Collaborative Contracting with AVEVA Contract Risk Management
Posted: July, 29 2020
Every week, I meet with contracting teams at Engineering, Procurement, and Construction (EPC) and industrial Owner Operator companies interested in driving efficiencies from their procurement and construction activities to improve the overall outcomes on their CapEx projects.
As project complexities rise and changes throughout has become the norm, these challenges commonly manifest as stakeholder fallouts, profit leakage, and reputational damage or worse, projects abandoned due to lack of viability. The symptoms for owner operators are cutting corners in governance checks or offloading risk onto contractors, who are forced to bid competitively to win business but then struggle to claim cost recovery for overruns.
A common scenario
I recently met with a large EPC who was just six months into a 4-year project which had already accrued 800 changes. They wanted my help to ensure that the right people had visibility of the change and decisions were being made before penalty clauses kicked in, all while guaranteeing that suitable traceability and authority approval was undertaken so they could build a viable cost recovery claim from their client.
This exemplifies that with the growing variables of uncertainty, project teams struggle to create predictable plans to execute a path to success and as such they have started to adopt more collaborative approaches to working. In turn, they rely on digital solutions to provide the right governance and support they need for greater agility. Their contracting strategy and the way they maintain contract adherence throughout the project, no matter the change that occurs, acts as the vehicle to deliver success.
The emergent thought leadership in contract administration practices is embracing the situation that it is nearly impossible to anticipate every future incident, contingency or exact detail when scoping the contract, and as such, an incomplete contract lifecycle management approach is recommended.
Incomplete contracts that contain uncertainty will require collaborative processes
between contract parties to be realised which are beyond the familiar comfort zone of
well-known contract practice” [ICE Apr 2019]
Breaking it down: Collaborative Contract Lifecycle Management (CLM)
Executing incomplete contracts, like those used in Integrated Project Delivery (IPD), requires project teams to take a collaborative approach to contract lifecycle management. And the results speak for themselves - according to a January 2020 McKinsey study, when operating around a common commercial language and repeatable, consistent processes, a collaborative contracting approach can improve cost and schedule performance by 15 to 20 percent.
We have proof that it works, but project teams still hesitate to implement these types of contracting structures. Why? Because they’re different than they’ve always done them. But, times have changed…I don’t have to explain why capital projects today are different than ever before – a quick glance at the news will do that for me. As project teams face more change and project interruptions than ever before, decision making based on precedence carries less weight and collaboration around the emergent circumstances of the project is ever more decisive to delivering successful outcomes.
So, the question we really need to answer is – how can you get started? More than just your typical terms and conditions, or relationship management agreement, truly collaborative contracts share four common elements, as follows:
- A defined preplanning period where all primary project stakeholders align on the project plan in conceptual design and agree to the desired cost and schedule to execute against.
- A single contract, signed by all parties, that defines the scope of work and the terms of collaboration and coordination between them and the other parties. It also defines governance around change management (MoC) and predetermines compensation mechanisms for when a project is successful or penalty when it is not.
- Counter to typical lump-sum contracts, collaborative contracts commonly contain a no-fault clause to reduce claims-based distractions and, instead, leave decision making to a shared governance committee which considers the impact of in-project change holistically before implementing. The no-fault clause is critical for a shared risk, shared reward approach to project execution.
- As mentioned in point three above, collaborative projects depend on a joint management structure, made up of representatives from all critical project parties and aligns the teams around a common goal through transparency and collaboration.
A collaborative contracting approach can improve cost and schedule performance by 15 to 20 percent.
[McKinsey & Company, January 2020]
The spirit of collaborative contracting is about people and principles and not tools and processes. It’s about connecting people and emphasising that the value of ongoing engagement and creating agility outweighs adherence to an out of date design and sticking to past agreements. This does not, however, mean that processes which require the need to record decisions and build approval trails no longer bear value.
AVEVATM Contract Risk Management
AVEVA Contract Risk Management (formerly, AVEVA ProCon) finds the perfect balance between agility and governance. Built for governing adherence to process while enabling contract agility, it's platform connects decision makers and centralizes their communications into a single secure and immutable repository. It adds intelligence onto each communication to ensure that reviews and approvals happen when they should and the right people and systems have real time access to the latest decisions throughout the project, while providing valuable insights into emergent change that is not typically possible within incumbent systems.
To learn more, tune in for the upcoming webinar by my AVEVA colleague, Melanie Fontenot, alongside Paul Branch, IACCM COO and CTO on August 4 titled Using Technology to Debunk the Post-Award Blame Game.
It’s all here: AI-enabled vendor payments, UX upgrades & Enhanced Analytics
Extending on the existing capabilities to digitize the contract administration process of managing change, claims and payment workflow, AVEVA Contract Risk Management 8.0 takes the concept of a smart contract to a new level by applying artificial intelligence to contractor payments.
The augmented, AI enabled platform simplifies creating & verifying payment claims by all progress reports for a given payment cycle and automatically generates the payment due based on the contract’s rules of credit. This saves our customers time and money, while improving transparency and reducing errors – allowing you to focus on getting the job done, on-time and on-budget.
We have also made significant improvements in the UX of contract setup and extended the platform’s unique contract risk analysis functionality by exposing financial health insights at breakdown and line item levels. All of the events and information associated with these business processes are exposed in the platform’s API which will facilitate easy integration to a project controls system to minimize data entry overheads and errors.
Finally, the analytics API has updates to allow for extended process governance to cover the processing of progress reports, and contracts already being managed in the solution can enable the new capabilities retrospectively.
Additional major features in AVEVA Contract Risk Management version 8.0 include:
- Product name change from AVEVA ProCon to AVEVA™ Contract Risk Management
- New communication template configuration for progress reports
- New setup flow for Contract Setup of breakdown items, lines items, schedule of rates & progress items
- New feature to set up the rules of credit for a contract
- New communication process flow specific to business rules associated with progress reports
- Updated contract change management process flow to support governance around changes to progress items
- Updates contract payment process flow to link to the progress process flow and automate payment calculations
- New contract health screen
- Additional Analytics and Rest API endpoints