Table Of ContentProcurement Routes for Partnering
A Practical Guide
Procurement Routes for Partnering
A Practical Guide
By
Jon Broome BEng, PhD, MAPM
Published by Thomas Telford Publishing, Thomas Telford Ltd,
1 Heron Quay, London E14 4JD.
URL: http://www.thomastelford.com
Distributors for Thomas Telford books are
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First published 2002
Also available from Thomas Telford Books
Enterprise focused management, Ted Hutchin. ISBN 07277 2979 9
NEC and Partnering: a guide to building winning teams,
John Bennett & Andrew Baird. ISBN 07277 2955 1
Partnering in Europe: incentives based alliancing for projects,
Bob Scott. ISBN 07277 2965 9
Unconstrained organisations: managing sustainable change,
Ted Hutchin. ISBN 07277 3016 9
A catalogue record for this book is available from the British Library
ISBN: 0 7277 3136 X
© JB Project Consulting and Thomas Telford Limited 2002
All rights, including translation, reserved. Except as permitted by the
Copyright, Designs and Patents Act 1988, no part of this publication
may be reproduced, stored in a retrieval system or transmitted in
any form or by any means, electronic, mechanical, photocopying
or otherwise, without the prior written permission of the Publishing
Director, Thomas Telford Publishing, Thomas Telford Ltd, 1 Heron
Quay, London E14 4JD.
This book is published on the understanding that the author is solely
responsible for the statements made and opinions expressed in it and
that its publication does not necessarily imply that such statements
and/or opinions are or refl ect the views or opinions of the publishers.
While every effort has been made to ensure that the statements made
and the opinions expressed in this publication provide a safe and
accurate guide, no liability or responsibility can be accepted in this
respect by the author or publishers.
Typeset by Prepress Projects Ltd, Perth, Scotland
Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall
This book is dedicated to my niece and nephew:
Abigail, at the time of fi nishing this book aged 3¾,
and Edward, aged 1¾
Contents
Acknowledgements xi
Foreword xiii
Glossary xv
1. Introduction 1
1.1 Why read this book? 1
1.2 Background to this book 4
1.3 Style of this book and how to use it 5
Further reading 9
2. Partnering 11
2.1 Introduction 11
2.2 What is partnering? A quick review of partnering
literature 11
2.3 The development of partnering in practice 14
2.4 A model for partnering 15
2.5 When is it appropriate to partner? 25
2.6 Conclusion 28
References 31
3. The process and concepts of procurement strategy 33
3.1 Introduction 33
3.2 The fundamentals of procurement strategy 34
3.3 Overview of a model for developing procurement
strategy 36
3.4 Information phase 39
3.5 Principles of risk allocation and sharing 42
3.6 Choose the ‘best-fi t’ procurement route 50
3.7 Develop contract/work package breakdown structure 51
3.8 Choose payment terms and select ‘best-fi t’ conditions
of contract for the individual contracts 51
3.9 Select project participants on their ability to deliver
good value 53
vii
3.10 Build in reviews to consider ‘what if?’ scenarios and
their second-, third- and even fourth-order effects on
other parties’ motivations and actions 55
3.11 Award, communicate, implement and measure 57
3.12 Feedback and continuous improvement 59
3.13 Summary 61
References 65
4. Conventional procurement routes and price-based
payment mechanisms 67
4.1 Introduction 67
4.2 Price- (output) vs. cost- (input) based contracts 68
4.3 Conventional procurement routes 69
4.4 Price-based payment mechanisms 91
4.5 Conclusion 107
References 110
Bibliography 110
5. Concepts and process for the intelligent use of
incentives 111
5.1 Introduction and overview 111
5.2 Uniqueness 114
5.3 Overview of the process 115
5.4 Balancing value, incentive and cost 117
5.5 Balancing risk, opportunity and incentive 119
5.6 Who designs the incentive plan and when 121
5.7 Use of positive and/or negative incentives 124
5.8 Measuring performance: type, when, by whom and
where 130
5.9 Types of incentive mechanisms 137
5.10 Conclusion 139
References 142
6. Single-incentive mechanisms for enhancing value
and improving performance 145
6.1 Introduction 145
6.2 Capital expenditure (CapEx) reduction incentives
under price-based or management contracts 147
6.3 Value enhancement incentives clauses 149
6.4 Performance incentive clauses 159
6.5 Process incentives 172
6.6 Incentives for improved health and safety (H&S)
performance 176
6.7 Conclusion 180
References 183
7. Cost-reimbursable contracts 185
7.1 Introduction 185
7.2 General advantages and disadvantages of cost-based
contracts 186
7.3 When to use a cost-reimbursable contract 192
7.4 Defi ning the principal components of cost-reimbursable
contracts 202
7.5 Degree of client involvement in the management of the
project 206
7.6 Financial administration of cost-based contracts 207
7.7 Summary and conclusion 222
References 225
8. Target cost contracts 227
8.1 Introduction 227
8.2 Defi nitions and terminologies 228
8.3 The nature of risk sharing in target cost contracts 229
8.4 When to use target cost contracts: boundary
conditions 230
8.5 Overview of how actual cost, the fee, the target and
the share profi le fi t together in a target cost contract 234
8.6 Setting the target 235
8.7 Setting the share profi le: the fi ve-zone model 246
8.8 Deciding when the contractor’s share of any over-run
is paid 260
8.9 Adjusting the target 262
8.10 Guaranteed maximum price contracts 263
8.11 Prime contracting 266
8.12 Conclusion 272
References 275
9. Project and strategic alliances 277
9.1 Introduction 277
9.2 Project alliances 278
9.3 Strategic alliances 292
9.4 Conclusion 302
References 305
10. Mechanisms for multi-incentive plans and other
incentives 307
10.1 Introduction 307
10.2 Standard method for combining cost and other
incentives 308
10.3 Sliding scales 313
10.4 Trade-off diagram 314
10.5 Incentive matrices 315
10.6 Multipliers 318
10.7 Indirect incentives 324
10.8 Conclusion 328
References 331
11. Summary and conclusions 333
Appendices
1. Procurement tool 1: The concept of value in value
management and the value planning process 347
2. Procurement tool 2: Risk management 355
3. Procurement tool 3: The NEC family of contracts 359
4. Procurement tool 4: Selecting contractors by value 363
5. Procurement tool 5: Value engineering 367
6. Procurement tool 6: Benchmarks and benchmarking 371
7. Procurement routes and suitable conditions of contract 373
Index
377
Acknowledgements
I would fi rst like to thank the sponsors of the original research: London
Underground Ltd, National Power plc (now Innogy plc), Anglian Water
Services plc and UKAEA (the United Kingdom Atomic Energy Authority). I
would also like to thank:
• all interviewees who participated in the original research, from which
many lessons have been drawn
• all the individuals and organizations that I have worked with as a
consultant and trainer for their insights and for allowing me to ‘test run’
models to check their usefulness to practitioners.
For their active participation in this book, I would like to thank:
• Sir Michael Latham for writing the Foreword
• Professor Perry of the University of Birmingham specifi cally for his input
into Chapter 8 and, more generally, for being my academic mentor, role
model, supporter and friend for some 8½ years now
• Norman Kerfoot, of the Advance consultancy, for co-authoring Chapter 9
and allowing me the pleasure of working with Advance
• Bob Soames FCIPS, of Contracts Consultancy, for giving detailed
comments, particularly from a Chartered Institute of Purchasing and
Supply perspective
• Malcolm Gibbins, of Amec, for his comments on Chapter 4
• Jeremy Brinton, the commissioning editor of Thomas Telford, for his
(almost) ever-present enthusiasm for the book and patience with me.
Finally, I would like to thank my friends for their ongoing support, both
while I have been writing this book and, more generally, for their understanding
and patience. This especially means (in no particular order): Phil and Saha,
Steve and Kate, Tim and Sarah, Mike, Mojo, Jane and Chris, my brother, Nick,
and his wife, Paula, and my girlfriend, Claire.
Foreword
There has been a tremendous surge of interest and involvement in partnering in
recent years. I suppose that my report Constructing the team helped by placing
heavy emphasis on teamwork and co-operation rather than the adversarialism
and confl ict to which the whole construction industry was very prone when
I began my work in 1993. Partnering received further major emphasis from
the Egan report (Rethinking construction) in 1998, and it has received very
substantial backing for public sector work in guidance documents and reports
from the Treasury, the National Audit Offi ce and the Offi ce of Government
Commerce. It is now the preferred procurement route for many major clients.
Since it was almost entirely unknown in Britain even 9 years ago, that is a
remarkable development.
However, there is still a great deal to learn. Plenty of so-called ‘partnering’
is not really partnering at all, leading to disappointment and reinforcing the
inherent cynicism of many in the construction process. That is why this book
is so valuable. It rightly seeks to ground the entire approach of partnering in
commercial reality by genuinely aligning the motivations and aspirations of
all involved in the project. A partnering agreement that ignores commercial
pressures and incentives will break down at the fi rst hint of trouble. Equally,
one that is not rooted in real commitment by all to working in a genuine spirit of
fi nding ‘win–win’ solutions will fail because support for the ideal of partnering
is not even skin deep. The participants need to understand what partnering really
involves and what responses it requires from all in the team, whether they be
client, consultant, main or specialist contractor or anyone else throughout the
supply chain. Achieving this balanced approach of real understanding, genuine
commitment and the opportunity to fulfi l desired commercial objectives is
not easy, and certainly not cosy. It requires real training and genuine culture
change by all involved at every level of the project.
This book will help them a lot. As the author says, readers do not need to
read every word (although I would encourage them to do so). Busy people
can pick out the core messages and implementation proposals and use them as
a checklist for action. I am sure all readers will benefi t from this serious and
practical study and I commend it to a wide audience.
Sir Michael Latham
Author of Constructing the team, Chairman of Willmott Dixon Ltd,
Knowles Management Ltd and Partnership Sourcing Ltd
xiii
