Poor risk allocation, and misaligned contractual structures and incentives result in cost overruns and schedule delays.

According to ARCADIS (2022) Global Construction Disputes Report, the top dispute causes in construction projects included poorly drafted or incomplete and unsubstantiated claims, errors and/or omissions in the contract documents, owner/contractor/subcontractor failing to understand and/or comply with their contractual obligations, and owner-directed changes. ARCADIS (2022) further revealed that North America's average dispute dollar values were at historic highs of $37.9 million and $30.1 million in 2020 and 2021, respectively, and the average dispute length was about 15 months. Changali et al. (2015) reported that over 98% of mega projects incurred cost overruns or delays, with an average cost increase of 80% of the original value and an average delay of 20 months over the original schedule. Post COVID-19 pandemic environment with rising costs, materials and labour shortages, and supply chain issues exacerbated the construction industry's challenges. Furthermore, increased legislative and regulatory requirements emphasizing ESG (Environmental, Social and Governance) considerations, sustainability concerns, and occupational health and safety needs have augmented construction projects’ complexity and risks. Therefore, it is not surprising that consultants and contractors find it difficult to deliver projects on time and on budget despite financial penalties.

McKinsey & Company (2020) attributed part of the problem to poor risk allocation with “misaligned contractual structures and incentives,” resulting in players making money from claims rather than embracing innovative approaches to improve productivity and performance.

Exhibit 1 presents an example of poor risk allocation because of the contractual structure. In this case, as per the traditional design-bid-build contract, the consultant had no direct contract with the contractor. The consultant informed the owner that the potential bidders be advised that they should not rely on the consultant’s reported “factual geotechnical data” and design recommendations and should instead perform their own geotechnical investigations and interpretations. It is difficult to fathom such statements and recommendations – why should an owner bother to engage a consultant for design, and why should the owner pay twice for geotechnical investigations? Such disclaimers and exculpatory clauses have no bearing in courts when contractors encounter materially different site conditions. In such cases, owners and/or consultants can be held liable for compensating contractors and providing schedule relief.

Because of the existing and upcoming challenges, there is an increased interest in collaborative (also referred to as alternative) project delivery methods and lean and agile approaches to help avoid disputes, expensive claims and litigation, project delays and cost overruns while eliminating waste and improving productivity and profits. Research has shown that collaborative/alternative contract delivery methods resulted in a 15-30 percent improvement in cost and schedule performance compared with traditional contracts. According to McKinsey & Company (2020), over 82% of respondents believed that transforming an organization toward an agile and flexible setup would be the “winning move” in the future construction-industry ecosystem.

Figure 1 shows a selection of contract delivery and pricing methods used in the construction industry. However, no “ideal” contracting method and project management approach exists to address the construction industry’s project delivery issues. Some contract delivery methods were proposed and developed to serve a particular construction industry sector. For example, the American Institute of Architects (AIA) proposed the IPD (Integrated Project Delivery) approach and system, which has been successfully used for institutional buildings (e.g., hospitals, schools, etc.) construction projects. However, IPD needs to be adapted and modified for other types of construction projects (e.g., roads, bridges, and water infrastructure). In Canada, CCDC (Canadian Construction Documents Committee) provides standard construction contracts, forms, and guides for most but not all contract delivery methods. The standard forms and contracts must be modified and adapted according to an owner’s organizational capabilities, procurement policy requirements, and bespoke project objectives, priorities, and drivers, such as scope, budget, schedule, risk, quality, and innovation.

The complexity, lack of understanding and experience, risk of failure, and time and resources required to develop customized contract documents can overwhelm owners, consultants, and contractors to incorporate alternative/collaborative contract delivery methods. Therefore, Good Roads and Trenchless Institute have developed a professional development course entitled “Collaborative/Alternative Contract Delivery Methods for Successful Projects”. The course provides foundational elements and best practices for developing and executing various contract delivery methods, including design-bid-build, design-build, construction management at risk, and integrated project delivery. In addition, experienced industry practitioners ( Asim Masaud, M.Sc.(Eng.), P.Eng., PMP and Arthur Winslow ) will share effective strategies to align an owner’s goals and objectives to select the suitable contract delivery method with the best risk allocation and management practices. Furthermore, information on integrating relevant lean and agile construction processes and tools at various project stages will be presented. Please visit https://www.trenchlessinstitute.ca/contracts/ for more information.

References

ARCADIS. (2022). Successfully navigating through turbulent times 2022 Global Construction Disputes Report. https://images.connect.arcadis.com/Web/Arcadis/%7Bcb063f2c-be31-410c-9807-d7a9bf16f666%7D_2022_Global_Construction_Disputes_Report_-_Successfully_navigating_through_turbulent_times.pdf

Changali, S., Mohammad, A., & van Nieuwland, M. (2015, June). The construction productivity imperative | McKinsey. www.mckinsey.com; McKinsey & Company. https://www.mckinsey.com/capabilities/operations/our-insights/the-construction-productivity-imperative

McKinsey & Company. (2020). The next normal in construction: How disruption is reshaping the world’s largest ecosystem. https://www.mckinsey.com/~/media/McKinsey/Industries/Capital%20Projects%20and%20Infrastructure/Our%20Insights/The%20next%20normal%20in%20construction/The-next-normal-in-construction.pdf