Can earlier collaboration mitigate project risk?

The war in Ukraine coupled with sharp increases in energy prices have had an immediate impact on the cost of building materials. Some have risen by as much as 25%, or even more. Lead times are significantly longer too because of depleted inventory or a shortage of manufacturing materials. For clients, estimating and programming building projects accurately has become a real challenge in such an unpredictable market.  For many, these are unprecedented challenges. Like how to forecast expenditure reliably.  How to make sure costs stay within approved budgets. How to deliver projects on time and still meet business expectations. It’s always been normal practice to shift these risks to the building contractor, but is this still possible, and if it is, is it fair?  Perhaps it’s time to move away from placing all the risk with a single party and adopt a new model based on collaboration amongst all the stakeholders.

Collaboration can start at the outset, beginning with the project planning stage. It’s usual to include a percentage-based contingency in any budget. Not too high so the business case remains viable and not too low so it’s still enough to absorb price increases, scope changes or delay. Open dialogue with contractors early on can yield better insights on price volatility and lead to improved capital planning and more accurate contingency allocations.  Where possible, shortening the time between agreeing capital allocations and going to market will further reduce the risk of unexpected budget challenges.  

Helping clients plan effectively means changing some of our methods too; for a large IT company, we estimated costs for business case approval based on the client’s anticipated decision point.  This captured the project budget increase over three quarters, the first two periods with committed prices, the third estimated. 

In an environment where prices can change so quickly, it’s no longer reasonable to expect contractors to hold their tender prices open for acceptance for two or even three months.  In the past, a post-tender negotiation often took place to squeeze the bid price a little further.  A more collaborative approach would see clients prepared to accommodate a fourteen day – or shorter - acceptance period for tenders and resist the temptation for further negotiation.  Ideally the client’s focus should be on the award of the contract within 10 working days. At the very least this will reduce the risk that bidders will inflate their tenders to cover the risk of a protracted period between tender submission and award. 

Building contracts typically use the threat of liquidated damages to incentivise the contractor’s performance against programme. In a volatile market the decision to include significant damages provisions in contracts may have unexpected, and unwelcome consequences for clients. Contractors may price the risk, look aggressively for opportunities for extensions of time, or behave contractually in a situation which works much better when both sides see it as a partnership.   Again, an open dialogue with the contactor about the delivery challenges it faces will likely have more impact on achieving timely delivery. Some acceptance that part of the project may not be delivered on time is required. Meeting frequently to really understand the risk inherent in the programme and being open to alternative strategies may be enough to give the contractor the flexibility it needs to complete successfully.  At a practical level, simple mechanisms like damages holidays often help the contractor accept more risk. 

On the client’s side more creative approaches can help manage risk too. For two international clients we recently delivered a 1,000 sqm workspace fit out using temporary furniture. The lead time for new furniture couldn’t be integrated into the progammme without unacceptable delay, so the temporary furniture will be swapped when it’s available.  

Ultimately, clients, project managers and contractors have the same objective, completing projects on time and within budget. When an unusually volatile market creates asymmetrical risks for one party – in this case the contractor - it threatens the entire process.  Builders facing unprecedented risks will simply withdraw from the market. It’s a situation that calls for flexibility and the development of new and creative solutions. When traditional contract practice no longer works, we need to find alternative ways to collaborate through open dialogue, and an acknowledgement that risks need to be shared fairly. Above all it’s the project manager’s responsibility to broker new arrangements between clients and contractors to enable both to continue to achieve their respective business objectives.