Time to take a fresh look at construction contracts

The construction industry has been traditionally known for its adversarial contracting practices - however, a new wave of thinking is emerging, driven by the need for greater efficiency, innovation and risk management. It is a movement that proposes a shift from established and more rigid, "us vs. them" contracts to collaborative models that promote shared success – and it is leading to greater efficiencies and better cost savings, writes John Ridgeway.

For decades, the construction industry has relied heavily on traditional, fixed-price contracts. These contracts often placed the burden of risk solely on the contractor, or in many cases, the sub-contractor, leading to a culture of blame and litigation when confronted with unexpected challenges. Additionally, the adversarial nature of these contracts has discouraged open communication and collaboration, hindering innovation and problem-solving.

Traditional contracts have had a limiting effect and have been a barrier to delivering excellence, particularly those based on fixed prices. This model simply incentivises contractors to cut corners to meet a pre-determined price, potentially compromising quality.

The contractor shoulders most of the risk for unforeseen circumstances like material price fluctuations or weather delays, which has in turn meant that both parties focus on protecting their own interests, hindering open communication and collaboration. The focus on sticking to the pre-defined plan further discourages innovation and finding alternative solutions.

The rise of collaborative contracting models

In response to these limitations, the industry is now embracing alternative models that prioritise collaboration and risk sharing. These models aim to create a more integrated project delivery (IPD) environment, where all stakeholders work together towards a common goal.

These include shared goals and risks where all parties involved have a vested interest in project success and jointly manage risk through open communication and contingency planning.

Stakeholders such as architects, engineers and contractors are now becoming more involved earlier in the design phase, to identify potential challenges and find creative solutions. Transparent and regular communication ensures everyone is on the same page and issues can be addressed proactively.

We are also seeing a more staggered approach, where the project is broken down into smaller phases, allowing for flexibility and adjustments based on learnings from each stage.

This in turn is resulting in a more collaborative approach which is leading to alternative target cost contracts, which aim for a pre-determined price, with both owner and contractor sharing any savings or losses that might exceed that target.

A mindset shift

However, successful transitioning to a collaborative contracting system requires a shift in mindset and a willingness to adopt new practices. Traditional contract language needs to be adapted to reflect a collaborative approach with shared goals and risk mitigation strategies.

Contracts should incentivise collaboration and innovation by rewarding all parties for achieving mutually beneficial outcomes. This means having open communication channels and regular project updates - essential for maintaining trust and fostering collaboration.

Furthermore, collaborative contracting fosters a culture of innovation and problem-solving, leading to better project outcomes in terms of quality, cost and schedule. Shared risk management helps mitigate unforeseen challenges and minimises project delays and cost overruns.

It also promotes trust and respect between all stakeholders, leading to a more positive and productive work environment. This in turn leads to improved efficiency, reduced risks and a focus on quality, which ultimately delivers greater value for project owners.

Building a collaborative future

The transition to collaborative contracting models will not be without challenges. Established industry practices and ingrained mindsets need to evolve. However, the potential benefits are undeniable - improved project outcomes, reduced risks, and a more efficient and innovative construction industry.

The industry needs to invest in training programmes that equip project managers, contractors and owners with the skills and knowledge necessary to work effectively in a collaborative environment. Developing industry-wide standards and best practices for collaborative contracting are also needed to provide a roadmap for successful implementation.

The future of construction is really about collaboration. By moving away from rigid contracts and adversarial relationships, the industry can unlock a new era of efficiency, innovation and shared success. By fostering collaboration, embracing risk-sharing models, and investing in a skilled workforce, the construction sector can build a brighter future – not just project by project, but for the industry as a whole.