Complexity and Uncertainty
Despite the proliferation of contracts
used in the building and construction industry the great majority of projects
are delivered under either the traditional design-bid-build or design and build
(D&B) and design and construct (D&C) contracts. The trend has been
toward D&B and D&C contracts for large projects, so these account for a
larger share of work done than number of projects.
There is some support for design and
construct procurement of buildings and social infrastructure from school PPPs in
Australia and hospital PPPs in the UK. This is probably due to the buildability
issues found in complex buildings with many services, like hospitals, or the
emphasis on maintenance costs with schools. However, problems found in D&C
projects associated with design changes by the client and a conflict of interests between
design team members and the contractor are common. These are typical of the principle-agent
type issues found in transaction cost economics.
Design and delivery of major
projects can be contracted separately to reduce project costs and risks so that,
as far as possible, design and documentation is complete or nearly complete
before tendering. The ‘nearly complete’ qualifier is important. A simple
project can be fully specified just because it is simple. However, there is a limit to how much design can be completed in the initial
stages of a major project, because the specification of a major project
develop over time as the project details are refined and defined. Therefore, it
is unreasonable to expect a major project to be fully specified at tender, and
in most cases this would not be possible. On the other hand, it is not
unreasonable for tenderers to expect the documentation they receive to be
sufficient, because the extent and clarity of the design determines their
project time and cost plans.
Using evidence from the 11,000 private
sector resource, industrial and engineering projects in his database Ed Merrow argues the best form of project delivery is what he calls ‘mixed’:
hiring engineering design contractors on a reimbursable contract and construction
contractors on a separate fixed price contract. The evidence from the database
is that this is the most effective form of project organization, and is
basically traditional construction procurement where consultants are appointed
to do the design and a competitive tender is held for one or more contractors
to execute the works on site against a complete design.
There are a number of advantages of this
strategy of unbundling design and construction, particularly for major
projects. Breaking a project into smaller, sequential contracts spreads the
cost out over time, and does not incur interest costs on finance for design
work (as in a PPP). It makes quality control easier and more effective, by
being focused on each stage, which is an important risk management tool.
Separating the design stage from tendering and construction will also improve
opportunities for consultation with the community and stakeholders. Most
importantly, completion of design and documentation before tendering reduces
contractor risk and therefore total project cost. M
anagement of the interaction between designers and contractors can
done by the client team, which would also take responsibility for overall design
management.
This argument
is for design and construction of projects to be contracted separately, because
this will reduce project costs and risks. As far as possible, design and
documentation should be complete or nearly complete before tendering or
starting the works. There is good
theoretical support for this from contract theory, for example Oliver Hart concluded:
"Conventional
provision (“unbundling”) is good if the quality of the building can be well
specified, whereas the quality of the service can’t be … In contrast, PPP is
good if the quality of the service can be well specified in the initial
contract (or, more generally, there are good performance measures which can be
used to reward or penalize the service provider), whereas the quality of the
building can’t be."
The key factor is therefore the extent of
the specifications, on some projects there may be a limit to how much design should or
could be completed upfront.
For many major projects these develop over time as the project details are
refined and defined. It is unreasonable to expect a complex project to be fully
specified at tender, and in most cases this would not be possible. It may also
be advantageous to look for innovative ideas or design options, so for these
projects an incremental approach would allow contractors and suppliers the
opportunity for input during the development of the design. This also has the
advantage of reducing uncertainty from poor tender documentation, thus lowering
risk and cost for tenderers.
This issue of project definition and its
relationship with complexity is the heart of the matter. Where on the spectrum
from simple to complex does an individual project lie? The Shenhar and Dvir Novelty-Technology-Complexity-Pace model was used here as a way to measure project complexity, based on the score
for each of those four dimensions. What that model lacks, however, is the world
outside the project, all the measures are internal but projects are delivered
in an uncertain world. This awkward relationship between project definition and
certainty and external complexity and uncertainty is captured in this figure.
Figure 1. Project Characteristics
Even a well-documented, fully specified
project is subject to some degree of environmental uncertainty, and such a
project may be delivered in a complex environment (railway station upgrades for
example). From this it is clear that the challenges on major projects become truly
complex with a combination of these internal and external factors. Therefore,
the central task of the project team is to minimize uncertainty due to internal
factors, so tenderers can be invited to challenge the design and/or specifications
if they can deliver a better alternative. For many projects providing an
opportunity for innovative ideas to address complexity or functionality can
deliver major benefits.
While it may be advantageous to
look for innovative ideas or design options, using an incremental approach to
allow opportunities for input during the development of the design, design
input comes at a cost to tenderers and only one tenderer is successful. Therefore,
clients should contribute to their design costs in return for ownership of the
designs. If clients have purchased designs from unsuccessful tenderers any of their
innovative ideas can be incorporated into the final design.
This can be seen as an extension of the bid cost reimbursement policies currently found in some countries: Canada typically reimburses a third to a half of losing bidders’ total external bid costs for design and legal components; and France, where the Government often reimburses up to 40 percent of design cost for the initial bid phase and 70 percent for the final phase to unsuccessful bidders, depending on the extent to which they participate in the competitive dialogue procedure and the detail of their offer. Australian state governments in Victoria and New South Wales have also used capped bid cost reimbursement for transport PPPs.
Hart, O. 2003. Incomplete contracts and public ownership:
Remarks, and an application to public-private partnerships. The Economic
Journal, Vol. 113(March), pp. C69–C76, pg.75.
Merrow. E.W. 2011. Industrial Megaprojects: Concepts,
Strategies and Practices for Success, Hoboken, N.J.:
Wiley.
