Contracting Solutions: Leveraging Contract Work for Project Momentum
Imagine you have so many projects coming up, but full-time employment isn’t within your tight budget. Why don’t you give collaborative contracting a try? This article will discuss what it is and how you and your organization can benefit from it.
What is Collaborative Contracting?
Collaborative contracting is a strategic approach to procurement and project management. It can help you prioritize collaboration, cooperation, and shared risk between you and your contractors in a contractual agreement.
Unlike traditional contracting models for major projects, it promotes open communication, trust, and collective problem-solving to help attain your desired results. You can pursue your shared goals through joint planning, shared decision-making, and incentivization of all stakeholders.
This approach can enhance your project outcomes, minimize possible conflicts, and cultivate enduring relationships founded on trust and mutual achievements.
Types of Collaborative Contracting Models
There are two types that you can check. Each may be beneficial for you and your contractors as long as you agree to the specifics of your contract.
Two-stage contracting models involve appointing contractors under a services arrangement in your project’s initial concept or pre-construction phase. During this stage, you will closely work with contractors to develop the project’s design, tackle significant challenges, and establish more efficient pricing.
Once this phase is done, the contractors will shift into a formal contract to carry out the design or construction work. Examples of two-stage contracting models include construction manager at risk (CMAR), construction manager-general contractor (CM-GC), progressive design-build (PD-B), and predevelopment agreement (PDA).
Relationship contracting models are designed for complex and demanding projects where a clear transition point with well-defined scope and efficient risk allocation may not be achieved during the design phase. Instead, continuous collaboration and risk-sharing throughout the entire project’s delivery process will be essential.
These models represent a “paradigm shift” from traditional contracting approaches, as they will involve pooling and sharing risks rather than allocating and pricing them individually. This collaborative approach will encourage you and other stakeholders to work towards mutually beneficial outcomes, fostering cooperation and minimizing disputes and adversarial behavior.
Examples of relationship contracting models include integrated project delivery (IPD), delivery partner (DP), and alliance contract model.
Collaborative contracting models can help you reduce risks and enhance project quality. When you share risks and rewards, you and your contractors can avoid adversarial relationships, litigation, and claims.
On top of this, you can rely on each other’s expertise, skills, and resources to deliver superior results. Collaborative contracts can help you establish a culture of trust, collaboration, and learning, which promotes innovation and creativity.
This environment will encourage you and your collaborators to explore creative solutions and technologies while benefiting from continuous improvement and consistent feedback. Ultimately, it allows you to adapt to evolving needs and opportunities.
Collaborative contracting models may pose certain challenges within the design-build industry. These may include the need to align incentives, manage expectations, and resolve disputes. In aligning incentives, you need to establish a clear and equitable agreement regarding target costs, performance incentives, and risk allocation.
You may find that regular monitoring and project performance evaluation will be essential. Managing everyone’s expectations requires effective communication and coordination among all parties, supported by a transparent structure with well-defined roles, responsibilities, and decision-making processes.
In resolving any disputes, you may also require a proactive and constructive approach to help you focus on finding mutually beneficial solutions.
It is why building and maintaining trust and respect is crucial in this process. In this regard, implementing a dispute resolution such as mediation, arbitration, or expert determination is important to handle disagreements effectively.
Collaborative Contract Elements
Your contract should be founded upon the co-creation of the project’s transparency, scope, and joint governance to ensure its effectiveness. Here are the four practices you would need to observe.
Set the Pre-Planning Period
At the commencement of every collaborative contracting endeavor, you should initiate the process by handpicking all vital delivery collaborators, such as your engineer and architect, the main original equipment manufacturers (OEMs), and at minimum, one contractor.
This central team will collaborate closely, typically at the owner’s cost, to develop a conceptual design, estimate costs, and establish a schedule. They will then proceed to negotiate and finalize the commercial terms of the contract, aligning everyone’s interests throughout the project’s entirety.
A Single and Final Contract
This singular and ultimate agreement you create together with your partners will be signed by all parties involved. It will precisely outline the work’s extent, schedule, coordination protocols, and collaborative responsibilities for each of your important delivery partners from the supply chain to the highest management level.
It also specifies the compensation structure, that covers the actual expenses and overhead recovery, and profit-sharing arrangements in the event of a successful project. It also includes the details of voting rights, representation on the governance board and executive leadership team, as well as the procedures for handling change orders throughout the project.
Collaborative-type contracts usually incorporate a no-fault clause that necessitates members to forfeit their rights to make claims against one another. Unlike a conventional lump-sum contract, where you may strive to offload as much risk as possible onto other involved parties, partners involved in a collaborative contract have a restricted ability to assert claims as they arise.
Instead, all decisions pertaining to your project are binding and determined by the governance board.
Throughout the implementation, collaborative projects are commonly overseen by a joint management structure bound by an explicit contractual obligation for all involved parties to make decisions in the project’s best interests.
Your governance board will include representatives from each crucial delivery partner, with each representative possessing voting rights in all project-related decisions. All partners should pledge to uphold transparency regarding their respective costs and schedule, while collectively sharing the risks and rewards associated with the project’s results.
Collaborative Contract Implementation
If you’re looking to switch from a traditional contract to a collaborative one, here are the steps you would need to consider taking.
Understanding structural readiness.
As the project owner, you should understand your own readiness to implement a new collaborative structure. Knowing where your weaknesses and strengths lie enables you to determine the level of collaboration your organization will require better.
An example is identifying if you have strong organizational capacity and capabilities, such as strict stage gates, and buy-in from executive leadership to the project team.
Choosing the right partners.
When evaluating potential partners, you should focus on verifying their qualifications and expertise. Your delivery partner model should possess relevant experiences, such as designing similar facilities or possessing local knowledge and presence.
It is also essential that partners exhibit distinct capabilities to avoid redundancy and maintain sound financial health. Next, evaluate a potential partner’s project team and senior management. Take into consideration their openness, self-driven mindset, and willingness to foster collaboration.
Defining the project in detail.
When deciding on the contract type, you should make an early determination whether the anticipated financial returns and risk assessment justify the expenses associated with a higher-quality final investment decision (FID).
If so, forming a cross-functional team, with the inclusion of key project stakeholders collaborating closely, becomes instrumental in developing a comprehensive project scope, execution plan, and cost estimate. Although this may increase your financial commitment, its benefits will outweigh the costs by significantly enhancing the chances of successful project execution.
Set up a common incentive.
Instances of distractions and inefficiencies may arise when you or your project stakeholder will only focus on your individual goals. One method to foster collaboration involves establishing a shared incentive pool that adjusts based on the overall performance of the project.
This way, all parties contribute to and receive compensation based on their involvement. This promotes a collective mindset and aligns everyone’s efforts toward the project’s success.
Invest in trust and maintain it.
Switching from an adversarial to a collaborative approach requires continuous investment in various aspects. It involves fostering and preserving trust with your delivery partners while cultivating collaborative behaviors like problem-solving, knowledge-sharing, curiosity, and creativity.
To achieve success, you should prioritize your organizational aspirations and give them the same level of importance as your financial ones and schedule objectives for the project. Enforcing principles of reliability and openness allows you to create an environment that fosters collaboration.¹
Improve business connections and results with collaborative contracting.
If you’re looking for an effective approach to your projects or agreement, collaborative contracting may be for you. It can help build relationships and foster cooperation while considering the shared objectives that can benefit all parties involved.
Go beyond traditional transactional models by promoting trust, open communication, and joint problem-solving to achieve your desired outcomes. Through collaborative contracting, you can improve efficiency, innovation, and long-term partnerships.
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1. Banaszak, Jim, et al. “Collaborative Contracting: Moving from Pilot to Scale-up.” McKinsey & Company, 17 Jan. 2020, www.mckinsey.com/capabilities/operations/our-insights/collaborative-contracting-moving-from-pilot-to-scale-up. Accessed 19 July 2023.