Sowing the Seeds for Success

Some time ago, I heard an anecdote - after the completion of a Government project, the contractor went bust.  The project manager engaged for the project by the Government was heard to say he thought that was a win!

The construction industry is currently unstable.  The Infrastructure Commission and the Construction Sector Accord is advocating for change, and NZS3910 is under review; and yet, while residential development is running flat out, our infrastructure deficit (transport, water, health, education and energy sectors) is heading to $200 billion.  At the same time, contractors continue to fail and talk of recession abounds.

The starting point has to be a definition of success.  As the project management adage goes - you can have good, fast and cheap, but you can only choose two!

So what does success look like?  For the owner, a completed project which meets the owner's needs, delivered within budget and on time.  For the contractor, a project similarly completed to meet the owner's needs, a project that the contractor can be proud of and completed for a profit.  Each is largely a question of definition.

Most owners have a price expectation, and a brief of what they require.  In the case of the development of the Northland Events Centre in Whangarei, the site at Oraka Park was provided by the Whangarei District Council; and the Northland District Council agreed to fund the development - with $18.5 million available (no more; no less); the stadium was to meet regional requirements for an events centre; and the timing was to be ready for the Rugby World Cup in 2011.

Initial designs prepared by a combination of representatives of local government and rugby came up with a concept design, priced at $35 million.  The project was eventually tendered on a design and construction basis, at an price of $18.5 million - if the cost looked like it would exceed that price, the Council would instruct omissions to keep within the price; if the price was coming in below that price, further work would be instructed.  The project came in on time for the RWC and, not surprisingly, on budget.

For the development of Auckland's viaduct basin for the America's Cup defence in 2000, price was less of a concern.  However, the date for the Cup defence was fixed, and the syndicates needed their bases finished for the spring of 1998.  The client, the Auckland Regional Services Trust, had no statutory power to develop the syndicate bases, it held none of the land surrounding the basin, it had no designs and no consents for those designs.  Time was of the essence.

Amendment to the Local Government Act and resource consents were obtained with urgency, and the reclamation (and declamation) of the basin was achieved on a design and construct basis, with the contractor appointed on a competitive basis.  Tenders were assessed, without designs or pricing, on capacity and experience.  The contract was awarded on a two stage basis - first, design development and confirmed lump sum pricing.  At the end of the first stage, the client benchmarked the pricing, on an express term that the client reserved the right to re-tender the second phase, construction, if it was unhappy with the pricing.

The project was completed on time, and the 2000 defence was the most successful America's Cup defence to date, with a record number of challenging syndicates.

Conversely, a recent hotel development was contracted on a lump sum, with limited designs and specifications (benchmarked against a similar hotel development), and without consents having been obtained.  After some three years, consents remained outstanding, designs had changed significantly and the price unchanged, with each claim for time and increased cost rejected.  The contractor was then successful in three adjudications, and terminated the contract for non-payment; the owner called the bond, and the ensuing dispute was arbitrated and the arbitration appealed to the High Court and the Court of Appeal.  In each jurisdiction, the contractor was successful.  Eventually, the bond moneys were repaid.  Five years after the original contract was signed, no physical work on constructing the hotel had been carried out.

This scenario is played out almost daily, to a greater or lesser extent; the owner has a brief and a price in mind; the engineer/architect prepares designs which are barely 20%, for which contractors are expected to competitively price on a lump sum basis, with only the protection of the claims procedures in NZS3910 to protect their commercial position.  No investigations of ground conditions are made.  The contractor prices to win the tender, relying on its ability to claim under the contract to protect its margin.

Following award, the design team further develops the design on a just in time, or just out of time, basis.  Ground conditions turn out to be more challenging and the contractor struggles to procure the subcontract/supply prices on which it built up its tender price.  The cycle of disputes then begins, with arguments over whether or not the ground conditions were reasonably foreseeable and the design developments were actually variations.  Inevitably, time and price suffer; and for every design change which is disallowed as a variation, the contractor completes as cost effectively as possible, at the cost of quality.

Project financiers, for their part, try to limit risk as far as possible, insisting on fixed prices, payment on a  cost to complete basis (rather than cost incurred) and bonds, guarantees and securities.

The lessons to be learned from each of these projects is that the seeds of disagreement are sown prior to contract award.  Each project has its own drivers and its own risks.  The starting point has to be to recognise those drivers, identify the risks to those drivers, and to then design the procurement strategy accordingly.  That must involve reducing uncertainty, and identifying how project risks are to be dealt with  The more uncertainty is reduced prior to award, the greater chance of project success.

The temptation to make gains out of a competitive contracting environment by requiring contractors to tender fixed prices on an incomplete design almost guarantees delay, cost overrun and dispute.