Out-Law / Your Daily Need-To-Know

Collaborative construction: incentivising the supply chain

Out-Law Analysis | 09 Jan 2020 | 11:14 am | 1 min. read

As alliancing and incentivisation contracts become more common 'tier one' contractors will need to consider how they contract with their supply chain in order to reward good performance and also recover losses from poor performance.

Ideally, specialist designers and traders whose performance is key to the success of the project should be incorporated into the tier one delivery body, or alliance where an alliance contract is used, so that their performance and objectives are fully aligned to the project. However, not all parties further down the supply chain will have the appetite for, or balance sheet capacity, to participate in these types of arrangements.

The best approach is for the supply chain's incentives to be linked to the success of the project as a whole so that either the whole of the 'pain/gain' share or a significant proportion is aligned to the project's overall performance. In that way, the whole project team becomes fully integrated, from tier one main contractors to tier two suppliers.

Blundell Nigel

Nigel Blundell

Partner

Not all parties further down the supply chain will have the appetite for, or balance sheet capacity, to participate in [target cost] of arrangements.

It is not sufficient to base incentives for consultants or subcontractors solely on their own performance against their contract targets. For example, a consultant with his own target may be tempted to devote insufficient resources to the design stage, which may go on to lead to the alliance incurring additional costs in improving the design later in the project. Here, the consultant may beat his own target but, as a consequence, put the wider alliance into 'pain'.

Where a subcontractor causes loss, what remedies are available to the alliance members? As a target cost contract works on the basis that all costs are reimbursable, contractors will be reimbursed for their own additional costs and those of other supply chain members which arise because of the subcontractor's breach.

The tier one loss is a reduction in the gain it would have made or an increase in the pain as a result of exceeding the target. It is an unusual head of loss, and must be catered for in the subcontract terms.

The main contract often has a term that if the employer pays out as a result of subcontractor defaults, the main contractor is required to pursue any resulting losses. Often this is expressed as an indemnity and outside of any 'no claims' clause. For the main contractor, a potential safeguard is to ensure that the project board has the right to decide if proceedings are in the best interests of the project.

Nigel Blundell is a construction expert at Pinsent Masons, the law firm behind Out-Law.