Construction and infrastructure development do not need to be a zero-sum game where one party wins at the expense of the other.
Excellent projects can be delivered ahead of plan and in budget, while being profitable for contractors. Open, transparent collaboration is the key to rebuilding trust between both sides and working for the benefit of the taxpayer.
The Grattan Institute’s latest report is a misdiagnosis of conditions within mega-projects in Australia that are ultimately failing taxpayers.
Titled ‘Megabang for megabucks: driving a harder bargain on megaprojects’, the report ascribes inefficiency within the industry to an imbalance between Governments and contractor demands, attributing the latter to a position of power that leads to Governments ‘caving in’ to demands after signing contracts.
This misdiagnosis leads in one direction: a focus on lower costs instead of value for money and a deliberately adversarial relationship between Governments and contractors. This is a recipe for ongoing failure and shifting of the imbalance pendulum – as Grattan recommends – but in the wrong direction.
Success through collaboration
State and Federal Governments across Australia are currently having to deliver significant and unprecedented infrastructure programmes to support regional and national economic growth and meet changing demands of residents.
These are opportunities that can become a win-win both for Governments and contractors by taking a far more positive attitude to shared improvement and success. Naturally, that requires changes in project structures, project management and supply chain collaboration – all of which can be met without upholding an ongoing confrontational contracting environment.
The Australian Government is not unique in the challenges faced with major project programmes. Organisations across the globe are grappling with how to achieve their programmes faster, practically and specifically, for less cost, with fewer emissions and no harm.
The discussion has shifted – no longer are owners looking to transfer risk to contractors nor blaming them for poor performance. Instead, they are working to develop the most valuable projects more efficiently, using the scale of their project portfolio to collaborate with their suppliers more effectively – delivering both successful projects for the owner and suitable profit for contractors.
Project owners will always own overall project risk and are accountable to their shareholders and customers. Regardless of how much of that risk they attempt to transfer, the risk on the supply chain will always be commercially limited. Therefore, it is in the best interest of owners to collaborate around a commercial structure that attributes risk appropriately by incentivising upside over shielding or offloading downside.
We see nine key requirements for successfully realising this substantial opportunity:
1. Focus on improving outcomes
Challenge yourself to achieve improved benefits by optimising your portfolio: accelerate projects, execute fewer in parallel, develop the right projects and ultimately secure improved overall outcomes.
Focusing on capital effectiveness delivers improved outcomes with lower capital investment. We see a need to shift towards rapid, needs-based project selection and prioritisation. The business case process must be streamlined to enable the timely selection of projects that maximise socio-economic impact for optimal capital allocation based on the best possible supporting evidence.
Rapid option analysis on widely variant project scopes facilitates informed decision-making by Government on project selection.
2. Wire in excellent project performance
Build teams that proactively drive performance rather than reactively review progress.
Far more complex and dynamic than the operations that they are built for, mega-projects are run by temporary teams often working together for the first time under significant pressure to perform from the start.
While decent standards exist for basic project management processes, mega-project teams also need to establish excellent project performance management ‘wiring’ (the priorities, processes, roles, disciplines and visible leadership that drive co-ordinated and improving performance every day) within and between owners and contractors.
Project performance wiring will deliver that high performing joint team that proactively delivers project success every day.
3. Embed collaboration
Build open collaboration, avoid blame, align incentives, create success for all.
Project challenges are too often attempted to be solved in silos without the right expertise or are raised to a wider group too late. Bringing expertise together early and solving challenges together builds a working environment that delivers success for all.
Projects teams need to select good partners, bring them onboard early, incentivise them to be open with project challenges and collaborate in improving project performance for all.
4. Ensure performance transparency
Automated dashboards must escalate performance issues early based on a single source of truth and updated every day in real-time.
Projects require diverse workstreams, teams and suppliers to deliver in full all the time – and keep on improving.
While projects typically collect huge volumes of data, management teams cannot easily see across contractual boundaries and do not see emerging performance issues until it is too late. Transparency and a single source of truth are key.
Simple systems must be put in place in contracts to ensure all project teams are using the same fact base, enabling them to see and resolve emerging issues together early.
5. Incentivise continuous excellence
Contract incentives must change to reward project management excellence every month.
Traditional contracting processes negotiate down base contract margins and drive hard bargains to deliver results. This pushes contractors to solve problems internally, maximise charges for claims and carefully manage cash flow until the final performance bonus hopefully appears.
Projects want and need contractors that deliver excellent performance and collaboration from day one as they know it is key to their success. However, they do not typically incentivise for it.
Projects must implement contract incentives that reward monthly and quarterly project management excellence against a shared view of best practice. Reward great inputs, not just the outcomes.
6. Commit to projects that can be successful
Invest in and take all reasonably practicable measures to remove foreseeable risks before approval – do not pass them on to contractors.
Too often projects go through final approval with unnecessary risk or believing risk will be transferred to the contractors. Key risk always returns to owners or, at best, the owner overpays for being ill-equipped to manage and mitigate its risk.
Owners’ boards must be knowledgeable and demand suitable quality of project readiness at final approval. Project approvers need to be upfront around what suitable de-risking looks like on all dimensions and be willing to pay or contract early to ensure risks are suitably removed before final approval.
7. Constantly challenge assumptions that constrain project performance
Every project can be built ahead of schedule and under budget – the opportunities are there every day – are we all chasing them together? “We cannot do that because…” is frequently heard on increasingly congested project sites.
Substantially higher performance is achievable by considering an unconstrained project built against a stable scope without unnecessary risk and a single team that can trade cost, time and quality.
We can all list the barriers to achieving this maximum potential, but do we really challenge them or do we ever have time? For example:
8. Avoid risky innovation on mega-projects
Reduce all but the most valuable, proven innovations on already risky mega-projects. Innovation and technology are key enablers to driving productivity on capital projects. However, excessive innovation risk is found in ‘that innovative mega-project – the future of XYZ’.
Mega-projects should not be the testbed for unproven technologies as the cost of getting it wrong is too high. Most organisations just want their big new build projects to simply work well and be brought in on time and within budget.
Pilot innovations on smaller and less complex new projects, or upgrades to existing assets where the impact of risk is substantially lower. Then scale up the innovations for the mega-projects once their technology is validated, their processes are understood, and suitable execution capabilities are in place.
9. Capture the full benefit of proven and integrated digital tools
Pursue the project of the future now – do not just implement another digital tool. From BIM 5D to AI-driven scheduling, drone quantity trackers, human safety trackers, or AR-assisted wearables, the future is here, or at least within our reach. Yet to capture its benefits, project teams have to get integrated and change their behaviours.
For example, design changes within integrated engineering tool suites can be linked to AI-assisted planning tools to provide immediate updates to schedules, budgets and risks. However, to capture the full benefit, project teams, their contracts and procedures must have a common data structure, work within one system and adapt their standard process to benefit.
Owners must pursue a rolling digital collaboration programme with their supply chains to develop, implement and capture the increasing benefit of digital across their project portfolio.
It is imperative to address the needs of taxpayers and the price of value; however, payers should not have to expect a 'bargain' but rather a project that delivers excellence and value that derived from a fair, honest and collaborative relationship between Governments and contractors.
This outcome is not just achievable, it is essential. The key requirements set out above provide an opportunity for both sides to start on the right footing, with a recognition of what has not worked to date and what improvements will deliver high performance for all.
Successful projects require deeply collaborative relationships between owners and contractors on projects and across portfolios – delivering short- and long-term benefits for all: Government, contractors and taxpayers.