This week a Dutch online newspaper opened its headlines with the one-liner: “ABN AMRO economists: Civil Constructors are losing billions through failures” and “Building sector is leaking EUR 5 billion per annum because of mistakes”.
The message attracted our attention immediately; was there another big failure detected or did another large civil construction contractor go bust? After reading the article and the excellent ABN AMRO Insight research, the article underscores what we have been saying all along.
The excellent insight research report states that the value erosion is beyond 5% of the contract value, and in a competitive sector such as the civil construction industry it can go beyond net operating profit outcomes of civil construction contractors.
One of our observations is that the 5% is rather modest compared to other research disclosure of the academic world, professional bodies and consultants who are reporting that value erosion is getting into double digits.
The composition of the research report was very well done; an introduction to the sector, a quantitative analysis of the issues, a couple of in-depth interviews with senior stakeholders and recommendations on how to prevent claims. We have enclosed a hyperlink to the research report, which is in the Dutch language.
For those who can’t read Dutch, see hereby our five takeaways on the recommendations made by the senior stakeholders on how to avoid claims in civil construction:
1.Diligent preparation in the early phase of the project is the key to success;
- Ensure that the information gathered is reliable;
- Requirements of the client are stated correctly and completely;
- Realistic planning, adequate budget and risk identification at the start results in less uncertainty and added cost during execution;
- Good preparation helps avoiding changes initiated by the client during the execution phase which would be disrupting, cause cost increases, delay, quality issues and disputes and claims;
2.Good cooperation between the strategic partners including the client;
The civil construction industry works with several parties to deliver a product. The collaboration beyond organisational boundaries is of paramount importance and ensures that knowledge transfer happens and commitment to achieve the project objectives will be there even when the scope of work isn’t exact. Cooperating in the form of an Alliance brings and keeps the primary stakeholders in the project together and it is a proven fact that such cooperation delivers much better results.
3.Experience is the foundation of success
A low economic cycle often results in the loss of knowledge and expertise and during the subsequent “boom” there often is a shortage of employees with the necessary knowledge and expertise. It is a given that companies that managed to hold on to their personnel and partners profit from that compared to those companies that didn’t. The gathering of the various partners in an alliance (subcontractors, suppliers, engineers, etc.) has a beneficial effect on the planning and construction process. Obviously, this requires attention for the composition of the alliance and the moment it should be formed. Familiarity breeds success.
4.Innovation and Standardisation
Process optimisation and process innovation like more efficient planning, digitalization and automation are key in the prevention of failures and reducing costs.
5.Knowledge Sharing facilitates learning from Failures
Knowledge sharing provides the opportunity to learn from failures both on the contractor’s and on the client’s side. An open communication between partners (contractors, subcontractors, suppliers, engineers and clients) beyond the boundaries of their own organisations, to capture and transfer knowledge on critical issues which hinder the successful delivery of projects.
Blindly transferring most, if not all, risks to the contractor cannot and will not result in the achievement of the project objectives; not for the client and certainly not for the contractor. Often such transfer is the result of budget constraints on the part of the client both for the preparation of the project as well as for the execution; the budget cannot be increased.
This will almost always lead to failures, conflicts and disputes, which will cause increased cost and additional time for completion. Such cost can be avoided by applying ABNAMRO’s five recommendations mentioned above and by not trying to achieve the unachievable by setting a too low project budget or by bidding a too low price. Also, a balanced risk allocation to the party that is best able to price the risk or best able to mitigate the risk within the budget will be instrumental in avoiding said cost.
The new thing is that critical stakeholders as financial service industry is recognising the issue now and offering support. See enclosed the hyperlink to download the ABN AMRO Insights research (Dutch Language)
In our value offering we have a couple of products, which will help you to mitigate the loss of value in your contracts and projects:
- Streamlining Commercial & Contract Management processes
- Contract Management As A Service to provide you with immediate capacity
- Knowledge Management to prevent loss of critical knowledge and to speedup knowledge of new personnel
Don’t hesitate to contact, we are committed to support you to reduce value erosion!