Trends&LessonsLearntInContracting 11Oct12 JBVs1 · Scheme to develop ‘Yuen Chau Kok Home...

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leading edgeprojects consulting ltd , 2012

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Presenter & Chair of the C&P SIG :

Jon Broomeleading edgeprojects consulting ltd

setting | your | projects

up for | success

[email protected] +44(0)7970 428 929 www.leadingedgeprojects.co.uk

Welcome to/

Trends & Lessons Learnt in Contracting from other Industrial Sectors


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• Housekeeping

� Mobiles off

� Fire Exits & Alarms

� Toilets

• Future Events

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Objectives

� To make a clear point about how to contract to get what you want.

� To give an overview of an innovative project to help clients & suppliers (in the

aerospace sector) get what they want.


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Agenda

� About the SIG (briefly)

� 2 or 3 examples of how not to do it. Lesson learnt ?

� 2 or 3 examples of how to do it.Lesson learnt ?

� Case study : creating a horizontal Extended Enterprise in the aerospace sector.

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� One of the first SIGs

� Flourished and then declined.

� A conference some 4 ½ years ago : members wanted the basics of contracts & procurement.

� We run a combination of basic training events called “seminars” (always booked up well in advance) & more leading edge events.


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Aim of the C&P SIG :The Contracts & Procurement Specific Interest Group :

� Exists to promote and disseminate knowledge, understanding and good practice of contracts and procurement in a project & programme environment.

� Aims is to become a lively and constructive debating forum which takes existing best practice and helps make it better.

� Wants to be disseminating this knowledge, understanding and better than best practice through a variety of accessible means.

� Has a long term aspiration to become recognised as an international forum at the leading edge of excellence in contracts & procurement for projects.

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2012 Contracts & Procurement SIG Structure

The Outer Circle (& beyond) : Receive Information via general APM publicity.

The Middle Circle : Those on the C&P web mailing list.

The Inner Circle Circle : Those who are willing to contribute when asked e.g. Talks, contributing & reviewing documents. Limited direct emails.

The Bulls Eye : Committee members & those who want to initiate ‘projects’ & pro-actively contribute. Copied in on most emails wrt SIG initiatives.Bi-monthly web / tele-conference meetings.


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Bad Case Study 1 : Yuen Chau Kok Flats

� Honk Kong (HK) construction conditions of contract were found, in an international survey, to be the 2nd out of 17 most onerous in terms of risk allocation.

� HK has variable ground conditions !

� Having Pre-qualified, contracts were / are typically awarded on lowest cost basis.

� HK Housing Authority housed approx. 60% of all HK residents and typically put full time related damages in contract.

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� Scheme to develop ‘Yuen Chau Kok Home Ownership Scheme (HOS) Site’ consisted of 5 high rise flats.

� In Feb ‘98, Zen Pacific Civil Contractors Ltd won contract to do piling for the lowest bid of HK$63m. Unsurprisingly, there were suspicions that this was on the low side.

� They subcontracted the work to Hui Hon Contractors Ltd without telling the client and giving the impression that they had not !

� Extent of damages in HK meant that average subcontractor would go bust if late by 7 weeks.

� On this (sub)contract damages were HK$170k per day.



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� Scheme to develop ‘Yuen Chau Kok Home Ownership Scheme (HOS) Site’ consisted of 5 high rise flats.

� In Feb ‘98, Zen Pacific Civil Contractors Ltd won contract to do piling for the lowest bid of HK$63m. Unsurprisingly, there were suspicions that this was on the low side.

� They subcontracted the work to Hui Hon Contractors Ltd without telling the client and giving the impression that they had not !

� Extent of damages in HK meant that average subcontractor would go bust if late by 7 weeks.

� On this (sub)contract damages were HK$170k per day.

So what would you be tempted to do if falling behind ?



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� Progress was slow, so Zen Pacific took back piling for remaining 3 buildings paying Hui Hon HK$17m in total.

� Piling completed by 19 Dec 1998 and Zen Pacific was paid HK$57m.

� Hui Hon was liquidated in July 1999 and ceased operation in January 2000.

� HK HA appointed an expert to investigate abnormal settlement of first two buildings. On 8th December 1999, he confirmed it was due to short piling.

� 9th January 2000 : construction suspended on what were now 30+ storey partially built flats.



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� March 2000 : decision taken to pull down buildings. This had happened by June 2001.

� Jan 2001 : Criminal case launched against two directors of Hui Hon and the site foreman. Got 12 years and 6 years.

� Nov 2001 : HK HA lodged a claim against Zen Pacific for losses amounting to HK$605 million. These included the costs of demolishing the two buildings and the compensation paid to the superstructure contractor.

� Nov 2003 : After legal costs of around $40 million, HA reached an agreement with Zen Pacific that Zen Pacific would pay compensation of HK$80 million.


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A happy ending … … .


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� In ‘90’s, BAA seen as very forward looking client, due in part to being an early adopter of NEC suite of contracts.

� Had successful experience so far, so up’ed the anti by using for Heathrow Express tunnel : a £50m+ contract.

� Tunnelling method was NATM which was innovative in UK and in clay.

Bad Case Study 2 :Heathrow Express Collapse

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� Contracting strategy was option A : activity schedules which puts maximum risk on the Contractor (although unexpected physical conditions would be a compensation event).

� Contractor won predominantly on lowest price and progressively started to fall behind on their EV curve on both time and cost.

� Contractor also found that they could not make up for a low bid in the way they traditionally did.

So what did they do ?

Bad Case Study 2 :Heathrow Express Collapse


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� A GNER train travelling at approx. 115 mph crashed, on 17th October 2000, because the rail fractured.

� The likely cause was “rolling contact fatigue” (defined as multiple surface-breaking cracks)caused by normal wear and tear.

� Both Railtrack (Rt) and their maintenance contractor knew of this condition. In fact they had monitored its continued progressive deterioration over the summer.

So why wasn’t it repaired ?

Bad Case Study 3 :Hatfield Train Crash


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� Rt were liable for large payments to train operators if their trains were delayed or unable to run as timetabled. It would pass these as damages onto those who maintained & looked after its network.

� The replacement of the track at Hatfield had been scheduled to be done by Rt’s track renewal contractor in mid-March 2000, but replacement rail did not arrive, so had to be scheduled for summer when more trains run.

� Rt offered 2 x 4.20 min possessions while Jarvis wanted 5 x 8 hour possessions and was not willing to proceed.

Bad Case Study 3 :Hatfield Train Crash

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One last tale … …

of the monkey approach to contracting.


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So what’s the lessons learnt ?

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Characteristics of a Project Alliance.

� Potential alliance members develop scope so can agree an alliance target.

� Each contract package is direct with Client

� Overarching alliance agreement partly ties fortunes of each member to success of project rather than individual contract.

� Incentive to partner horizontally & vertically.


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Characteristics of a Project Alliance.� Potential alliance members develop scope so can agree an

Alliance Target around which a pain / gain share mechanism operates.

� The Alliance Target typically has within it :> Client project costs e.g. people, land take etc. and> risks traditionally held by the Client and added in through

‘claims’. Instead, participants can focus on managing them vs. arguing over ownership and quantum.

� Each contractor typically has an individual works contract with the Client for their scope of work.

� There is an overarching alliance agreement / agreement to tie fortunes of each member to success of project rather than individual contract.

� This gives the motivation to partner vertically & horizontally.

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Alliance Contractual Framework

Sub

Consultants

Principal

Consultants

Sub

Contractors

Principal

Contractors

Sub

Suppliers

Principal

Suppliers

Client Alliance Agreement


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Key Features of a project Alliance

� A pain / gain share mechanism which aligns the motivations of the key parties to the success of the project.

� Open book contracts, promoting transparency of cost

� A single integrated Alliance team in terms of project organisation, systems, processes and behaviours. This is both to maximise the value gained from each organisations’ strengths and avoid unnecessary duplication.

� Joint governance in terms of performance management and a Core Group made up of senior members of the organisations who are members of the Alliance. They set direction, steer and confirm strategy, monitor performance etc. and are the first tier of dispute resolution.

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Good Case Study 1 : The Andrews Oil Field Alliance� At £450 million CAPEX, Andrew’s oil field not worthwhile

developing.

� BP communicated vision & evaluated returns on commitment to ten ‘Minimum Conditions of Satisfaction’.

� 7 Potential alliance members paid on input basis.

� Reduced budget to £373 million at sanction, including allowances for risks.

� Most contracts on input or cost reimbursable contracts.

� Under or over run split on TC basis between seven principal alliance members up to maximum limit.

� Project came in 6 months ahead of 3 year schedule and 22% below sanctioned budget.

Slides courtesy of Norman Kerfoot of

WorkContracts

AllianceAgreement

ANDREW DEVELOPMENTPost-Sanction Agreements

• Defines gain sharing

• Establishes relationships/behaviour’s

• Establishes Alliance Board

• Stand-alone conventional type contracts• Between BP and individual contractor• Specifies individual scope of work• Method of reimbursement

• Lump sum• Fixed O/H & Profit plus reimbursable

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ANDREW DEVELOPMENTSanction Risk Assessment

100%

85

%

54

%40%

15%

£439 Upper limit

£383 Expected cost

£373 Sanction

cost

£328 Lower limit

Cost 4th quarter 1993

Probability

Of

completing

within cost


FinalCost

SanctionCost £373m

360

-20

-40

-60

340320300

380 400 420 440 460

+20

+40

+60

Gain

Loss

PartnersSavings

ContractorsReward

Contractors Risk

Total Contractors £27m

AdditionalCosts to Partners

46%

54%

ANDREW DEVELOPMENTGain Sharing

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BP/Partners-46%

Allseas4%

THOF12%

Saipem 6%

Santa Fe 3%

Emtunga 1%

Hifab 6%

Brown & Root 22%

ANDREW DEVELOPMENTGain Share Equities


• Sanction Estimate £373M

• Sanction First Oil Date 1/1/97

• First oil produced 26/6/96

• Out-turn cost £287.5M

• Saving to alliance members £85.5M

• Resulting cost to BP & partners £334M

ANDREW DEVELOPMENTSummary Results

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Good Case Study 2 :Environment AgencyHumber Package 1

Slides Courtesy of

• Donald Robinson – Project Executive, Environment Agency

• Cameron Dufton – Regional Commercial Director Birse Civils

Humber Package 1: Management and Procurement

HESMP

• Delivery of first 5 years

• 5 schemes initially, now 7

• 22,000 properties, 120ha BAP

• £30m

• 2 out of 3 years completed

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Section 1.1 : The PAR

PAR

Risk

EA Costs

Designer’s Costs

Contractor’s Costs

EA Costs

Designer’s Costs

Contractor’s Costs

Shared Savings

•What It Is

Commencement Completion

Section 1.4 : The Individual Schemes

Risk

EA Costs

Designers Costs

Contractors Costs

Stallingborough

Risk

EA Costs

Designers Costs

Contractors Costs

Halton Marshes

Risk

EA Costs

Designers Costs

Contractors Costs

Swinefleet

Risk

EA Costs

Designers Costs

Contractors Costs

Brough

Risk

EA Costs

Designers Costs

Contractors Costs

Donna Nook

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How It Works

The Parties are Incentivised (Overarching Package)

• Contractor obtains 50% of the savings to 94% of PAR Value

• Contractor obtains 25% of the savings between 88% and 94%

• Designer obtains 5% of the savings (capped at 10% of Fee)

• Overspend is dealt with in a similar manner

Section 1.2: Incentivisation

Additional Incentive Measures (Target Cost)

• Contractor required to produce Target Cost

• Contractor loses Fee if overspends by 6%

• Contractor does not get defined cost if overspends by 12%

Section 1.3: Target Cost

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So we have:

• 2 schemes that were at Target cost stage at PAR “sign up”

• 3 Schemes that are partly designed

• The Team is required to sign up to the PAR in the belief that it can be achieved.

• The sum of the 5 schemes is fed into the overarching PAR

• For the purpose of managing the Package we allocated each scheme with its own correctly apportioned PAR.

Section 1.4: Individual Schemes

Section 3.4: The Result

• Saved £6m

• Change reduced from Industry “norm” of 18 % to 3%

• No Contention

• Fully integrated and aligned team

• Repeat Business

• Delighted customer

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Humber Package 1: Management & Procurement

Successes

• Promises delivered: £2m VE as tendered, total of £6m savings to date

• Change per contract minimised (<2%)

• Risk expenditure: 18% industry average down to 3% actual

• TPM scores 7.2

• Zero Riddor H&S or environmental incidents

• Zero defects on completion of schemes

• Positive feedback from the public

We Have

• A Customer who had chosen a Contractor not a price

• A Target we could achieve and a Customer who wanted us to achieve it

• A Plan to beat the Target

Part 5: The Strategy

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So what’s the lessons learnt ?


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Background to the creation an Extended Enterprise� Client a regional aerospace agency.

� Region had one Customer but no established Tier 1’s.

� Fear that business would drift away from region.

� Worked, via the Advance Consultancy, with regional aerospace agency and subsequent Tier 2’s / occasional Tier 1’s to develop an Extended Enterprise.

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The Concept : traditional arrangement looks something like … …

Lead Supplier

Customer

Sub-Supplier

2

Sub-Supplier

1

Sub-Supplier

3

Extended Enterprise Structure looks something like this … …

Leading

Partner

Customer

Supporting

Partner2

Supporting

Partner . 1

Supporting

Partner3

Horizontal & VerticalRisk Sharing (RS’ing)& Collaboration

Horizontal RS’ing& Collaboration

Contractual Link

Vertical RS’ing &Collaboration

Note : Risk can be both downside threat

and upside opportunity / innovation.

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1. A Customer approaches the Extended Enterprise

2. The Leading Partner (from the Core Group of LP’s) is appointed based on work content, Customer preference etc.

3. Sub-Partners are appointed earlier on a number of criteria, but cannot just be approvals and lowest price. SPs can be from both the Core Group and Tier 3’s

4. Risk – threat & opportunity - is identified early leading to a better bid.

5. Customer enters into a contract with Leading Partner with risk sharing between it & Sub-Partners in the form of :

a. Joint, shared (in agreed proportions) & proportional liability for damages and insurance up to normal limits.

b. Risk pots for specific identified threats and opportunities.c. Potentially programme, inflation and production quantity risks

6. Risk sharing drives collaboration in managing threat out and opportunity / innovation in.

Very High Level Process

The Value Proposition for the Customer is

> Single interface : Leading Partner manages the supply chain below them but gives the end Customer complete transparency

> Business Continuity : a supply web vs. a supply chain

> Better risk management : incentive and mechanisms to jointly identify and manage whether threat or opportunity

> Cost and Efficiency savings – work done at the right price at the right level of the Tiering structure

> Increased Global supply chain sourcing for Design, Engineering & Manufacture

> Network with other Groups to solve any supply chain gaps

> Wider capability – cradle to grave – design, manufacture, assembly and improve

> Established Common language, Common Culture, Common Processes

> Flexibility and agility – more responsive to rate increases and meeting rate requirements

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The Value Proposition for the Suppliers

> Risk sharing means able to bid for bigger packages of work

> Potentially more work.

> Different types of work.

> If competitive advantage develops as Extended Enterprise develops, more profitable work.

> Smoothing of workloads.

Does it Work ?

Will it Work ?

Trends&LessonsLearntInContracting 11Oct12 JBVs1 · Scheme to develop ‘Yuen Chau Kok Home...

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