Contracts for complex or complicated projects
There are different types of contracts which can be applied to deliver project outcomes. Basic purchases, standard builds, support services and leases may be facilitated by conventional fixed price black letter law contracts based on templates. In contrast, for complicated or complex projects, in-house contract templates will need to be heavily tailored or almost developed from scratch.
Complicated and complex projects often involve design elements which require integration of extant and emergent technologies during a project lifecycle to create functioning systems. These projects undergo system design, development, production, verification, implementation and validation stages. Different organisations may be responsible for these stages. For example, one organisation may complete design and development, a separate organisation may undertake production and implementation, while a further separate organisation may conduct verification. Aligning the interests of these parties can be achieved through more sophisticated contracts which will be critical given the buyer will play a coordination role for the multiple different suppliers.
One way to incentivise desired behaviours is to incorporate a performance framework into the contract. A supplier’s profit may be directly tied to its performance and in the scenario of a multi-party contract, performance may also measure how well the parties work together. Superior performance may also be rewarded which could result in a higher level of profit than initially agreed. For example, the supplier’s profits could be increased by linking payment to bringing forward the agreed schedule.
A balanced performance framework will contain a mix of both ‘hard’ and ‘soft’ measures identified as Key Performance Indicators. Hard measures are quantifiable (e.g. measuring a project’s progress against an agreed delivery schedule) whereas soft measures have higher levels of subjectivity (e.g. supplier relationship performance). In this manner, the performance framework can be tailored to the parties’ priorities which may range from innovation to cost savings.
As complexity increases and accountability for work becomes blurred, more collaborative approaches may be considered. Alliancing takes the focus away from blame and enables risk sharing between multiple suppliers. Although this contracting model facilitates risk sharing, it can be inappropriately applied where a simpler contract would be effective and the high level of management overhead in effectively implementing it can be underestimated.
Alternatively, a contract could incorporate a Target Cost Incentive (TCI) payment method. TCI promotes risk/reward sharing between parties through a ‘pain‐share’ (cost overruns are shared between the parties) and ‘gain‐share’ (cost savings are shared between the parties) to align the interests of all parties to the contract. This method can be further tailored to encourage innovation and relationships by linking it to the performance framework.
In summary, variations to fixed price black letter law contracts may be used for complicated and complex projects where projects comprise many lifecycle stages i.e. design, development, production, etc. Based on the project’s complexity, a buyer will need to consider risks associated with awarding the work to a single supplier or multiple suppliers and its preferred level of accountability for the parties. - Michael Kim