TARGET COST CONTRACTS: A ONE TEAM APPROACH
Original Publication: November 9, 2015
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 used in the construction phase 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 programme, 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. It was common to favour the use of specific contractors, and often the contractor was not selected on the basis of the lowest tender, but rather on his experience and skills. That was when the goal was to build the mine in time to catch the rising market and cost was less of a focus.
Unfortunately, we often found that setting out processes to manage and administer construction contracts in the traditional way, did not always bring the desired result.
The contractual path, to get to construction, has traditionally been rigidly set, with little flexibility to fast track. The contracting strategy also took for granted the scope to be “typical”. Mining projects are more and more unique, requiring continues 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 do we need to do differently then? As projects are more unique, we need to assess alternative methods to deliver assets, in a way which benefit all parties. Successful projects are not only the ones which are developed and commissioned within time, budget and quality, but are completed to the fulfill the applicable scope, and reach or exceeds what it is intended to deliver or produce commercially.
To get to “project success”, the approach of Target Cost Contract partnering does the following:
• Provides for 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 accuracy of scope, cost and quality.
• Establishes an environment for partnerships that share the cost risk.
• Empowers pro-active, forward looking, change management leading 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 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 incentivise 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