Go beyond the traditional

Procuring complex capital projects: are learning and co-operation key to delivery of a mega project? By Gerard Chick

Why is it that mega projects tend to be overdue, over budget and often fail to meet the client’s original specification? Plans to spend £24.5 billion building Britain’s first new nuclear power station in two decades should come to fruition now the final go-ahead for Hinkley Point C in Somerset has been given. The project, which is being partly funded by China, is underwritten by £2 billion of Government loan guarantees while the huge cost of the plant will ultimately be paid for by consumers in their bills.

When it comes to something of this scope and nature, one wonders is there really such a thing as a formal procurement strategy? Or will its completion be driven by a process which goes beyond the customary make versus buy decision; does a project of this nature need to be driven by something else, some kind of innovative contracting and relationship strategy?

The opportunity presented to those charged with delivering a project of this nature, to think beyond the traditional procurement approach, is especially challenging as we work in increasingly volatile and unpredictable market conditions.

Hinkley C is expensive because it is very big and very complex. For more than a decade, EDF, the state-owned French energy giant, has been building two similar reactors, both of which are running late and neither of which has generated a single watt of electricity.

EDF won the Hinkley contract partly because of the Treasury’s preoccupation with not spending public money, and it is struggling to raise the private finance. That is one reason why George Osborne is ‘cosying-up’ to the Chinese with potentially costly blandishments. For a while, there was resignation about the project’s cost. It was a price that had to be paid to keep the lights on and the smart phones charging. But in the past few years, it has looked less and less like the next generation in clean energy and more and more like a rerun of previous debacles.

But why should this be? Why can’t we learn from those who have seen this type of project through to a successful conclusion? There have been previous successful projects for the construction of mega infrastructure. Perhaps one forgotten success story, which reflects how a mega-project can be successfully managed, is BAA’s delivery of T5. Those working on the project faced the challenge of developing and implementing a radically new approach to project management in an industry notoriously resistant to innovation and change and often reluctant to embrace new ideas from other industrial sectors.

If one casts a cursory glance to the oil and gas industry, where several core project management approaches frequently used by those working in it are analogous to the T5 undertaking we can see how these projects can be successfully delivered. Practices such as client risk bearing, integrated project teams and pre-assembly techniques, all of which were first developed by the oil and gas sector in the 1980’s; have been successfully deployed to avoid the high cost of delays associated with the construction of offshore platforms.

These techniques give those working in the construction sector an alternative approach; rather than using the traditional prime contractor methodology, integrated project teams can be created. These can be made up of people from the client organisation as well as various contracting and engineering teams. More importantly the management of contracts and their integration with key aspects of the relationships established for completion of the project can be leveraged to maximum effect. To deploy such a strategy, the key issues for consideration when working with the complexity associated with mega projects include:

• The need for early engagement of commercial resources;
• The importance of focus and definition of goals, objectives and a clear understanding of their relative importance;
• The imperative for stakeholder inclusion and engagement;
• The need for risk management to be integrated into performance management and the development of a practical and structured approach to handling risks; and
• The importance of engaging the right people, with the right attitudes at the right time.

The chances of project failure are likely to increase if the parties simply rely on some vague notion of ‘the relationship’. Today’s business environment demands a far more realistic definition of performance and governance techniques. Consequently informal, relationship structures such as frequent meetings or the use of phone and email, just don’t work. Similarly face-to-face meetings with little or no purpose or definition can often be an excuse for a lack of discipline – and are therefore often associated with unsuccessful projects.

On the other hand success factors include robust and well-defined contracts, which offer defined approaches to goals, their oversight and governance. They are also linked to a well thought out contract management plans, where well-trained contract management professionals are deployed and are engaged early in the project. Performance measures must be few in number and relevant in form. Technology also plays a growing role – in fact many of the out-dated procurement systems typically used in mega projects have little or no relevance to project success since they are too mechanistic and generate little or no relevant data or analysis.

Ultimately it is the perseverance of those leading these mega projects to break with tradition and to reinforce team-based behaviours and foster a culture of learning among and between the partners on the project who will succeed. Their behaviours, based on so called ‘soft’ skills associated with elements of trust and co-operation require all parties to work constructively, rather than the more traditional modus of contracting based on a commercial estimation of risk and making claims when problems arise.

The recognition that a different procurement approach to different types of capital projects works is one thing. However the real test for those charged with delivering major capital projects such as Hinkley Point C will be to enforce the change beyond a single project and ensure the application of non-traditional techniques more widely. Whether this can happen remains to be seen.

Gerard Chick is Chief Knowledge Officer at Optimum Procurement Group, a leading procurement outsourcing and consulting company, which supports clients in the UK, Europe, the Middle East and North America. Optimum currently manages over $1bn of annualised client spend across more than 200 categories of expenditure, with specialist service lines operating in vehicle fleet management (Optimum Fleet) and energy procurement (Optimum E-Switch).

For more information, please see www.optimumprocurement.co.uk/index