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A wake-up call for contract and commercial management

April 3, 2014

If it costs over 500 million Euros, it’s a Megaproject. An awful lot of them – some 65% – go wrong, substantially overshooting on budget or experiencing major delay. And since governments worldwide are expected to spend around 100 trillion euros on such projects over the next 15 years, their performance really matters.

 

Yesterday I attended a Megaproject conference where delegates – mostly academics – were pooling research aimed at understanding how success rates can be improved. The trouble is, we don’t really seem to know. And to the extent we do know, it appears better commercial management lies at the core.

 

Until now, the problems affecting megaproject performance have been perceived largely as issues for project management. However, the evidence – thin though it is – appears to point more towards weaknesses in stakeholder analysis, relationship definition, coordination and management. These are capabilities that should be provided through commercial skills and addressed through effective contracting structures and management.

Specifically, the major findings from research have been:

  • A need for ‘special purpose entities’ (SPEs). Essentially this is about defining the best relationship model for the project and structuring the organization for its delivery. An SPE is generally a newly structured company or joint venture.
  • A need for ‘modularization’. This is essentially about work breakdown and may take several forms, but is especially relevant in addressing some of the more common contract management issues, such as disagreement over scope and goals or contention over change management. Modularization could affect how and where work gets done; but it is executed through separation of contracts and might (I believe) include the type of ‘modularization’ one would see in agile contracting.
  • Impact of external stakeholders. This is an area that should be very familiar to any commercial manager – the need for thorough stakeholder analysis and reconciliation of their views. Beyond that, in megaprojects, consideration of external stakeholder needs may generate creative ideas for additional value; it will certainly influence how the project is presented, its value proposition and, therefore, will potentially alter scope and goals.
  • Establishing effective performance criteria and management. The business model for megaprojects varies. The criteria that need to be managed also vary – for example, the duration, the likelihood of cost overruns or delays. But in these complex environments, there need to be more measures than the traditional time, cost and quality. For example, behavioral characteristics or agile budgeting might be examples of additional areas requiring active management, as well as the characteristics identified as elements of relational contracting.

Professor Naomi Brookes provided valuable insight when she observed that the ideas being applied in the structuring and management of megaprojects are mostly decades old and never truly tested or validated; they were mostly developed for smaller projects; and they tend to be driven by the buyer or funding agency. In other words, without effective research, contract and commercial management will remain an area of guesswork and far too many projects will continue to under-deliver. That is why IACCM is so determined in pushing the research agenda and raising the skills and competencies within member organizations. It is time for the practitioner community to awaken to the scale of need and opportunity that this represents and to become far more active in support and advocacy of improved commercial and contracting standards. 

4 Comments
  1. Eric permalink

    Isn’t this a Simple matter of Best Price WINS the deal so Vendors are pushed to quote low and therefore knowingly under quote with the understanding that having done so they will now go over budget? It’s been going on for years?
    i.e. If Vendors quote reality they won’t win the deal. Small, Medium, Large or Mega Deal. Do we really need a team of analyst and “Accademics” We may wnat to think there is some such complicated archaic structure that cna be fixed to improve the situation but if you dont fix teh basics the rest won’t flow on.

    • Eric
      the issue you raise regarding low price bidding is real and remains pervasive. But your comments seem rather fatalistic. As a CEO receiving this advice, I guess my reaction would be ‘Why are you in the room if this is all you can tell me?’ I think your comment goes to the heart of my original post. That is, if we want to gain respect and add value, we must be able to advise management on issues such as the one you raise. So if you face customers who make buying decisions solely on best price, what is the commercial strategy to get beyond this?

  2. kulbir lamba permalink

    Thankx for the informative piece of knowledge.

    Would like to elaborate that the buzzing concept of Public Private Partnership tries to accommodate the risk and tries to divide it on the party most suitable to take it. However it is caught in the policy issues in the country like India.

    I would like to ask how the innovation/ tactics mentioned can be applied while working in a government framework where the guidelines are mostly fixed and rigid leaving almost zero maneuverability.

    • Kulbir
      Your question is a good one.

      Of course the answer is implicit in the title of Public Private Partnerships. The word ‘partnership’ implies some sharing of responsibility as well as the resulting benefits. The problem – as you suggest – is that public procurement policies are frequently not aligned with this concept. Indeed, the problem goes fur4ther than just how risks are allocated. A partnership suggests that the parties will work together towards a common goal and the each in some substantial way contributes. I think many have found that the public sector struggles to adjust to these very different delivery models by building internal capabilities – skills, processes, systems – that can support greater collaboration. They are more accustomed to passing all responsibility to the supplier and having little engagement in the delivery process – which is then a major cause of such arrangement under-performing.

      To be fair, a similar challenge often occurs with private sector suppliers, who may not have grasped the significance of partnering in this way. Certainly, there are many examples where bidders have substantially under-priced in order to win the bid, then discovered (or admitted) that the work cannot be done at that price …. So here we face a slightly different challenge, which is the maturity of they buyer’s selection system and criteria.

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