The global construction market is set to grow by US$8 trillion by 2030, reaching a total size of $US17.5 trillion. That is up by 85% and growing by an average annual rate of 3.9% to 2030 (Global Construction 2030). One of the areas fueling this growth is a global deficit in public infrastructure, due in part to population growth and the aging inventory of infrastructure assets, especially in developing regions.
To close this infrastructure deficit, multilateral institutions like the World Bank, African development Bank, the Asian Development Bank and other similar organizations are providing development funding. Infrastructure accounts for nearly 50% of World Bank’s current active portfolio.
In an effort to ensure the social, economic and environmental sustainability of communities through infrastructure development, Public Sector organizations must improve capital efficiency through an infrastructure lifecycle management approach – a key part of which is standardizing contracts.
Capital efficiency in the “plan” phase
Selecting the correct projects to be included in the overall infrastructure development plan is a key success factor for project owners. An integrated approach to the selection and planning of infrastructure projects will ensure that inter-related and dependent projects can be clustered together in a cross-cutting program. This can span the responsibilities of multiple departments within local, regional and national government and even penetrate national boundaries where transportation, water and energy infrastructure is concerned.
A holistic enterprise project portfolio management approach will also highlight investment opportunities for the private sector and involve investors early in the planning process.
Capital efficiency in the “build” phase
Infrastructure delivery should be undertaken by those best placed to deal with the complexity and risk associated with the ventures.
In keeping with this philosophy, infrastructure assets are normally delivered through a contractual relationship between the project owner (employer) and a contractor with the ability to deliver. A project delivery mechanism which is gaining popularity is the Public-Private-Partnership (PPP). In almost all infrastructure delivery contracts, there is a requirement for the project owner or employer to provide financial guarantees to the contractor or PPP partner. This acts as a risk mitigation mechanism related to payment guarantee, and this is often where the multilateral development banks play a significant role. Many of these institutions recommend the use of a standard contracting form for the delivery of the infrastructure asset, an example of would be the FIDIC suite of contracts.
Managing risk, communication and anti-corruption via contract management forms
Standardized contract management forms for infrastructure development projects provide a platform to ensure predictable and repeatable behavior from the parties involved in the contract. It promotes good communication and cooperation between the parties and provides clarity in the roles and responsibilities of the parties when they operate under the general conditions of the standardized contract form.
Standardized contract forms enable parties to the contract to cooperate on a cross border or international basis as standard language, terms and definitions are used throughout the general conditions of contract. These contracts are normally written in a language format which is easy to understand and interpret.
Standardized contract forms aim to provide a balanced risk allocation between the employer and the contractor and provide guidance on issues such as design responsibility, land acquisition, site access and political and legal framework changes.
Implementing standardized contract forms contribute to anti-corruption measures as they provide a platform for capturing the rationale of all decisions, are open to audit and assign clear accountability. A key aspect is the provision for dispute resolution through an arbitration process.
Standardized contract forms ensure the application of professional standards and the use project management best practices in the development of the infrastructure. This further allows for capacity building and skills development of the community using these contracts, leading to familiarity and operational efficiency over time.
In the spirit of cooperation, standardized contract forms have a specific process to deal with variations and changes to the contract and aim to avoid disputes as far as possible. These are combined with specific provisions for payment by the employer and asset handover from the contractor to the employer.
Underpinning standardized contract management with an electronic platform
The very nature of construction contracts administration results in multiple records, document, drawings and specifications being created over the course of the contract. A high volume of transmittals, submittals and correspondence can be expected on a daily basis. Generating minutes of meetings and email communication is at the order of the day. All these data items must be related to the contract terms and conditions, the contract line item detail, payment applications, variations and change requests. Most contract forms make allowance for time barring on changes, adding the need for time tracking on events. In short, construction contract management causes a high administrative burden on the project team members, especially where they are not supported through an electronic platform.
The importance of structured administration and the timely availability and access to information becomes evident in the case of an Extension of Time (EOT) claim, due to delay or disruption, when the contractor is asking for more time and or money due to an action by the employer. If supporting information related to specific events, loss in productivity or increases in cost cannot be adequately proven, the contractor stands to lose money and may even be liable for delay damages. With significant construction claims, this situation could compromise the financial sustainability of the contractor organization or significantly impact on the share price of a listed entity.
Modern cloud based project and contract management platforms, like Oracle Primavera, provide an electronic record of project and contract events. It provides a collaborative environment where all stakeholders under the contract communicate, log and approve events, update progress and draw on performance dashboards and reports for decision making. Even in cases where the project program is not a contractual document, the ability to provide dependable critical path scheduling capability is an invaluable tool in the analysis of claims related to extension of time, thereby reducing the cost of processing a contract claim. Ad hoc and standing Dispute Adjudication Boards (DAB) can now be armed with dependable and traceable information related to the project and facilitate informed finding in disputes, often preventing expensive arbitration cases.
Modern cloud based project and contract management software platforms can no longer be treated as a pure project expense, it should be appreciated as a significant project asset with real return on investment.
To find out more, watch the Primavera Infrastructure Lifecycle Management Solution video.
This post was authored by Werner Maritz, director, public sector and infrastructure strategy, Oracle Construction and Engineering