THIS output examines the future of construction on infrastructure projects and contracts. The future of assurance in construction was once again discussed from a multi-disciplinary view. We explored the topic from the perspective of clients, contractors, and subcontractors, as well as from the viewpoint of auditors, commercial managers, finance managers, project managers and lawyers on infrastructure projects. This output developed by our steering group members includes key themes relating to the future of construction and answers questions raised during the July 2022 conference.
The future of infrastructure projects and construction contracts will entail increased internal and external risks. This will result in global environmental complexity, necessitating the need to collaborate and share intelligence early amongst multidisciplinary professionals in an attempt to resolve industry-wide challenges like data, labour shortages and productivity and unexplained cost escalations.
The objective will be to use digital and data to drive improvements and influence decisions in real-time. This will involve governing the use of technology and leveraging technology to address key construction challenges. This will include the increased use of data analytics in assurance to manage data volume and managing legal complexities of innovating. The objective will be to instil stakeholder confidence, equitable risk sharing and responsible business/ environmental practices.
The more successful infrastructure projects will begin with a cost assurance strategy that is aligned with strategic goals and operational objectives that permeates throughout the business and supply chain. This will be governed by legal contracts agreed on protocols and a robust assurance regime that is communicated early and included in a wider more complex work scope.
These Protocols will be adhered to from the onset pre-contract, and on the mobilisation of the project and certainly not 3-5 years later or at final accounts which is often what currently happens in practice. On major projects, the volume and complexity of work, data and risks will be significant. Consequently, the cost-bene fit of 100% sampling will mean that the use of technology, a pre-agreed sample and risk sharing will be key. While some still see cost assurance audits as nice to have, the risk of increased cost pressures and legal costs when things go wrong is no doubt influencing changes in behaviour, as is presently being seen on major projects.
Cecelia Fadipe
Technology that is operated correctly should help avoid and reduce the traditional causes of construction disputes. An example is the use of a private blockchain by Walmart Canada for managing its extensive supply chain and following introduction increased certainty of suppliers’ performance, to the extent that the percentage of invoices requiring reconciliation fell from 70% to 1%. In the future, such technologies will be used in infrastructure and construction projects.
Technology means different things to different people. So, we must be clear on the context recognising that we can only cover part of what is a very broad topic that is constantly developing and evolving. Importantly, it is key to emphasise that technology should not be seen as only having a positive impact.
For example, BIM systems should provide greater certainty as to how the design was developed and by which party, which will help reduce disputes as to which party made design changes, when design information was delivered, and whether it was late.
Similarly, electronic site records and site cameras will provide certainty as to which work phases progressed daily, and whether there was in fact delay or disruption. Reducing the need to analyse a large number of paper allocation sheets. Indeed, software systems are currently available that can use AI to analyse a large amount of data available and provide reliable information on what was the position at any given time.
Another aspect of technology is that modern methods of construction should result in fewer defects and the need for rework, which should reduce cost-related disputes. A good example is the increasing use of modular off-site manufacturing, which should reduce work on site and therefore defects and delays related to remediation costs. Similarly, using BIM and other systems that ensure that design data is the most updated and correct version, as opposed to paper-based drawings, should reduce mistakes that require costly remediation.
Shy Jackson and Jennifer Varley
As we continue to work in challenging economic times, construction professionals will have to be more creative and inventive in managing risk. Established practices may no longer be sufficient to create the cost certainty that parties require. Higher standards of cost assurance are required, as there is less flexibility in being able to accommodate price overruns. Upskilling and adopting these increasingly popular methods may help fulfil the need for providing economical and important infrastructure services.
Alliance contracts
There has been an increase in the use of alliance contracts whereby parties work together to promote greater cooperation, communication, and cost savings. This can be achieved in two ways. The parties may have separate contracts, like in a traditional design and build arrangement, but these contracts are overlaid with increased collaboration obligations so that the parties work together towards common aims and objectives.
For example, on an NEC contract, this could be achieved by including the partnering obligations in X12 and introducing standardised KPIs. Alternatively, the parties may have greater integration whereby they are all included within a single contract and work together as one. Alliancing has become more popular because the risk is shared collectively across the whole project team. This minimises the impact felt by one party and also incentivises the parties to work together to mitigate the effects of any difficulties encountered.
These arrangements have also been praised for promoting a ‘no blame’ culture, so that any disputes are dealt with proactively and efficiently, without incurring additional time and costs. The alliance contract requires complex governance protocols as the alliance team signs up to a single set of terms that include shared rewards and risks of the success or failure of the project. Through strategic polls and Q&As conducted during the conference, it became clear that the future of cost assurance on construction and infrastructure projects needs to take account of more than just the rising cost of materials, supply chain availability and a move towards alliancing and collaborative risk-sharing.
Other key themes for the future include:
(i) Managing sustainability obligations (in particular carbon offsetting);
(ii) Establishing best practices across non-cost aspects of the project (including ESG and legal), adopting a standardised approach; and
(iii) Identifying and best-utilising technology across all aspects of the project.
Data analytics
A key component in assessing costs and anticipating any overruns is to ensure that there is good data analytics in a project. Access to this type of information can identify key trends, spot issues before they arise, and provide explanations on where things go wrong to avoid repetition. The collection and analysis of such data require appropriate technology. This requires financial outlay, upskilling of staff, and changes to everyday working practices.
There are also issues in preserving the confidentiality and security of such data and ensuring that the technology remains relevant and up to date. However, the returns on such investment offer perhaps the most tangible benefit towards cost assurance. Having real-time data helps with project management and avoiding disputes by promoting communication, strengthening relationships, and encouraging proactive avoidance and management of any potential risks as they arise.
Open book accounting
Open book accounting is where a contractor keeps transparent records of the costs it incurred. This can include the number of hours worked, cost of materials, head office costs, and overhead costs. This promotes discussions on what costs can be adjusted or redeployed to allow a global budget to be maintained as far as possible. For example, when considering the cost of insurance, there may be other ways in which such insurance can be procured or shared between the parties to achieve cost savings. As well as facilitating the ability to operate on a reimbursable or target cost contract, it also promotes greater accountability, trust and cooperation between the employer and contractor.
Identifying and managing risk
A continued theme in managing cost is a clearly communicated strategy and risk-based methodology to identify and manage cost risk. The ability to do this comes from experience. At present, there are some difficulties in making sure that the current labour market has the necessary skills and knowledge to be able to proactively respond to these issues. Upskilling staff, putting in place appropriate management cascades and making sure that each person has clarity on their role and responsibilities are really important. This can ensure that the individuals working on projects have the expertise to respond to issues in real time and reduce their potential costs.
Claire Randall-Smith and Charlotte Hughes
I have worked on a very successful alliance project for the past 10 months. I have been impressed by the collaboration between the non-owner participants (NOPs) and owner participants (OPs), the project performance, and the team ethos. The project truly comes first. However, being a QS on traditional NEC contracts for the past 15 years, I am still left with questions and a feeling, ‘is this too good to be true’. When it comes to risks, change, and disputes, the alliance contract has the desire to resolve disputes within the alliance leadership team (ALT). The ALT agrees with scope variations quickly, easily and at the lowest level.
NEC will shortly be introducing the new alliance contract which requires the client and key members of the supply chain to form an agreement with a multi-party contract and shared objectives. The OPs and NOPs work together truly collaboratively, sharing staff, supply chains, buying knowledge, construction skills and self-assurance.
The owner representative is fully immersed in the team and involved in the day-to-day decision-making. An alliance contract provides the project with the right people for the tasks. With the prime focus being on what works best for the project.
What happens when things go wrong, and will the collaboration benefits become the alliance contract’s downfall? Do alliance contracts and the no-blame culture, result in the commercial team behaving like the client or owner participant? Would the consultant/principal contractor acting more like the owner participant be a bad thing?
Charlotte Edwards
Global trends in procurement continue to see a move to more collaborative engagement models and alliancing approaches. The NEC has always required the parties to a contract to act in a spirit of mutual trust and cooperation and allows for collaboration between multiple parties through the use of X12 multi-party collaboration or the alliance contract. The NEC4 alliance contract is designed for use on major projects or programmes of work where longer-term collaborative ways of working are to be created.
Another trend we are seeing is greater risk sharing through the use of target cost contracts for complex, high value or high-risk projects. This is often linked to clients wanting to understand the real cost of the work being delivered. The target cost and cost-based options in the NEC are:
- Main option C target cost contracts with activity schedule/price list.
- Main option D target cost contract with bill of quantities.
- Main option E cost reimbursable.
The NEC4 is a suite of contracts that can be used anywhere globally for work, services, and supplies. The contracts are used in locations such as the UK, Netherlands, Belgium, South Africa, India, United Arab Emirates, Peru, Hong Kong, New Zealand, and Australia.
The NEC4 suite continues to evolve to meet the needs of users and in 2021 introduced a set of facilities management contracts (FM contracts) developed in conjunction with the Institute of Facilities and Workplace Management (IWFM). These allow for the engagement of key suppliers on consistent terms enabling them to be used by clients and suppliers for the different contracting strategies that are employed in the provision of both hard and soft FM. Of particular importance in respect of cost assurance is that the facilities management contract and subcontract feature target cost and cost-reimbursable main options (C&E).
Ian Heaphy
The technology exists but in my experience in major infrastructure projects, it is not being used to the extent it should be on the projects that should be using it. I do hope though that it is on the cusp of being used more widely.
I’m involved in a very large infrastructure project with a considerable budget and a very long programme. Projects like this should be the ideal testing ground for employing new technologies to make the task of cost assurance and allocation less laborious and more accurate. However, I’m not seeing much (with my own eyes at least) that would be considered ground-breaking. It’s as if not much has changed in the last 15 years.
The technology is there to make good inroads into what plant is on site. QR codes on the plant can link to an automated system of recording when it comes through the gate or enters the working area and then when it leaves. Biometric systems can do similar things for people each day. That satisfies the resource that was there. More lateral thinking can be employed to show whether these resources are actually providing the work, perhaps infrared imagery and satellite technology.
This information can populate the relevant part of the payment application if using a cost-reimbursable contract and then can then automatically link to an auto-generated project bank account access code. The same systems can link with supplier invoice systems to auto-generate the invoices. The audit function is then to check that the systems are working properly rather than checking financial transactions.
The project probably has thousands of individual pieces of equipment and hundreds of people on site each day. Yet fairly traditional labour and plant returns are being produced. Is it a case of ‘if it ain’t broke don’t fix it’, or is changing traditional practices taking a lot longer than one might think?
Gary Bone
The growing importance of cost assurance is clear in an industry where open book/ cost-reimbursable contracts are becoming the standard. This will continue to play an important role in infrastructure and construction projects.
The construction industry is playing a key role in helping to get our economy back on track. However, as projects become larger and more complex the need for assurance in the future of construction is clear.
More complex delivery models (e.g. alliances/joint ventures) and supply chains mean that a good assurance framework and approach will recognise and incorporate all levels of defence across organisations to help realise cost optimisation and value-formoney opportunities. Finally, as other factors such as carbon and sustainability become more pressing, the principles and features of a robust cost assurance framework are transferable to these areas and should be developed in conjunction with each party to identify opportunities to enhance project performance on construction projects.
Imran Akhtar
Multidisciplinary Steering Group for cost assurance and audits on infrastructure projects and contracts
www.cfbusinesslinks.com/multi-disciplinary-steering-group/
The Multidisciplinary Steering Group on Cost Assurance and Audits on Infrastructure Projects and Contracts: Cecelia Fadipe (chair), CFBL Consulting; Imran Akhtar, Turner & Townsend; Michael Bamber, Capita; Gary Bone, Blake Newport; Adrian Charlton, Atkins/SNC Lavalin; Kathleen Hannon, Scottish Water; Mark Harvey, Crossrail-Transport for London; Chris Haworth, Ridge & Partners; Ian Heaphy, IN Construction, NEC Contract Board; David Heath, Atkins/SNC Lavalin; Victoria Hill-Stanford, Network Rail; Charlotte Hughes, DLA Piper; Tom Leach, Southern Water; Jim McCluskey (CICES representative), Vinci; Lisa O’Toole, Network Rail (HS2); Elliot Patsanza, Ridge & Partners; Paul Railton, The Orange Partnership; Claire Randall-Smith, Eversheds Sutherland; Matt Yates, Buckingham Group; Darren Ward, The Orange Partnership; Michael Strickland, Network Rail; Shy Jackson, Bryan Cave Leighton Paisner; Jennifer Varley, Bryan Cave Leighton Paisner; David Sharp, Mott Macdonald; David Worsley, Transport for the North