For a long time, it has been considered a misnomer to refer to contracting as a collaboration. Thus, historically, the concept of ‘collaborative contracting’ didn’t exist.
However, in reality, ‘contracting’ and ‘collaboration’ go hand in hand.
Today, there is mounting evidence that owners of large capital projects should implement collaborative contracting practices today to improve project outcomes.
Research, for instance, suggests that collaborative contract agreements have resulted in a 15 to 20 per cent improvement in cost and schedule performance compared with traditional contracts.
With this in mind, in this blog post, we will explain what collaborative contracting is and why it is so useful.
What is collaborative collaborating?
First, let’s look at the textbook definition:
Under a collaborative contracting model key delivery partners work together during a defined preplanning period to develop the project scope, schedule, and budget.
But what does this mean exactly?
If you look at it from first principles, contracting involves two parties reaching some form of understanding to achieve a common cause for remuneration. Collaboration too is based on similar principles. Therefore, conceptually, collaboration isn’t far apart from contracting.
What differentiates collaborative contracting from traditional, adversarial contracting practices is the level of risk and reward the parties jointly share. In a traditional contract, one parties’ failure to deliver its promise means the other party has a legal claim against it.
However, in a collaborative contract, points of failure and risk are anticipated. Thus, collaborative actions are agreed upon such that no one party bears all of the risk in an unforeseen event.
Why was collaborative contracting created?
Large scale projects are often fraught with inefficiency. From delayed start date to a key document not being approved, a lot can go wrong! However, the most significant cause of inefficiency is the misalignment of incentives between project owners and the other participants involved in the programme delivery.
Let’s use an example…
On the one hand, a project owner may regard the timely realisation of business benefits following the implementation of the project as their key objective. On the other hand, a supplier contracted to deliver the project will be most interested in getting paid for completing their share of the work in the project.
Consequently, this can sometimes lead to the suppliers negotiating the scope of the project down to meet deadlines; irrespective of whether the reduced scope still achieves the business objectives desired by the project owner.
It was from a desire to overcome this misalignment of interests that ‘collaborative contracting’ was born. There is recognition from both parties that there can be a mutual benefit from working collaboratively.
In the above instance, for example, the project owner and the supplier can share any excess supplier costs that may be incurred if the original scope is retained and the deadline moved slightly to the right.
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Who is using collaborative contracting?
Collaborative contracts are typically used in the construction and engineering industry. Moreover, research from McKinsey indicates that early adopters of these collaborative contracts in industries such as oil and gas, healthcare, water, and consumer-packaged goods are seeing improved financial performance for their capital projects during execution.
What are some examples of collaborative contracting?
Due to the COVID-19 pandemic, collaboration was needed within the healthcare industry to ensure the rapid development and distribution of a vaccine. Here are two examples:
1) Oxford/AstraZeneca COVID-19 Vaccine
With the urgent need for a COVID-19 vaccine, a landmark partnership between The University of Oxford and the UK-based global biopharmaceutical company AstraZeneca was announced in April 2020.
This collaboration brought together The University of Oxford’s world-class expertise in vaccinology and AstraZeneca’s global development, manufacturing and distribution capabilities. A key element of the collaboration is the joint commitment to provide the vaccine on a not-for-profit basis for the duration of the pandemic across the world.
By utilising the strengths of each organisation and with both committing to provide the vaccine on a not-for-profit basis it ensured that the Oxford/AstraZeneca COVID-19 vaccine was developed and made available for a global vaccine rollout in a timely fashion.
2) NHS England and independent hospitals
In March 2020, the NHS agreed a deal with independent hospitals in the UK to expand hospital capacity. Through this collaboration (the first of its kind), more beds, ventilators and nearly 20,000 fully-qualified extra healthcare staff were made available.
The deal demonstrated the benefits of collaboration in healthcare and was so successful that the NHS signed a £3-billion extension.
Collaborative contracting – 3 things to watch out for
There are 3 things you need to watch out for when it comes to collaborative contracting.
1) Collaboration is more than just a mindset
It’s a common misconception that collaboration is just a mindset or a set of behaviours. For successful collaboration between two organisations, there needs to be a commonly agreed Collaborative Working Policy, along with a management framework that has to be administered.
Serious practitioners of collaborative contracts will also commit to ISO 44001. ISO 44001 is the International Standard for Collaborative Working and is a roadmap for establishing and managing collaborative relationships.
It’s a common misconception that collaboration is just a mindset or a set of behaviours.
2) Don’t expect all the benefits straight away
Reaching a collaborative contracting agreement shouldn’t take more than 3-4 months from start to finish.
However, although all parties will enjoy some of the benefits of partnership right away, it could take several months to achieve the full benefit.
3) Always aim big
Collaboration allows you to think and aim for bigger and far-reaching outcomes. This is because the relationship between you and your suppliers is authentic and provides for pragmatic recourse if difficulties arise.
Neither party should therefore try to play it safe; instead, regard a collaborative arrangement as an opportunity to innovate.
Collaborative working with your supplier is a lot easier to put into practice if you as the client are willing to participate in it.
Having collaboration as one mode of operation with your supplier gives you more flexibility in how you respond to events within the relationship. For example, a claim by a supplier can be responded to by an offer of more collaborative working in the future, rather than an offer of cash.
In reality, many customers would regard their biggest suppliers as anything but collaborative. However, a few tweaks to the relationship can be enough to trigger collaborative behaviours across the board.
If you would like us to help find what’s stopping your biggest supplier from acting collaboratively, contact us to see if we can help.