Improving procurement and contract strategies to ensure project success

Between May and June 2020, I conducted an online survey of NEC users to investigate the extent to which they felt productivity and success were affected by procurement activity during the pre-construction stage.

Since the Latham report nearly three decades ago (Latham, 1994), productivity in the UK construction sector has been persistently low, with lack of vertical supply chain integration recognised as a key factor. Poor collaboration across supply chains has impeded innovation and led to uncertainty, inefficient procurement processes and high construction costs.

Contractor and supply chain profitability is also affected by inefficiencies caused by poor planning and management, re-work of defects, disputes, waste and parties carrying disproportionate levels of risk.

The purpose of the survey was to examine the role of developing procurement and contract strategies during the pre-construction stage to create a contract framework that will set the tone for a more collaborative and productive relationship.

I am now helping the UK Parliament to implement a framework agreement that was procured to establish long term collaborative relationships. During mobilisation, parties have agreed a behavioural charter that sets out the standards and behaviours to support collaborative working and progress mutual objectives.

Responses from 110 NEC users

Of the 110 users who completed an online questionnaire, 58% were clients and 42% contractors. The respondents were mainly from large organisations with over 250 employees and turnover more than £50 million.

The most common role of respondents was commercial manager (39%), followed by project manager (19%), procurement manager (17%), quantity surveyor (13%) and project leader (8%). Fewer than 4% identified themselves as either designer or main contractor.

The majority (69%) were involved in procurement and commercial planning for infrastructure projects. Just over half (51%) of all respondents identified themselves as ‘advanced’ users of the NEC Engineering and Construction Contract (ECC), and 68% had more than 15 years’ experience in their roles.

Procurement and pricing strategies

Nearly all users (98%) either strongly agreed or agreed that a well-thought-through procurement and contract strategy aligned to project objectives increased the likelihood of successful delivery. Only 5% indicated that detailed or high-level procurement strategies were not developed for works tenders. Over three quarters (78%) also recognised the benefit of establishing long-term relationships to decrease construction costs.

Procurement and commercial input is obtained as early as the end of the RIBA work stage 1 (preparation and briefing) by over half (55%) of respondents. But only a similar proportion (57%) said their in-house procurement team had led and managed the procurement process. Given 82% of respondents were from large organisations, this seems to indicate that in-house procurement resources are perceived to be of limited value.

The most common procurement method (53%) was design and build, either single-stage (agree price following competitive tender) or two-stage (collaborate with contractor to agree price). The majority of respondents (58%) who used design and build engaged the contractor at either the beginning of RIBA stage 3 (spatial coordination) or stage 4 (technical design). Only 20% involved the contractor from the beginning of stage 2 (concept design). This seems to confirm the supply chain is often not integrated early enough in the design process.

Only a third (34%) of respondents indicated that quality was given a higher weighting than price in tender award criteria. The continuing use (37%) of traditional build-only procurement, coupled with price being the deciding factor over quality for awarding contracts, indicates organisations are still looking for cost certainty over collaboration and best value.

ECC Option A (priced contract with activity schedule) was the most commonly used pricing strategy (66%), followed by ECC Option C (target contract with activity schedule). When ECC Option C was used, 58% of respondents said the early contractor involvement clause was also adopted. Widespread use of Option A and traditional procurement confirms a preference for programme and cost certainty, with risk transferred to contractors.

NEC contract strategies

According to NEC users, pre-tender soft market testing was not used as standard practice to inform procurement and contract strategies. Less than a third (32%) said it was sometimes undertaken and only 28% always consulted contractors before tendering. However most (86%) confirmed that contractors had the opportunity to comment on a client’s conditions of contract before the tender closing date.

Over half of respondents (58%) felt that clients’ additional Z clauses amended NEC core and secondary clauses ‘a lot’ or ‘a great deal’. Contractors generally perceived that clauses were amended a great deal, indicating that commercial terms may be unbalanced from their perspective.

To support collaborative working, most (80%) users confirmed it was a requirement for supply chains to have back-to-back NEC forms of contract with the main contractor. Most (again 80%) also indicated that contracts stipulated minimum requirements for vetting, due diligence and management of supply chain partners. Two thirds (66%) said 30 days was a fair payment term to maintain healthy cashflow in the supply chain.

The survey concluded with an open question to identify factors that impacted on the appointment of suitable contractors. The following themes emerged as important:

• Appointing the right supply chain through early contractor involvement in tender and project
• Using procurement resources and expertise to plan and align scope, price and contract risk profile with delivery objectives
• Allowing sufficient time for early engagement of procurement and contract planning resources given that procurement and contract planning are critical to achieving project outcomes

Summary of survey findings

NEC users recognised the importance of well developed procurement and contract strategies that aligned with project objectives, managed constraints and distributed risk appropriately across the project team. Such strategies increased the likelihood of successful delivery.

NEC ECC Option C with its pain/gain sharing mechanism is considered to be the most collaborative two-party form of contract in the NEC suite. Users said it supported early integration of the supply chain during the pre-construction stage and collaborative working during construction. Collaboration was optimised if used with provisions such as the early contractor involvement clause and other secondary optional clauses that appropriately apportioned risk and incentivised performance.

Furthermore, to drive value and quality, users said tender award criteria needed to weight quality higher than price. This provided a solid commercial foundation for productive relationships, joint planning, risk management and decision making prior to and during construction. Professor of Law at King’s  College London David Mosey (2019) suggested that unless quality accounted for at least 70% of tender award criteria, cost would be the deciding factor.

Users believed that collaborative foundations could be established through the procurement process and governing terms and conditions of NEC contracts. However, they said collaborative behaviour standards needed to be understood and embedded by all supply chain partners.

Embedding collaborative behaviours

At my current assignment with the UK Parliament, I am helping to manage a new main contractor framework agreement that was let in accordance with public procurement requirements.

Contractors were consulted at pre-tender stage using a market-testing questionnaire to help refine the procurement and contract strategy. This also aimed to attract suitable contractors that were aligned to framework objectives and to sow the seeds of collaboration. The main objective of setting up the framework was to establish long-term strategic partnerships with fewer contractors to deliver a challenging programme of critical mechanical, electrical, plumbing (MEP) and fabric safety works with numerous constraints.

The governing terms and conditions of the bespoke framework are closely aligned to the principles of NEC and provide flexibility to use a range of NEC forms, secondary options and pricing options for pre-construction and construction services. The award criteria weighted quality and price in the ratio 70/30, reflecting the framework’s ambition to drive quality and productivity in all stages of delivery. UK Parliament expects to achieve this through early integration of the supply chain, design and build capability, NEC competence, modern construction methods, innovative approaches, effective management processes and collaborative working.

The requirements of the framework agreement include back-to-back NEC terms with supply chains, open-book accounting, qualitative and quantitative key performance indicators, and participation at six-monthly continuous improvement and innovation forums.

Mobilisation workshops

Since the framework agreement was awarded, the parties have invested considerable time in participating in a series of six mobilisation workshops intended to put new and incumbent contractors on a level playing field, and to achieve standardisation and efficiencies for mobilising call-off contracts to be let under the framework.

Contractors have not only been inducted into delivery processes, they have formed a common understanding of joint objectives and expectations with the client and consultant teams for working in an open, integrated and productive manner.

One workshop, facilitated by NEC drafter and expert Jon Broome, focused on behaviours and standards for collaborating across project teams. A role play of a programme-specific scenario was acted out by members of the programme team. It demonstrated bad behaviours and promoted use of the NEC early warning process for joint problem solving and management of risk.

Following the workshop, the parties signed up to a behavioural charter based on joint objectives and behaviours that will enable them to collaborate and work productively. A positive tone has been set for the framework and it has created a sense of excitement about the possibilities of what can be achieved by working closely together and progressing joint objectives.

Conclusion

Clients need to engage their supply chain early to understand, what challenges they face and what motivates them, and use the procurement method and commercial model to reflect project specific objectives and the values of their organisation. Collaborating is not simply a case of allocating risk appropriately in the contract. The importance of aligning goals and the joint effort of the parties to create a culture of collaboration for cooperation and teamwork post appointment must not be underestimated. As Abbas Naqvi, MEP programme lead at UK Parliament, says, ‘Upfront investment by us and our delivery partners to form a common understanding of expectations and to align interests has provided the platform for open dialogue and collaborative working. It has enabled us to productively work together to progress our mutual objectives.’

Key Points

• Most NEC users said in a survey last year that well-thought-through procurement and contract strategies aligned to project objectives increased the likelihood of successful delivery.
• They said construction productivity and collaborative working is often hindered by traditional methods of procurement and contracting.
• UK Parliament has implemented a framework agreement in which parties agreed from the outset the standards and behaviours for productive collaboration to drive value.

References

Latham M (1994) Constructing the Team. HMSO, London, UK, available at: https://constructingexcellence.org.uk/wp-content/ uploads/2014/10/Constructing-the-team-TheLatham-Report.pdf

Mosey D (2019)  Collaborative Construction Procurement and Improved Value. Wiley Blackwell, Chichester, UK.