Maximising Innovation in the Supply Chain beyond Procurement and Contract Execution (CBR project)

Overview

Aims and objectives

This project involved collaboration between the CBR, Costain and Pinsent Masons LLP to study the constraints on innovation in major civil engineering and construction projects. The project aimed to:

• develop a conceptual model surrounding how to rectify the problems which currently exist within the supply chain within construction, with specific reference to contractual and related commercial practices and processes
• understand and illustrate how the contracting process in construction has evolved over time and how the contracts themselves have had to change to embrace these changes
• develop a case study showing how a client encouraged a behaviour of innovation across a programme
• identify key areas of focus in the procurement process, from customers to the supply chain, analyse how the commercial process currently does or does not encourage innovation; and look at what can be done to address this (again, case studies with a range of customers will assist with this)
• produce commercial and legal guidelines which include clauses which can be adopted and recommendations on how to get more from the supply chain. This guidance / toolkit will allow for innovation to be ingrained throughout the whole supply chain relationship
• write a ‘white paper’ to take the learning and discussion points from the organisations involved and stimulate debate within the industry, including among large government customers

Background

There is a high degree of uncertainty inside the supply chain in construction and infrastructure projects. There is particular concern over the capacity of current contractual frameworks and supply chain practices to deliver innovation. Innovation by its very nature carries a degree of risk and where collaborative innovations are undertaken and the desired result is not as expected, these relationships can become litigious. Once a contract has been agreed, the scope to accommodate innovation within the contract is governed by the contract itself and the nature of the contractual relationship. Most construction contracts are not set up to accommodate this. Under the current model, the potential for innovation diminishes as a project develops. The project studied ways of addressing this reduction in the ability to innovate, ensuring that the opportunity to do so is maintained throughout the whole life of a contract.

Results and dissemination

An initial literature review produced the following conclusions:

• the logic of collective action suggests that that the risks of free riding increase as projects involve more parties and additional layers of contracting
• contracts are only a partial solution to the collective action problem
• relational contracting may be preferable to more traditional ‘classical’ contracting but the ‘braiding’ of formal and informal elements of contract seems more likely to work than a completely informal contracting framework
• standard forms such as the New Engineering Contract NEC do not correspond exactly to the concept or ideal type of a ‘relational’ contract
• bespoke governance structures such as the Heathrow Terminal 5 Agreement and Thames Water’s 82O initiative, and flexible procurement practices such as early contractor involvement, may have a role to play in promoting knowledge sharing in innovative projects.

On this basis, a conceptual model was developed in which key variables driving project outcomes were identified as the degree of complexity of a project; the contractual devices used to address complexity; and nature of the resulting behaviours.

The empirical analysis consisted of 3 parts:

• a survey of industry practitioners conducted between March and June 2016
• in-depth interviews with a number of practitioners selected through industry contacts
• four focus groups with 20 or more participants in each case, held periodically during the year-long life of the project.

The survey showed that practitioners value formal contracts as devices for shaping their relationships during the performance of projects. They understand contracts to be legally binding agreements which should be strictly enforced and do not, on the whole, view them as loose, non-binding arrangements. In particular they see a role for formal contracts in dispute resolution should problems arise in the course of a project.

In addition, the survey indicated that civil engineering and construction contracts have been changing: they are seen as more collaborative than they were. However, this does not mean that they have necessarily become more clearly drafted, more flexible, or more important to the performance of projects: responses on these points were mixed or equivocal. It does not appear that the shift which has taken place has made contracts easier to read or understand. Nor has it resulted in fewer contractual disputes than in the past.

The survey evidence indicated a strong association in the construction industry between trust, on the one hand, and flexibility in performance, as indicated by the practices of honouring informal understandings and engaging in dialogue, on the other. Respondents associated strict performance of contracts with trust, although to a lesser degree. This suggests that in certain contexts, contract and trust can be complements.

In the survey data there was a stronger association between flexibility, dialogue and the sharing of information, risks and costs, on the one hand, and innovation, on the other, than there was between these features of contractual practice and trust in general. This suggests that innovative projects more than others require a contractual framework capable of engendering close cooperation, based on dialogue and risk-sharing, between the parties.

The interview-based evidence suggested that barriers to innovation in the construction industry exist, including a continuing emphasis on adversarialism in contractual relations. This is exacerbated by price-driven procurement processes. There is scepticism towards innovation on the part of clients who see it as expensive and risky. Main contractors, conversely, regard many clients as unwilling to share risks and willing to use formal contract terms to displace costs on to contractors. Pain-gain sharing arrangements are helpful for fostering innovation but they may not work if gain-sharing is not cascaded down the supply chain as opposed to being confined to first-tier contractors.

A case study of the Crossrail project, based on a combination of interviews and documentary research, suggested that clients need to be proactive in developing business and commercial models that encourage supply chain participation. Contracts which share the benefits of innovation among the parties are one aspect of this. Bespoke governance structures can play an important role in creating the equivalent of ‘common pool resources’ for sharing knowledge and information. Crossrail’s innovation programme illustrates the benefits of taking steps to ensure that innovation does not conclude when projects come to an end.

The results of the work were presented at the final conference of the project which was held in London in September 2016, and published in a ‘white paper’ designed for wide dissemination in the construction sector. The white paper made a number of suggestions for the improvement of industry practices including proposals to promote university-industry collaboration, improve contract clauses affecting innovation, and achieve better measurement of the social benefits deriving from projects. During 2016/17 further dissemination of the project findings took place and discussions are continuing with policy makers and industry-level actors to implement its findings.

Project leaders

Simon Deakin
Tim Embley (Costain)
Adam Golden (Costain)
Shy Jackson (Pinsent Masons)

Project status

Ongoing

Project dates

2015-2016

Funding

Innovate UK