Achieving a gold standard of collaborative contracting in construction

Mosey called for an overhaul of public frameworks and suggested there was a need for more positive framework contracting models – a ‘gold standard’, based on sound commercial strategy, a sustainable pipeline of work and fair procedures to drive performance improvements.

Legal advisers and the construction industry should now start thinking about how to move to this new gold standard of framework contracting, aiming to deliver consistently high project outcomes. The best and most successful frameworks include a number of key features, all of which encourage collaborative decision-making and behaviours from the outset of the project.

Aligned incentivisation

If all stakeholders in a project have a common purpose and interest to achieve the same outcomes, and their contractual incentives and rewards are aligned, the gold standard is more likely to be achieved.

This type of working can already be seen, for example in National Highway’s Collaborative Planning System, which involves parties working together to improve productivity, time and cost. The system uses lean principles to support National Highway’s three imperatives – safety, customer service and delivering the road investment strategy. The lean principles provide a basis that enables these priorities to be achieved.

Clear outcome-focused goals should be agreed at the start of a collaborative framework programme, with the aim of achieving whole-life value. These objectives should not only look at cost and time, but also areas such as sustainability, social value and safety. A shared focus on outcomes, rather than scope, will unlock innovation and drive continuous improvement.

Equally, positive incentivisation can support a collaborative framework approach. Negative incentivisation such as deductions, liquidated damages and uncapped liabilities, can undermine the collaborative achievement of best-for-project outcomes and lead to defensive and combative behaviour.

When collaboration is effective, overly onerous contractual terms may be unnecessary, as a successful enterprise is jointly incentivised by repeat delivery of best for project outcomes to drive performance.

Collaborative behaviour

Well-structured and balanced contract terms, combined with the right behaviour and culture, can help achieve collaborative contracting. Clear contract management processes support contemporaneous decision making and risk management, which, together with good collaborative governance, can ensure effective collaboration at all levels of the project.

Contemporaneous management allows joint management of issues as they happen. This is illustrated in the well-regarded NEC suite of construction contracts, which require all parties to act in the spirit of mutual trust and cooperation. The NEC contracts force contemporaneous management through early warnings and risk reduction meetings to deal immediately with matters which might affect time, cost or quality of a project.

The Conflict Avoidance Pledge (CAP), developed by a coalition of professional and industry bodies, also aims to minimise adversarial conflict through collaboration. CAP is adopted as a standard clause in contracts and endorses collaborative working, early intervention techniques and amicable resolution procedures to resolve differences of opinion before they escalate into disputes.

Collaborative approaches are successful when each party commits enough resource to manage the contract properly. Contractual collaborative principles can be enhanced with project-specific governance, such as the use of project delivery boards and partnering groups, or less formal weekly meetings or charters.

The Construction Playbook recommends that collaborative decision-making should start at the planning stage and in particular, suggests using opportunity framing workshops to mobilise this. These bring together key individuals with functional delivery expertise early on, when the ability to influence changes in strategic planning and project design is relatively high, and the cost to make those changes is relatively low.

Sustainable commercial models

Mosey recommended implementing on a ‘comply or explain’ basis the Construction Playbook principles of profitability in contracts and fair returns and expectations.

Doing so would help create a profitable, sustainable and resilient construction and infrastructure industry which supports a skilled workforce and supports future progress, able to tackle increasingly complex issues such as climate change and building safety.

This applies equally to framework contracting; being a construction framework supplier should not be an inherently risky business.

Collaborative behaviours are supported by greater certainty of profit margin and confidence in the commercial basis of a deal. Therefore, collaborative framework models need to be encouraged where suppliers benefit from shared incentivisation under long-term enterprises which integrate principles of financial sustainability within procurement, instead of simply focusing on bottom line cost.

All parties involved in a project should be rewarded in proportion to the value they bring.

When it comes to frameworks, acceptance onto a framework by a supplier should ensure an appropriate pipeline of work. ‘Zombie frameworks’ – multiple, speculative frameworks not connected to a pipeline of work – should be ended, as only a steady flow of work will realise the benefits of relational enterprise-based contracting for the public sector.

In effective framework models, risk allocation proposals, payment mechanisms and pricing are linked to the delivery model and the incentivised outcomes, with potential to improve financial performance where contractual performance is properly achieved. A progressive approach would see performance linked to margin return instead of applying onerous financial penalties that expose suppliers to the risk of unsustainable losses. This requires a departure from traditional risk allocation.

Key performance indicators (KPIs) should incentivise the delivery of outcomes which are important to the parties involved in the project – but KPIs must be relevant to the size and complexity of the project.

Too many KPIs risks over-complicating the contract and encouraging ambiguity, even among experienced suppliers. Collaboration should be encouraged from the tender stage to jointly shape and understand KPIs, helping prevent bidders to be overcautious and to price the contract incorrectly.

KPIs should also be subject to greater drafting scrutiny to ensure they are quantifiable and measurable to drive the desired behaviours and constantly monitored to ensure relevance and effectiveness.

The unprecedented change and increasingly complex challenges within the construction sector require the industry to work together more to collaborate and support innovation, and Mosey’s report offers a model for a new and improved approach to framework contracting which could well achieve this aim.

Co-written by Samantha Conkling of Pinsent Masons. A version of this article was first published in Construction Law magazine.