Strategic considerations for new projects
Will your capital project take longer or cost more in light of COVID-19?
The unfortunate truth is that as some owners have already deferred or cancelled projects due to weakened economics, so too have supply chains experienced severe disruption and reduced productivity. We have seen labour shortages from illness or travel restrictions, the roll-out of COVID -19 related health and safety procedures, glimmers of contractor/subcontractor insolvencies, and increased pressures on overhead costs. Many of these issues are being played out in real time as claims or disputes under existing contracts; however, for readers focused on capital planning and procurement, the live question is how to address these issues efficiently and clearly (and achieve mutual agreement) in future competitive processes and contracts.
We propose three strategic considerations to address these issues:
1. Consider a market refresh
Industry sectors across Canada are being affected by COVID-19 in very different ways. For example, the oil and gas sector has largely pulled back on capital spending, while there are positive signals for the construction of new residential housing stock. Some projects may be supported by COVID-19 stimulus funds, while others might be “state of good repair” and would have to be done in any event. Private sector projects may be subject to more stringent lending guidelines. On the design side, there has been discussion about engineering “resilient” infrastructure and other design shifts more generally in light of the new social realities of COVID-19.
As a result of these and other factors, some capital projects that proceed may need to place a greater emphasis on design development, while others focus on schedule or cost containment. Note: for procurements in Ontario commenced prior to the implementation of the prompt payment and adjudication provisions under the Construction Act, consider whether a refresh or restart may cause you to be subject to such provisions. In the contracting market, some general contractors and suppliers may be experiencing cash flow issues while other contractors may be stretched to keep up with work or managing subcontractors who themselves are delayed. Relationships are fraying in light of the claims and disputes noted above, and cash flow issues may precipitate behaviour such as undercutting pricing to get a contract award in the door or increased changes and extras in an attempt to bolster profitability.
2. Consider project delivery model
Choice of project delivery model is shaped by a number of factors including industry type, degree of owner involvement, level of design certainty, and fast-tracking the design and construction schedule. If the main goal is to fast-track a project (especially given recent emphasis on “shovel-worthy/shovel-ready” projects), certain models or contractual tools could be more responsive, including:
- construction management with on-going design and early engagement of initial trade contractors
- the use of Limited Notices to Proceed (or similar types of early works agreements) in advance of the construction contract
On the other hand, “relational contracting” models for complex public infrastructure projects may be able to facilitate the increased collaboration needed to manage COVID-19. For example, beyond public private partnerships (PPP) which are showing signs of re-starting, other newer models such as integrated project delivery (IPD) and alliancing can use painshare/gainshare, big room collaborations and other techniques to reduce overall costs and schedule. Even within a given delivery model, contracting parties are free to consider varying degrees of flexibility within the commercial terms, such as cost-plus-a-variable or a fixed fee pricing instead of lump sum fixed pricing, or using incentives and disincentives, all of which may address risk and motivate successful completion of the project.
3. Consider procurement: Value strong management, innovation, and counterparty creditworthiness
Whether one sole sources from a trusted partner or competitively procures in the open market, we recommend that a contractor selection process include special consideration of the following:
- established means and methods to address COVID-19
- the use of innovative means and methods such as modular construction or off-site fabrication
- degree of internationalization of supply chain
- experienced and effective management
- creditworthiness, including a guarantee, bond, or more liquid security
These attributes are relevant and critical to the successful administration of the contract ultimately awarded. While there are a number of varied approaches to COVID-19 risk that we are seeing in the market, the bigger picture is that such risk is being actively allocated, and contracting parties need to develop the skills and the tools to do so (and resolve any disputes) efficiently and effectively.
As the engineering and construction industry re-adjusts to the new normal, it will be critical for all participants to be creative in reconsidering project delivery models, contracts, and procurements to best manage the successful delivery of projects going forward.
For more information about shaping the “new normal” of future contracts and other impacts of COVID-19 please listen to our webinar.