How to encourage innovation, reduce waste and provide an environment for investment in capability and productivity improvements.
Infrastructure projects the world over are notorious for completing late and over budget. Infrastructure developers have historically believed that true value is best derived from an open tender process that transfers as much risk as possible to the contractor whilst locking in a fixed price for delivery.
Contractors seek to mitigate this risk by dividing the work into numerous trade packages and passing risk to the Subcontractors.
All of parties to these numerous commercial relationships are only incentivised to maximise value to their shareholders rather to the infrastructure developer. Consequently, when project issues arise, focus turns first to protecting commercial positions rather than to finding best for project solutions.
No organisation benefits from such an approach. Owners / Developers do not get value for their money and Contractors do not make enough of a predictable return to invest in the training and new technology necessary to improve the industry’s woeful productivity performance – illustrated by the graph below.
Infrastructure Client Group (ICG)
The ICG was established under the guidance of the UK Institute of Civil Engineers to support the implementation of the UK Government’s Infrastructure Cost Review Report 2010. This report highlighted the opportunity to improve the delivery of major infrastructure projects and make efficiency savings of at least 15 per cent by 2015.
Recognising the inherent issues with conventional infrastructure delivery models, the ICG sought to develop a new delivery model called Project 13 (this was the 13th initiative of the ICG).
Transactions to Enterprises
Project 13 seeks to establish a new approach to infrastructure delivery based upon a delivery enterprise rather than traditional transactional arrangements. The enterprise comprises:
- Owner – The organisation that owns and operates the infrastructure
- Integrator – The organisation that plans and delivers the infrastructure project or programme
- Advisor – An organisation that provides advice and professional services to the Owner or the Integrator
- Supplier – An organisation that supplies materials, services, construction or labour to enable the delivery of the project or programme
- Investor – The organisation that reviews the infrastructure project or programme for viability and secures funding (this could be a Government treasury department)
The main changes in this structure when compared to traditional structures are:
- The owner is central and leads the enterprise, defining long term value
- Suppliers and advisors have direct relationships with the owner
- An integrator actively engages and integrates all tiers of the market
- The key suppliers, owner, advisor and integrator work as one team to optimise value
In terms of the model itself, the main differences between such an enterprise model and a traditional transactional model are:
- The enterprise is rewarded based on increase in value provided rather than on services provided.
- There is a greater understanding of cost drivers and risk across all organisations in the enterprise with commercial incentives for collaboration to jointly mitigate risk, not transfer it.
Risk Shares rather than Risk Allocation
One of the biggest differences between the Project 13 Enterprise Delivery Model and the traditional Transactional Model is the way it deals with project risk. The architects of Project 13 realised that ultimately the majority of risk defaults to the owner and investor irrespective of whether they try to transfer it to other parties.
The model therefore incentivises other parties to mitigate these risks through the allocation of ‘programme shares’.
The process for deciding how to allocate programme shares is as follows:
- An understanding is gained of the value and risk profile of the project or programme of works.
- Consideration is given as to who is best places to maximise value and mitigate the risks
- Risk shares are issued based on a function of (1) and (2) above
- A forecast value profile is developed based on when benefits are realised and shares will be paid out.
As with all shares the return from them can go up or down depending on the performance of the enterprise.
Project Enterprise ?
Project 13 has been successfully trialled on a number of infrastructure projects and work programmes in the UK resulting in significant cost savings. Further details can be found on their website www.p13.org.uk.
Given the success of Project 13 to date and the fact that Australia has experienced similar issues with infrastructure delivery isn’t it time for a similar initiative here but perhaps with a more appropriate name?
Project Enterprise anyone?