The right kind of bribe: BAA's Steven Morgan on project roles

Over recent years, much has been said about partnering and alliances in the construction industry. These alliances were noble efforts intended to end adversarial relationships between client and contractor.

Partnerships work well in small businesses and marriages – but billion-pound capital programmes are too big to work around well-meaning best intentions. Like a good prenuptial agreement, project contracts are needed that clearly spell out the duties of contractor and client, define the required outcomes and, very importantly, provide incentives for constructive behaviour.

The NEC3 Option C or Target Cost type contract is a good tool in incentivising cost containment, as the contractor shares in the savings if the project comes in under budget – but it requires discipline on the part of the client not to change its mind.

Clients pay a stiff penalty for not having done their homework or failing to specify required outcomes. Vague statements of work and specifications are the handiwork of lazy or amateur customers. The “unintelligent” client also incurs extra costs if he demands to retain too many decisions or self-perform large blocks of work. Truly intelligent clients define their requirements and get out of the contractor’s way.

Partnerships work well in small businesses and marriages, but billion-pound capital programmes are too big to work around well-meaning best intentions

But a standard NEC3 Option C contract is not enough to ensure this. As well as clients, contractors can get away with misbehaving. More effective carrots and sticks need to be used. Contractors should not just be wagering their fee; they need to feel some real pain if they lose control over cost.

Risk allocation has to be specific, with risk attributed to the party best equipped to manage it, although neither contractors nor clients should expect to be indemnified against everything that might go wrong. Finally, behaviours other than frugality need to be incentivised. Too few construction contracts provide incentives for better behaviour that are of enough substance to make a real difference.

A technique that has been used in the US for many years is the award fee contract, where many incentives are offered. An award fee pool of 2-5% of a target cost is set aside to create rewards for the contractors to pursue. Either semi-annually or quarterly, the client evaluates contractor performance against previously established criteria and grants an award on a totally unilateral basis. The award is not subject to appeal or dispute but it is the client’s right to define just how happy he is with the contractor.

Indeed, award fee criteria can cover not only objective factors such as schedule, safety and quality, but should also address subjective factors including co-operativeness and innovation. Even the mitigation of failures can be rewarded when problems emerge, so that pulling the project out of the fire can be recognised too.

More effective carrots and sticks need to be used. Contractors should not just be wagering their fee; they need to feel some real pain if they lose control over cost

Under an award fee contract, the contractor is afforded an opportunity to make a concise and objective self-assessment, but all stakeholders can have some input into how much award fee should be granted. If cost savings are realised during a project, the award fee pool can even be increased so that the incentive pot becomes partly self-funded by the contractor’s own performance.

Through the award fee process linked with cost-based incentives, the responsibilities and objectives of the client and contractor are each defined. In my view, it is this clarity that we have all sought over the last decade or so, not really partnership or alliances.

Contractors and clients should be team mates but not partners. They have different roles to play on the pitch. Clients must avoid running around madly within a construction project playing the part of tier one, tier two and customer. Not everyone should play goalkeeper, nor should everyone be a striker. We each need to play our position on the field as assigned … by contract. When roles are confused or blurred, then chaos, disputes, ill will and frustration follow and just as in a football game, the whole team goes down in the flames of defeat. It is the contract, not alliances, that make good team mates.

The American poet Robert Frost wrote, “Good fences make good neighbours.”

Just so: good contracts make good projects. Calling out the lawyers and the commercial people at the beginning of a project to write a smart contract saves calling the lawyers and the judges out at the end of the project.