How contracts can help to build a prosperous project culture

Leonard Cohen said “there is a crack in everything, that’s how the light gets in”, not as a principle of construction design but in recognition of how good ideas do not always come from applying strict rules. We all know that creative thinking, helpful actions and fair decisions are motivated by complex human factors, many of which have nothing to do with procurement processes and contracts. Hence, there is a dilemma when we are trying to create a successful project culture, namely how much can be expressed in written rules without sucking the air from personal relationships and thereby inhibiting innovation?

Some recognise that contracts can integrate the parties’ work and can build the common knowledge that reconciles mutual trust with differing commercial needs. Others believe a project culture can be destroyed by negotiating a contract and that contractual procedures inhibit collaborative behaviour. For example, Sir John Egan’s 1998 Rethinking Construction suggested contracts have a negative effect on success and that “if the relationship between a constructor and employer is soundly based and the parties recognise their mutual interdependence, then formal contract documents should gradually become obsolete”. This observation was not supported by evidence in Egan’s report, but it stuck in many people’s minds as a signal that a better project culture can be achieved under arrangements that are not contractually binding.

How can a contract improve rather than undermine a successful project culture?

The courts take a different view and have made clear that supposedly non-binding agreements can be taken into account when trying to work out the parties’ rights and obligations. In Birse Construction vs St David, a non-binding charter described how the parties would “produce an exceptional quality development within the agreed time frame, at least cost, enhancing our reputations through mutual trust and co‑operation”, but a contract was never signed. Ten months into the project, the client gave notice that it would deduct liquidated damages, the contractor left the site, the client alleged abandonment of the project, the contractor claimed there was none because there was no contract and the judge used the charter as evidence in untangling the mess.

So, how can a contract improve rather than undermine a successful project culture? Firstly, by dealing with people as well as organisations. Good project relationships are not assignable, and continuity can be broken when people move on. A strong requirement governing early contractor involvement under NEC4 Option X22.4 provides that the contractor cannot replace any key person unless instructed by the project manager or unless that person is unable to continue to act. Logically, this could be extended to key persons working for the NEC4 project manager and for other team members.

A strong project culture also depends on leadership, not least from the client

The people who form a strong project culture do not always emerge up front, and contracts should make clear how individuals can be replaced if they do not perform their agreed roles. For example, PPC2000 clause 7.5 provides that “if any individual […] disrupts or otherwise adversely affects the project then, after consultation with the core group, the client may require exclusion of that individual […] and the relevant partnering team member shall engage a suitable replacement”. The use of the “core group”, who reach agreement by consensus of all members present, is intended to ensure the replacement procedure is not used arbitrarily or unfairly.

A strong project culture also depends on leadership, not least from the client. Infrastructure Client Group alliance guidance in 2015 stressed how cultural change “is most important for the client organisation, as a reversion to traditional behaviours by the client inevitably has the most significant impact”. The FAC-1 alliance contract makes clear the role of the client as an active alliance member, for example in contributing to the achievement of agreed objectives.

Many standard form contracts now include other provisions designed to enhance a project culture. To identify them we can still use the recommendations of Sir Michael Latham from his 1994 report, Constructing the Team:

• “A specific duty for all parties to deal fairly with each other, and with their subcontractors, specialists and suppliers, in an atmosphere of mutual co-operation”
• “Clearly defined work stages, including milestones or other forms of activity schedule”
• “Integration of the work of designers and specialists”
• A “specific and formal partnering agreement” that is “not limited to a particular project”
• Partnering arrangements that “include mutually agreed and measurable targets for productivity improvements”
• “Shared financial motivation” and “incentives for exceptional performance”
• “Taking all possible steps to avoid conflict on site”.

Contract clauses that bring these principles to life should not inhibit spontaneity or innovation. Where used in combination with provisions that ensure the right attitudes and capabilities of key individuals, they instead provide the contractual foundations for a successful project culture.

Professor David Mosey is director of the Centre of Construction Law at King’s College London