A number of major infrastructure projects have been stalled, canceled or simply struggle as they are "over budget" or running late. This may be measured against the original project estimate of time and cost, or against the contract conditions, but is either real?
The reality is that projects cost what they cost and will be completed when they are ready, in an ideal World.
So, what is this elusive ideal World?
In any number of construction industry reviews over the last 30 or so years, a number of common threads:
(1) shortage of skilled resources
(2) price vulnerability
(3) inappropriate allocation of risk
(4) unrealistic procurement process
Each contributes in its own way budget overruns and delayed delivery, resulting in disagreement, and if the sums are great enough, formal dispute.
The initial driver is owners' need for budgetary certainty and timely delivery. This is understandable, but neither can be achieved without properly defining the project and ensuring that it is feasible. That process takes time and care, requiring investigation of the regulatory environment, understanding the functional needs which drive the project, investigating the site and, finally, defining project uncertainties.
All too often, I see projects where the client has settled on either a prescriptive design or a functional need on not much more than an outline basis, and then attempted to shift all further risk and cost onto the contractor. Consultant teams are often as guilty of this as clients, providing inadequate designs to contractors for costing.
Only once a project has been properly defined, and tested, and project uncertainties understood, can the issues identified above be properly understood.
Shortage of skilled resources
This is clearly contractor's risk, however like any risk, clients can minimise the disruption this may cause to project by ensuring that tendering contractors have the skilled staff and other resources to actually carry out the work, rather than simply appointing a "project management" contractor, engaging labour, plant and specialist skills as subcontractors.
When properly assessed, there are fewer fully resourced contractors available than most people believe.
It is a truism that it is you should only contract with good people. But it is true in practice. In most cases a brief, but properly focused, questionnaire issued to recommended tenderers will flush out the contractors with the resources required for the project.
Most pre-qualification documentation provides a brief description of the proposed project, the skills required, budget and confirmation that the client has funding. The aim is to get potential contractors to answer questions about themselves, rather than respond to the project. Questions asked can vary, but typically they include:
- name of the company to be appointed - this enables public registers to be searched to establish the directors, shareholding and notional capital, and also any registered security interests.
- statement of financial position - this is often on a group basis. Where this is offered, consideration should be due given to obtaining parent company or owner guarantees.
- similar project experience - often smaller, specialist companies are preferable, where a lack of capital or resources can be managed. It is also important to understand other project commitments - does the contractor have the capacity to undertake the project?
- outstanding claims - is the contractor in delay or subject to cost overrun on other projects, and outstanding claims, bonds or disputes.
- available staff and resources - identifying key project staff and obtaining their curriculum vitae. Where some element of design is required, identification of architectural or engineering design specialists may be relevant.
- proposed subcontractors - care should be taken to ensure that subcontractors are not under exclusive arrangements with potential bidders. In most cases, at pre-qualification, such arrangements have the potential to be anti-competitive.
Once pre-qualification has been concluded, a suitable list of tenderers can be prepared. It is important that this list is realistic, and is no more than six and no less than three. The tender process can then be structured to enable tenderers to submit realistic proposals for the work.
The tender documents should provide designs and contract terms which enable contractors to provide realistic and certain prices and proposals to deal with project uncertainties. The tender package should also promote innovation.
In terms of the process, rather than identifying a "preferred tenderer" and negotiating with them, the ideal is to arrive at the end of the tender period keeping as many tenderers engaged as possible. This will inevitably involve negotiating with each tenderer, and potentially agreeing individual terms with either play to tenderers' strengths, or accommodating their vulnerabilities.
Price vulnerability
While owners may want price certainty, this is typically impossible to achieve. A tender process may provide a "fixed" price, or a "guaranteed maximum price", but these terms are ultimately sophistry. Underlying these concepts is either the reality that the contractor has padded its pricing in the hope that it can manage price increases, and that the contractor will claim anyway if prices do increase. If either fails, then savings will be sought elsewhere at the cost of the project, either in delay, quality or dispute.
If contractors accurately take their prices, or if prices padded for uncertainty can be identified during tender negotiations, then price vulnerability can usually be managed by identifying such prices as cost reimburseable, or provide for those items to be subject to separate sub-trade or supply tender process approved by the client team.
Allocation of risk / contract terms / procurement process
During the feasibility stage of any project, developing a risk register can be crucial. Taking the time to identify events which may impact on price or cause delay in each stage of the project will help to ensure that the contract terms properly allocate responsibility for managing risk, and mitigating its effects.
This will inevitably impact on the contract terms.
While standard form contracts are an excellent starting point, not least because they are familiar, they will need review to ensure they meet the project requirements, and adjustment where they don't. This is not an opportunity to opportunistically shift risk in the hope of achieving price certainty. That is the inevitable route to project failure and dispute.
Conclusion
This may all seem like a statement of the bleeding obvious, but a quick review of project failures over the last few years should remove any doubt that the way in which projects are being procured simply is not working.
Sadly, the biggest failures seem to be in public sector procurement, with Government projects being the most spectacular culprits.
It really doesn't need to be this way, provided projects are properly defined, risks investigated and procurement strategies and contract terms tailored to ensure that contractors are resourced and committed to the project; that procedures and contract terms properly deal with project vulnerabilities and uncertainties; and that the project is managed in a way which promotes a successful outcome for both the client and the contractor.
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