How can contracts help to unlock innovation?

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The agreed terms of a construction contract can foster a positive relationship between client and contractor, unlocking fresh ideas and fuelling innovation – or do the opposite and create a stifling atmosphere that discourages new thinking.

These potential outcomes are the focus of a recent Construction News webinar, sponsored by technology provider Oracle Construction and Engineering, looking in particular at the NEC suite of contracts. Widely used to govern larger projects, the New Engineering Contract as it was known at launch in 1993, reached version 4 in 2017. Late last year, NEC4 was in turn updated to reflect industry feedback, though some organisations continue to work with older iterations, including NEC3.

Value engineering

Glenn Hide, director at specialist consultancy GMH Planning, draws out some of the NEC4 terms likely to foster innovation during project delivery, such as Section 16 governing contractor proposals.

“The way you write your scope of works information can send a message to the market that you want innovation”

Kuda Kadungure

“This allows value engineering,” Hide explains, where the contractor can “propose a change to the client’s scope and actually share in the savings”. The equivalent section in prior iterations of NEC risked the opposite, with the contractor standing to lose money if it proposed a cost-saving revision.

Among NEC4’s optional, bolt-on terms is clause X21, covering whole-life savings – revisions that “will cost the client money now but will have long-term benefits,” Hide notes, such as choosing materials with an upfront premium but lower maintenance costs.

Clause X22 covers early contractor involvement (ECI), with NEC4 now offering “real opportunities for the contractor to be early on the scene, helping develop the design,” Hide says.

Technological innovations

Another option, X10, provides contractual terms for adopting building information modelling (BIM), while X12 outlines terms for multi-party collaboration, providing for “common objectives to achieve things across multiple contracts,” he adds. Joint objectives can also be bolstered via X20, which covers key performance indicators (KPIs).

Hide also notes that NEC4 “finally highlights the use of cloud-based systems to manage the flow of communications”, encouraging firms to adopt a modern means of pooling project data.

Kuda Kadungure, head of procurement at client organisation UK Parliament, has worked with NEC contracts for two decades across major projects including the 2012 Olympics, Crossrail and HS2. He observes that “pain-gain share mechanisms” such as those set out in NEC4 Section 16 only work if “the percentage is large enough for the contractor to be encouraged to innovate”, warning clients against the temptation to set out terms that grab the lion’s share of potential savings.

Kadungure also highlights the value of X10 in helping to standardise the way contracts cover BIM, arguing that the technology is vital for capturing and consolidating information throughout the project lifecycle.

Werner Maritz, director of industry strategy at Oracle Construction and Engineering, sees innovation, collaboration and new technology as a way for contractors to improve on the sector’s notoriously slim margins. “If a contractor wants to go from a 5 per cent margin to a 6 per cent margin, it sounds like 1 per cent improvement – but it’s actually 20 per cent improvement,” he observes. “A 20 per cent improvement in either efficiency, productivity [or] cost containment [means you] really need to do something significantly different. It’s not just tweaking the processes.”

Maritz adds: “A contract like NEC4 with clause X10 [covering] information management, is really about collaboration. It helps us to avoid errors, it helps us to protect the contractor and the contract margins.”

Barriers to innovation

Some of NEC4’s bolt-ons are well intentioned but still fall short of industry realities, argues lawyer Nora Fung, an associate director in the legal group at engineering consultancy Arup.

“Under NEC4, the ownership of the IP [intellectual property] vests in the consultant – which is great – and we can use that to look at innovation,” she points out. “But when you look at BIM and the way X10 is structured, the ownership of the BIM model vests in the client. So, there’s immediately a disconnect there.

"What does that mean to the consultant who’s expected to innovate? It just makes it confusing.”

Fung also fears that NEC4’s standard liability arrangements “can be quite risky” for consultants and contractors given “the hardening insurance market".

“The sheer size and complexity of projects is starting to amplify many of the challenges that have been around for a while”

Chris Woodbridge

“These are factors which do contribute towards consultants and contractors alike just taking a much more conservative stance in coming forward with innovative solutions.”

Standard contracts can of course be amended to address shortcomings but this is another area that brings risk, Fung says.

“We very infrequently if never find an NEC4 [contract] used in and of itself, unamended,” she says. “The volume of [custom] Z-clauses we see is astounding.”

Hide agrees, saying that Z-clauses all too often contain “nasty transfers of risks” that clients mistakenly believe is in their interest. “Why? Goodness knows,” he adds, given that contractors will have to reflect the transferred risk in their bids.

A virtuous cycle

For Kadungure, it comes back to the client setting reasonable expectations.

“It’s all employer driven really,” he says. “The way you write your scope of works information, in itself, can send a message to the market that you want innovation on your project.”

He adds: “Clients need to be educated about the benefits of BIM [such as] shorter project life cycles [or] better safety, because you can [anticipate] hazards”. He also notes that a contract based around BIM usage is less likely end in dispute because of the clarity and data captured in the model.

Oracle’s Maritz adds that a broadly consistent, industry-wide approach to technologies like cloud-based data and BIM in contracts could create a virtuous circle, making it easier for software specialists to build systems tailored for the industry. He also notes the common observation a “single version of the truth” is vital throughout a project.

Chris Woodbridge, business development executive at Oracle partner RPCuk, says that today’s ambitious projects require complex supply chains, so contracts must reflect the need for effective collaboration among client, contractor and subcontractors.

“The sheer size and complexity of projects is starting to amplify many of the challenges that have been around for a while,” he says. “It’s really hard to manage processes across multiple organisations, and it’s really hard to drive data integrity, to have that visibility into progress.” And the more parties there are the more challenging it gets.

“What we need is a more sophisticated and integrated solution," Woodbridge adds, "where the contract is at the heart of the project and allows the entire supply chain to move to the same beat – as opposed to their own ones.”