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How collaborative contracting can improve infrastructure projects

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5 minute read 17 Jun 2021
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Infrastructure
Real estate, hospitality and construction

Large infrastructure projects have put owners and contractors at odds. Collaborative contracting is an emerging way forward.

In brief

  • Competition has been the rule, but large, complex construction projects are demanding that owners and contractors engage more collaboratively.
  • Two-stage and relationship contracting are two categories of collaborative contracting models that can better address challenges and enhance project outcomes.

With the North American infrastructure contract bidding process at an inflection point due to costly changes and delays on complex projects, collaborative contracting is an important avenue for project owners and contractors.

Competitive hard-bid contracting models, which typically involve the owner planning and scoping a large project without meaningful input from a contractor, historically have been the foundation of most public procurements.

However, across all sectors, pervasive cost overruns, schedule delays and high-profile contractual disputes are defining the relationship between public-sector project owners and contractors.

The increasing scale, scope and complexity of capital projects and programs has greatly intensified the risk and reward from the fixed-price, date-certain nature of these contracting models. Intense competition from local and international contractors and developers has driven contractors to bid low to win, with major project risks often being ignored, misunderstood or underestimated in bids. Contractors have been left striving to restore profitability through claims or change orders during the delivery phase.

In response to the challenges, one key practice that is gaining momentum is adopting a more collaborative approach to project planning and delivery, including harnessing collaborative contracting methods.

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How EY can help

Working together from the start

 

Collaborative contracting methods can provide early contractor involvement for the benefit of technical and commercial planning of a project.

 

Early contractor involvement can improve project outcomes by harnessing a contractor’s input in the overall scoping of the project, including managing and mitigating project risk and uncertainty. It facilitates identifying cost and schedule challenges early, analyzing potential design and scope adjustments, and carefully considering the role of third-party stakeholders, all supported by open-book cost estimates and construction experience. Early contractor involvement enabled by collaborative contracting can reduce guesswork to improve confidence and predictability for all parties.

 

Two forms of collaborative contracting may be part of the solution for the owner and the contractor:

  • Two-stage contracting models: Contractors are appointed under a services arrangement during the concept or preconstruction phase of the project to work collaboratively with the owner in developing the design, addressing key project challenges and enabling more efficient pricing before transitioning into a contract to complete the design and/or construction. Examples of this model are construction manager at risk (CMAR), construction manager-general contractor (CM-GC), progressive design-build (PD-B) and predevelopment agreement (PDA).
  • Relationship contracting models: For particularly complex and challenging projects, a transition point where the scope is clearly definable and risk can be efficiently allocated may not be reached during design, and continuous collaboration and risk sharing throughout delivery may be appropriate. Relationship contracting models cater to this, involving a “paradigm shift” from conventional contracting, where risk is pooled and shared rather than allocated and priced. This approach can drive collaboration to strive for win-win outcomes and avoid disputes and adversarial behavior. Examples are integrated project delivery (IPD), delivery partner (DP) and alliance frameworks.

Across North America, Ernst & Young LLP (EY) is seeing a growing trend in the use of collaborative contracting models on complex public infrastructure projects. These include the long-standing use of CMAR in vertical infrastructure (such as urban, high-rise buildings and the aviation sector), the use of the CM-GC model in US transit and the use of the P-DB model in the US water sector, to the newer PDA models being seen in the US transportation space, as well as the introduction of alliances in the Canadian market.

Challenges in collaborative contracting

A range of factors may affect whether collaborative contracting is used on a given project.

From the contractor’s perspective, a long preconstruction period with potentially uncertain future conversion to a design and/or construction contract may not be the highest and best use for “A-team” resources, open-book pricing can be uncomfortable and conflict with an entity’s broader strategic interests, and there may be concerns with respect to owner commitment to the process.

From the owner’s perspective, a lack of experience with collaborative contracting and a lack of a precedent or delivery framework may make the shift daunting. In addition, the capacity, capability and culture of the owner entity and its governance structure, combined with legislative constraints, may preclude the process altogether.

An important concern of owners is that collaborative contracting can reduce competitiveness and value for money as a result of selecting a contractor team based largely on non-price criteria. While this is a function of the early stage of engagement before scope and risk are well defined, there are tools that can help owners drive competitiveness and value. These may include enhancing the initial competitive procurement process by evaluating financial parameters, such as unit rates and management fees; evaluating open-book estimates throughout the process; and maintaining a degree of competition at the subcontractor level.

How to engage in successful collaborative contracting

  • Use it for the “right” projects by conducting a thorough procurement options analysis and market testing, and assessing organizational readiness
  • Commit to it once the decision has been made to proceed by investing in the right team with the relevant expertise and experience, and tailoring a delivery framework that effectively aligns incentives
  • Set the right expectations between owner and contractor as early as possible, as well as including appropriate off-ramps to provide owners with the flexibility to pursue another delivery strategy if appropriate

EY teams are supporting public owners on over $30 billion of live collaborative contracting procurements in the US and Canada. Leveraging insights and lessons learned from these projects, whether you are an owner or a contractor, EY can advise on model selection and deployment for your project, and lead or support you through planning, procurement and delivery.

Sean Boyd, Jillian Beaton and Madeleine Myers contributed to this article.

Summary

Earlier contractor involvement and strong collaboration between owner and contractor, enabled by collaborative contracting, can benefit large, complex projects. Collaborative contracting can reduce inefficient pricing, improve risk allocation and reduce adversarial situations, and ultimately enhance value and improve the chances of project success.

About this article

Authors

Related topics
Infrastructure
Real estate, hospitality and construction

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