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Strategy vs. Rules: The Key To Successful Contracts

February 14, 2011

Most contracting processes are highly rules-driven. The terms are dictated by a range of stakeholders from Legal, Finance, Operations, Product Management and various other functions. Contracts or commercial staff mostly have limited authority to make changes; their role is to impose standards or to reconcile and manage differences between stakeholder perspectives and market needs, negotiating within permitted boundaries. On occasion, they may develop creative commercial solutions to intractable problems.

Last week I met with Barbara Chomicka, who project managed the highly successful Mediacity development in Manchester, UK. This $500m project was at the leading edge of technology and included a complex mix of suppliers, operating under both public and private sector procurement rules. Unlike most major construction projects, it came in on time and within budget.

In addition to her project management skills, Barbara is a qualified architect and a Certified Member of IACCM. I was particularly interested to discover more about the approach she had adopted to contracting and risk management.

In common with a growing number of today’s complex projects, Mediacity involved many uncertainties. The specifications were in many areas imprecise or highly generalized – for example, that the buildings must comply with the environmental and regulatory standards applicable in 5 years time. The major certainties were the date for completion and the reputational damage that would occur in the event of failure.

At the outset, a key decision was made. It was estimated that traditional contract negotiation would take a minimum of 6 – 8 months, and that this would make the completion date unachievable. Therefore work commenced under a Memorandum of Understanding that released an initial $8m to enable start-up . Once this was exhausted, further top-up funds were released. More formal contracts were negotiated in the background while work continued.

Another strategic decision related to the criteria for supplier selection. Given the many uncertainties, it was obvious that individual price estimates would have limited meaning and that the key to delivering within budget would be the combination of experience and attitude. In appointing suppliers, the contractor was looking for evidence of collaborative working and a sense of shared ownership for problems.

This spirit also influenced the approach to risk management. There was no formal risk register. The integrated project team operated on principles of openness and transparency. When issues arose, they were immediately communicated across the team to enable resolution or mitigation.

In combination, these approaches add up to a contracting strategy. They broke many of the rules associated with traditional contracting, yet they led to a successful outcome. Certainly I am not suggesting that they represent a model for every project  or relationship, but they illustrate the need for contracts and commercial professionals to exercise judgment and to develop flexible approaches to their work. It is the ability to understand when the rules do NOT apply that is the essence of good judgment in every profession. In the world of contracts and commercial, we need more people who exhibit this courage and understanding.

Barbara Chomicka is presenting at the IACCM EMEA conference in Amsterdam May 9th – 11th – see http://www.iaccm.com/emea for details.

One Comment
  1. haward permalink

    Hmmmm

    “This spirit also influenced the approach to risk management. There was no formal risk register.”

    I simply don’t believe that that is possible in any contract. There must have been some form of risk recording because it is essential from a legal , financial and HSSE standpoint. The risk register may have been run differently , there may have been greater transparency but the essence of successful management of anything is an understanding of the risks , an appreciation of how to manage them and formal methodology for putting that into practice

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