the project areas in most need of improvement or that yield the highest returns, depending on project objectives” and

� that when these areas are targeted a “total return to the owner of five times the plan’s cost is not unusual” ! In other words, the return

minus plan cost / plan cost was 4 to 1.

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CSF 5 : Focus on the positive� Uff and Capper, two distinguished UK lawyers, claim 26 that

“bonuses are far more effective psychologically than liquidated damages in obtaining performance and timely completion”.

� Newman of Bechtel illustrates this by stating that “our experience is that positive incentives, for some reason, have a much lower risk of causing aberrant behaviour, even when the monetary effect is the same. Applying a 20% fee penalty, as with a negative incentive for a cost over run, is somehow more painful to a contractor than getting an 80% score on an award fee basis”.

� Ibbs, in his research 9, found “positive incentives encourage positive actions, behaviours and relationships. Contractor’s energies are directed toward developing more effective ways to achieve project objectives”.


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CSF4 : Realistic starting point� A basic principle of incentives is that the Contractor

makes :o average profit for average performance,o improved profitability for better than expected

performance, ando reduced profit for poor performance

� This implies that the starting point of any incentive plan has to be realistic targets of performance.

� Stukhart 14 concludes that “to insure that incentive contracts achieve the efficiencies that owners want, it is essential that targets be realistic .... . This implies that owners must emphasise ....... reliable targets rather than elaborate sharing schemes and complex incentives”.


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CSF6 :

� Negotiate versus impose.

�Why ?

o Because the Contractor better understands the Client objectives & their weighting

o Because the Client better understands the Contractors drivers & their weighting

which results in a more effective incentive plan.

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Cost Reimbursable Contractswhat are they ?

Provider is reimbursed Actual Costs plus Fee.

Fee can be expressed either as :

� a fee percentage applied to Actual Costs.

� a fixed fee.


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Cost Reimbursable Contractwith fee percentage

Defined Cost

fee percentage

Price for WorkDone to Date


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Target Cost Contracts :what are they ?

� A development of CR contracts where the Provider is reimbursed Actual Costs plus the Fee.

� Any cost over or under run vs. the Target is split in pre-agreed proportions.

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Target Cost Contract

Actual Costs

Target

Under run

/ Gain

Overrun

/ Pain


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Target Cost Contract

Actual Costs

TargetEmployer’s share

Employer’s share

Provider’s share

Provider’s share

Under run

/ Gain

Overrun

/ Pain


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CSFs for Target Cost Contracts

1) Use them in the right circumstances : (a) in less extreme circumstances to cost+ contracts

where, if a Priced contract was used, the Contractor would either not tender or add a high premium

(b) where both parties can contribute to managing risk (threat &/or opportunity) within the target &/or

(c) where there could be significant, but manageable changes to the Target I.e. Employer owned risks

2) Intelligently set the share profile to create alignment & reflect risk within the target Prices

3) Make sure all the components of the Target are realistic : Defined Cost, Fee & risk allowance

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Target Cost Contractwith variable share profile and Employer taking large share of over run

Actual Cost

target Prices

Under run

/ Gain

Overrun

/ Pain


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Target Cost Contractwith cap on Employer’s share of over run :a Guaranteed Maximum Price (GMP)

Actual Cost

target Prices

Under run

/ Gain

Overrun

/ Pain


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CSFs for Target Cost Contracts4) Specify audit requirements as :

o a performance spec pre-contracto evaluate Providers’ proposals &o fine tune / agree early on in contract before start

spending serious money.

5) Ensure ‘real time’ financial management systems are in place foro up to date monitoring of Defined Costo agreeing changes to the Prices due to CEs ando forecasting out turn Defined Cost and pain / gain

share.o Adding in ‘bells & whistles’ / pairing back Scope to hit

Employer’s budget.

6) Select right quantity and quality of staff with pro-active collaborative skills and culture.

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Characteristics of a Project Alliance.

� Combination of construction management & target cost contracts & used in similar (more complex) circumstances to the former, with significant players part of the Alliance.

� Potential alliance members develop scope so can agree an alliance target.

� Fundamental characteristic is that alliance agreement / contract largely ties fortunes of each member to success of project rather than their individual work scope.

� Incentive to partner horizontally & vertically.


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Three sorts of Alliance Contract1. Traditional Alliance Contract : an extra

contract which sits on top of conventional (normally cost based) routes.

2. Pure Alliance (The “Australian model”) : everyone signs the same contract at the same time and includes works scope. PPC’2000 takes this approach.

3. Alliance Agreement : Add-on clauses to the individual contracts which tie fortunes to the success (only !) of the project. E.g. NEC3 option

X12.


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Alliance Contractual Framework

Sub

Consultants

Principal

Consultants

Sub

Contractors

Principal

Contractors

Sub

Suppliers

Principal

Suppliers

Client Alliance Agreement

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Project Alliances

When to use them :� On large projects where a management contract

might otherwise be used.

� Where there is potential for break through solutions through partnering, which implies must not over constrain alliance members

� There is a limited number of ‘strong’ works Providers who can have significant impact on project outcomes by working together.


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FrameworksWhat are they ?� A Client selects a Provider or Providers for a

series of as yet undefined projects usually for a set time period.

� As the time for each project approaches, it is defined and scoped up together till a budget and contract Price can be agreed.

� The Project is let, often in a Target Cost or Project alliance format.

� Each project is heavily benchmarked and lessons learnt from one are used in the next.


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FrameworksAdvantages :� Genuine ‘Bulk purchase’ discount on overheads

� Particularly in public sector, once framework in place, quicker and cheaper to get to contract.

� Continuous improvement against performance parameters of Client.

Disadvantages� High selection & start up costs : scale of works needs

to justify investment

� Complacency may set in : robust and visible benchmarks, incentives, transparency of costs, non-exclusivity clauses need to be in place to ensure motivation, plus internal competition

� Reduced competition at end of alliance period

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Frameworks

When To Use Them :

� When there is a series of projects, whose total value is sufficient to justify the investment in selection and start up.

� To minimise time & cost of getting to contract.

� When the workload will be roughly continuous and consistent.

� There is scope for (continuous incremental)

improvement over time e.g. they cannot be too constrained.


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Interlude …

� Answer this question in your mind :

“Of all that has been discussed, what insight is potentially of most use to you ?”

� Having answered it, swop perspectives with those around you (groups of 3) ?


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NEC Overview :the 3 main objectives

Stimulus to Goodproject Management

Clarity &Simplicity

Flexibility

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FlexibilityPurpose : to promote easy selection of ‘best fit’

contracting strategy for the project circumstances

� Whole family of interlocking contracts for works, goods & services.

� Modular structure within each contract, so that can rapidly assemble ‘best fit’ procurement arrangement without expensive legal input.

� Similar structure & terminology across whole family to promote ease of learning and ‘back to back’nessfor process integration and contractual cover.

Note : Whole family updated in 2005 and pre-fixed with nec3


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Members of the nec3 family :

� Engineering & Construction Contract

� Engineering & Construction Subcontract

� Engineering & Construction Short Contract

� Engineering & Construction Short Subcontract

� Professional Services Contract

� Professional Services Short Contract

� The Adjudicator’s Contract

� Framework Contract

� Term Services Contract

� Term Services Short Contract

� Supply Contract

� Supply Short Contract

As well as X12 : partnering option & X19 : Task Order.


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Contracting strategy at main payment option level

ECC EC-SubC

PSC TSC SupplyContract

Short Contracts (not Supply)

A : Priced Contract with Activity Schedules (AS)

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B : Priced Contract with Bill

of Quantities��

C : Target Contract with AS /

Price List��

D : Target Contract with Bill

of Quantities��

E : Cost Reimbursable/ Time

Based contract��

F : Management Contract ��

G : Term Contract ��

X12 : Partnering (project

alliancing) option��

X19 : Task Order ��

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Contracting strategy at main payment option level

ECC EC-SubC

PSC TSC SupplyContract

Short Contracts (not Supply)

A : Priced Contract with Activity Schedules (AS)

��

B : Priced Contract with Bill

of Quantities��

C : Target Contract with AS /

Price List��

D : Target Contract with Bill

of Quantities��

E : Cost Reimbursable/ Time

Based contract��

F : Management Contract ��

G : Term Contract ��

X12 : Partnering (project

alliancing) option��



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Secondary Option SelectionECC EC

SubCTSC PSC Supply

Contract

X1 : Price Adjustment for Inflation ��

X2 : Changes in the Law ��

X3 : Multiple Currencies ��

X4 : Parent Company Guarantee ��

X5 : Sectional Completion ��

X6 : Bonus for early Completion ��

X7 : Delay Damages ��

X8 : Collateral Warranty Agreements ��

X9 : Transfer of Rights ��

X10 : Employer’s Agent ��

X11 : Termination by Employer ��

X12 : Partnering ��


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Secondary Option SelectionECC EC

SubCTSC PSC Supply

Contract

X13 : Performance Bond ��

X14 : Advanced Payment ��

X15 : Limitation of Contractor’sliability to reasonable skill & care

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X16 : Retention ��

X17 : Low Performance Damages ��

X18 : Limitation of Liability ��


X20 : Key Performance Indicators ��

Y(UK)1 : Project Bank Account ��

Y(UK)2 : H, G, C & R Act ��

Y(UK)3 : Rights of 3rd Parties ��

Z : Additional Conditions of Contract ��

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Other Aspects of Flexibility� International Use : catered for by secondary options and no

paraphrasing of law

� Contractor’s design : for ECC, extent defined in the Works Information or equivalent.

� Multi-discipline work : exclusion of discipline specific procedures from CofCs. Either in Requirement or Contract Data

� Able to fine tune many provisions by entry in Contract Data

� Subcontracting : o ‘Purple Book’ can be used

o Short Subcontract for low risk & complexity work

o Slightly amended PSC or PSSC can be used for design subcontract

o Supply for specially designed goods

o Short Supply for commodities / off-shelf goods.


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Clarity & SimplicityPurpose : to promote ease of understanding at ‘doer’ level

& so reduce disputes due to misunderstanding or omissions

� Simple & common structure across whole family leads to ease of finding way around any contract

� Flow charting to ensure logic : hints at process of project management

� Shorter sentence length & use of bullet points

� Less subjectivity: preciser definitions, risk allocation & Roles & Responsibilities; stated maximum timescales.

� Defined Terms with Capital Initials to avoid replication

� Contract specific information in italics in Contract Data

� ECC is about a third of the length of traditional contracts


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Stimulus to Good Project Management

Purpose : Range of contractual mechanisms and incentives to promote collaborative project management, thereby increasing predictability of time, cost & quality being delivered.

It is founded on three key principles :

1. Foresighted, co-operative management shrinks risk and mitigates problems

2. Both parties are motivated to work together if it is in their professional and commercial interests to do so

3. Clear division of function, responsibility (& risk) helps accountability and motivates people to play their part

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Foresighted, co-operative management shrinks risk and mitigates problems

� A regularly updated and agreed programme with method statements & resources showing timing and sequencing of Employer and Contractor actions

� An active Risk Register stimulating active risk management

� An ‘early warning’ procedure for identifying future problems & minimising their impact

� Assessment of time and cost as contract progresses ideally before work done, but within set timescales

� Stated maximum time scales for actions of parties


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Overview of how change is dealt with

early warning Risk Register

16.1 Early

Warning

Potential

Event

Actual

Event

Contractor doesagreed actions asDefined Cost only

No CE

CE, but “arises fromfault of Contractor”

OR no effect

No change toCompletion Date

& Prices

CE

PM givesinstruction to

submit quotation

Forecastif possible

Recordsif not

Quotationsubmitted

within3 weeks

Quotationaccepted

within2 weeks

Use ofAccepted

Programme

16.3 Risk Reduction

meeting

Full on risk register (an aide memoire)


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Both parties are motivated to work together if it is in their professional & commercial interests to do so

� Statement of events for which Employer is liable : cleardefinitions of compensation events (CEs) in one place

� Sanctions on the Contractor to :o early warno submit a first programme containing information requiredo maintain an up to date Accepted Programmeo provide notification of CEs within set timescaleso provide realistic and timely quotations to these CEs

� Sanctions on the Project Manager to make timely decisions on the Employer’s behalf : stated timescales

� More structured method of calculating changes in Contractor’s time & costs : a dedicated detailed CE process + the Schedule of Cost Components

� Margin on compensation events is tendered : the fee percentage(s)

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The nec3

Professional Services Short Contract

(PSSC)


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The NEC3 Professional Services Contract (PSC)

‘the Orange Book’� First published in 1994.

� For use with any Professional Services Contract, where services specified in the Scope.

� Allows the project management of Professionals.

� But considered by many to be too heavy handed for simple to medium complexity appointments… … such as a client empowered project manager.


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The Requirement for aProfessional Services Short Contract

“a simpler approach to simpler commissions”� Replacing the APM’s current Standard Terms of

Appointment, including

o managing an NEC3 form as the ‘Project Manager’ etc.

o any project.

� Appointing other consultants under NEC3 e.g. designer

� Appointing any professional in the built environment

� Be attractive for any low value, low risk professional services commission in whatever sector.

� For international use.

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For flexibility of payment, the Consultant could be paid on :

1. A fixed price activity schedule basis

2. A time charge basis where they provide a service :

i. over an approximate period of time e.g. a project’s duration.

ii. on a very flexible ad-hoc ‘call-off’ basis e.g. a professional term services contract; or

iii. an ill-defined or high level Scope, where the issues etc. and therefore Scope are not defined.



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3. allow for payment of standard measured items, both those specified to be done in the original Scope and those specified in the Scope, but ‘called off’ at a unit rate.

4. a combination of 1., 2. and 3..

5. as per 1. to 4., with additions to the Scope done either on a fixed price or time charge basis.

6. allow for time charge contracts as per 2. to have additions done on a fixed price basis where new bits of definable work emerge and the Client wish’s to have greater cost certainty.



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The Target MarketThe centre point or bulls eye is a few people doing the work with helpers. For instance :

� One or two people doing the majority work to deliver a series of outputs to stated dates, albeit with their bosses oversight, and specialists contributing advice & reviews.

� A project manager under a time charge contract managing a project full time who, from time to time, may require extra expertise or resource at busy times.

� A professional adviser giving predominantly on-going, but ad-hoc advice to a client on a time charge basis. From time to time, they may need to bring in extra expertise &/or a discrete bit of work may drop out to be delivered on a priced basis.

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Value of Contracts ?

� less than a £1,000 for a couple of hours work to … …

� a couple of hundred thousand pounds per year for a full time project manager to … …

� up to half a million pounds for defined assignment delivered on priced basis by a small team (of say 6 people over half a year) at which point the PSC might start to come into contention.


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Final Review

On your tables :

� Review your original objectives : have you got them ?

� Discuss and agree your Top 3 key insights from today.

� Briefly feedback one to the main group ...... but it can’t be one that a previous

group has said !


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Contact Details :

Dr Jon Broome

Tel : 07970 428 929 / 01179 093 297

Email : [email protected] | your | projects | up for | success

Web : www.leadingedgeprojects.co.uksetting | your | projects | up for | success