TARGET COST CONTRACTS: A ONE TEAM APPROACH

 I have recently seen some thought-provoking articles on Target Cost Contracts, which spurred me to provide additional thoughts from my past exposure to Target Cost Contracts.

Traditionally, contract management schemes and strategies used in the construction phases of projects, are set up with detailed tables of responsibility for all the parties to the contract including the owner, the architect, the engineer, the surveyors and the contractor. Contracts also contain detailed administrative procedures to allow the engineer to establish if the work is ahead or behind schedule, the work is above or below budget, what the right price for any extra work is, stipulate payment for contractors, and the unexpected is allowed to take its course. 

When it comes to awarding contracts it is not uncommon to favour the use of specific contractors, and often the contractor is not selected on the basis of the lowest tender, but rather on the experience and skills they bring to make the project a success. 

Unfortunately, we often find that setting out processes to manage and administer construction contracts in the traditional way, does not always bring the desired results. The contractual path set out to get to construction, has traditionally been rigidly set, with little flexibility to fast track. The contracting strategies applied traditionally also takes it for granted that the scope of work is generally categorized as “typical”. When it comes to Mining projects that is not the case. These projects are more and more unique, requiring continued flexibility and innovation. The relationships between the parties in the traditional approach, is typically authoritarian, with the owner taking charge, making decisions, and giving instructions to contractors who are to make it work.

What would we like or need to do differently then? As projects are more unique, we need to assess alternative methods to deliver assets, in a way that benefits all parties. Successful projects are not only the ones that are developed and commissioned within time, budget and quality. Successful projects are also completed to fulfill the applicable scope and reach or exceed what it is intended to deliver or produce commercially.

To get to “project success”, the approach of Target Cost Contract partnering does the following:

• It allowed getting early contractor and specialist involvement, fast-tracking the traditional procurement and contract cycle. When we refer to “early”, we mean as early as the option analysis phase and during early assessment of procurement and contracting strategies.
• Enables improved integration between the different project teams and thus collaborative relationships which allows for application of the contractors’ technical skill set early thus increasing the accuracy of scope, cost and quality.
  • Establishes an environment for partnerships that share the cost risk.
  • Empowers pro-active, forward-looking, change management leading to better forecast of exceptional items.

The collaborative approach raises many questions, such as: “How is this done without traditional lump sum contracts or bills of quantities?” “How do we appoint a contractor in the absence of a defined scope of work?” “How do we fairly share the cost risk?” and “How do we enter into long term relationships with?”

The first step toward success is a paradigm shift in mindset by all the contracting parties. To help achieve this mindset, the aspects the owner and the contractor need to consider are:

• Target(s) - Agree on this by considering what is important to the success, such as cost, schedule and safety. 
• Compensation - How to compensate the Contractor for work completed.
• Change Management - How to adjust the target(s) for changes in the scope, timing, or the environment within which the works are provided.
• Timing - It should also cater for the failure by the Owner to act timely in accordance with the provisions of the contract, encountering physical conditions which are considered unlikely to occur;
• Incentives - Understand how to incentivize the contractor to proactively propose changes to the scope which result in financial and / or schedule savings or which impact the operability of the asset.
• Risk - How to share any savings or overruns to reflect the value added.

The interaction between the Owners and Contractor has evolved from an ‘authoritarian us and them’ relationship, to a complex collaboration between specialist contributors which works well, only when a paradigm shift in mindset is taken toward a ONE TEAM approach.

Written by W van Niekerk
President, Tamkali Limited