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Changing behaviours to streamline projects

New Engineering Contracts

This second of four Aurecon thinking papers will focus on trends that could shape client approaches to programme, project management and delivery across the globe. 

To begin our series, Steve Rowsell, director of Rowsell Wright and John Mason -- Expertise Leader, Programme & Project Management at Aurecon defined the transformation that the UK industry went through in the '90s and 2000s and the impacts of this differing approach on the supply chain and the client organisation.

In this paper, Steve and John discuss the importance that procurement and contract forms play in underpinning the behaviours that the Government and the industry were seeking to promote. Specific reference is made to the New Engineering Contract (NEC – now NEC3) which, at the time, represented a significant departure from the tried and tested forms of contract that had driven construction behaviour in the '70s, '80s and '90s.

Rowsell Wright is a specialist UK consultancy providing practical advice on all aspects of construction procurement. Rowsell Wright has worked closely with clients from the public sector, construction, clients central, and local government and private sector suppliers, including civil engineering contractors and consultants.

John Mason: I have a couple of questions that centre around forms of contract and the critical role they play in driving the right project behaviours. I’m thinking of the NEC, in particular.

How do you manage to instill trust between a client and their supply chain when you move to new forms of procurement, new ways of working and adopt new forms of contract? Mutual respect, aligned objectives and trust are key drivers for project success and, obviously, conditions of contract can reinforce or undermine these.

Do you think that the introduction of new forms of contracts, like the NEC, have changed client and supply chain attitudes? Could you perhaps elaborate on the effect that the NEC had on changing mindsets and the way procurement and commercial considerations helped to expedite the changes we discussed in our first thinking paper?

John Mason and Steve Rowsell

Steve Rowsell: It's an interesting question. I think it was a combination of being much more open and honest with the supply chain and actively engaging with them when setting up the new procedures. This was critical. We also wanted to show the industry that something fundamental had changed. The Institution of Civil Engineers (ICE) Fifth Conditions had been used for a long time, but they were the source of a lot of the claims and the legal disputes which were troubling the industry.

That said, the ICE Fifth was certainly not the only cause of the problem. The form of contract combined with a lowest tender, lowest-priced tender approach and a very competitive market at that time all came together to contribute to the commercial and contractual problems we were seeing. Against this backdrop, we wanted to show that we were doing something fundamentally different.

John Mason: Can you walk us through that process of change and how you achieved positive results?

Steve Rowsell: The NEC first came to prominence in the early '90s. As the Highways Agency, we then piloted it during the mid-'90s and then adopted it for the whole range of programmes on highways. A number of other clients also took it up at that time. The NEC was then implemented across everything we did in the early 2000s. While it is just a form of contract, what it really showed was that the client was now going to do something different, because the NEC3 contract is built on a spirit of mutual trust and collaboration.

What clients are saying to the supply chain is “we're not going to break that cultural proposal. If you want to, then, okay, yes, you can mess up one contract, but once you break that spirit of trust, then don't expect to be working with us after that.”

We were demanding an approach, based on collaboration; but, of course, it is collaboration supported by a range of commercial controls; and the contract itself provides inbuilt project contract management procedures which give the client a lot of confidence.

You are requiring open-book accounting, full transparency of cost; you're looking for a culture that identifies risks in advance, requiring the parties to come together to see how best to manage those risks.

You are requiring that programme schedules are maintained, so that the consequences of risk and change are properly considered. You are setting a fair allocation of risk between the parties but requiring the parties to work together.

So it is a combination of saying, “Yes, we want this spirit of mutual trust and cooperation, but we're going to monitor and administer that by strongly applying the controls which are there within the contract and also trying to measure performance not just on a project basis, but also over a long-term programme of work.”

You're setting incentives on a project basis; so equal sharing of costs, but also linking that to longer term opportunities to continue to be involved in larger programmes of work.

John Mason: In terms of the NEC, are there particular developments that have happened in the recent past? Where do you see the NEC going? Do you see any refinement coming, as a result of lessons learned from some of the recent megaprojects?

Steve Rowsell: Certainly, refinements are occurring. We have had some great successes with the NEC; and, until recently, I had the pleasure of being the NEC3 Users' Group chairman here in the UK (Beth West has now taken over the chair). I continue to be associated with the NEC as a member of the NEC Board which is responsible for its future development. I know that there is an NEC3 Users' Group in Australasia, as there is in Hong Kong; and the group regularly gets feedback through these channels.

That's the great thing about that users' group; it is a very close group. People involved in it do share and value feedback and lessons learned. We have an annual conference where many projects are discussed, and we have newsletters wherein lessons learned are shared. We are reviewing the contract at the moment, with an expectation that over the next year or so, further refinements and enhancements will be available; but they will not be changes that change the basic principles of the contract because we are very pleased with how the contract is performing.

We're now on NEC3, the latest edition came out in 2013. The latest we are looking at is the guidance to come out from the Government and the Treasury in London which have just published a code of practice on alliancing. Of course, the definition of 'alliancing' might be slightly different in the UK than it is in other parts of the world.

In the UK, the term 'alliancing' is used to cover a wide range of different approaches. I would prefer to use the term 'collaborative working' because many of the alliances which are in place aren't full alliances along the lines of some of those I know you've had in Australia.

There is a new code of practice out now that provides a number of building blocks, best practice principles. The code of practice isn’t a British Standard, it is “The Alliancing Code of Practice for Infrastructure Alliancing Projects” produced by the ICE, in association with the Infrastructure Client Group. The latter was set up to take forward the objectives of the Government’s Infrastructure Cost Review, but we will need to consider whether the NEC3 needs to pick up on any of those.

Recently, we published some new clauses to support the ECI (early contractor involvement) approaches using the NEC. It's a bit surprising we have not had those before now because quite a number of clients have used the ECI with the NEC3, but on each occasion they have adopted their own clauses. We've now got the standard clauses, and they’re now available on the NEC3 website.

We are also looking to see how the NEC can be used with initiatives such as project insurance. There is already advice on how project bank accounts can be incorporated into the contract to support fair payment down the supply chain and also to encourage the involvement of small- and medium-sized enterprises. As you know, from the work we did together on Crossrail, John, this is something the Government is very keen on in the UK at the moment.

So lots of work is under way, but it is more about fine-tuning and building on best practice.

John Mason: I know that the NEC is a very popular form of contract in South Africa. It is less visible, I have to say, in Australia. Steve, you’ve been over to Australia and New Zealand and have talked with a number of the New Zealand agencies. What do you see as the primary barriers to adopting NEC in countries like Australia and New Zealand?

Steve Rowsell: I can understand an uncertainty about using the NEC, if you've had long periods of difficulties with the supply chain. Perhaps,  where relationships are not strong, I can understand why there is some reluctance to adopt it, but that is exactly the position that we were in in the early 2000s. What we wanted to do was replace risk with opportunity; and, for both parties, the client side and the supply side to understand the opportunity of working in a more collaborative way, incentivising the parties to work together and to share those benefits.

So I think the focus has to be on "This is what a good collaborative approach, supported by the right incentives, can deliver. The opportunity -- the upside with that opportunity -- is much greater than the downside." One of the things that you also have to do is to make sure that the client team does understand the contract and the contract controls that can be used to give you confidence that the supplier and the supply chain are delivering in a robust way and that they can demonstrate value for money.

So it is that combination of understanding the opportunity and client leadership supported by a new, collaborative approach. An approach supported by a contract such as an NEC requires good capability within the clients' team and the right culture created between the client and the supply chain. It’s about ensuring that the contracts are properly managed and that control procedures are properly applied.

If you can do that, I think the upside is very great. Of course, if you can do that -- and I know not every client can do it as part of a long-term programme of works -- but where you can achieve this, looking at long-term relationships, suppliers are going to be very reluctant to undermine the trust that is being sought between the parties. This is because they will be losing out on long-term work rather than individual projects.

About Steve Rowsell,  Director Rowsell Wright UK

Steve Rowsell is a well-known figure in the UK construction industry and has 40 years’ experience in major project delivery. This includes senior roles at the Highways Agency and Crossrail Limited, and procurement-related expert witness work.

From July 2007 to 2010, Steve was Head of Procurement for the UK£15.9-billion Crossrail project across London. From 2000 to April 2007 Steve was the Highways Agency’s Procurement Director. He was responsible for developing and implementing its new procurement strategy for the delivery of the Government’s UK£2-billion per annum strategic road construction and maintenance programme.

The success of the Highways Agency’s approach to procurement resulted in Steve leading the new Change Agent role given to the Highways Agency by Sir Peter Gershon in his 2004 Efficiency Review. This involved working with local authorities to help improve their procurement methods and achieve the challenging new efficiency targets. Steve has now established a procurement consultancy, Rowsell Wright Ltd, and is supporting major infrastructure clients, including High Speed Two (HS2) Ltd.

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