Commitments by all team members can be influenced through agreed incentives by reference to a range of success measures. For example:
■ NEC4 provides for incentives embedded in the shared pain and gain provisions and also for a bonus on early completion
■ PPC2000 provides for agreement of ' shared saving arrangements and added value incentives' and for consultant and contractor incentives 'linked ... to achievement of the agreed Date for Completion ... or to the achievement of any of the targets stated in the agreed KPIs'.
Collaborative procurement often uses pain/ gain performance incentives, and these should distinguish between:
■ The sharing of all or some cost savings, sometimes combined with the sharing of all or some cost overruns, designed to create a shared motivation to minimise costs
■ The sharing of all profits and losses arising from the project, sometimes aggregated with the profits and losses arising from to other projects undertaken by the same team, designed to discourage each individual team member from protecting its own position through non-collaborative means such as hidden contingencies.
Example: On the Anchor Property Trial Project: ■ 'Gain share incentives were ... established early and it was decided that Anchor would keep the first 10% and the rest would be shared between the client, the contractor and the consultant' ■ 'The share basis was client 40%, contractor 40% and consultant 20%. Anchor had decided on a very open and trusting approach with its supply chain and consequently there was to be no pain share' ■ 'Accordingly, the savings made were around 9% when projects that failed to improve against targets were taken into account' ■ 'Savings were agreed with supply chain members for paint and kitchens and bathrooms, and formal agreements signed.' |
The agreement of a pain/gain incentive does not itself establish a system for identifying and testing potential cost savings and other improved value, nor does it ensure that the team will work collaboratively with subcontracted supply chain members. If not combined with ESI, Supply Chain Collaboration and other collaborative activities, the agreement of a pain/ gain incentive leaves open the possibility that a contractor will achieve its share of savings simply by putting pressure on subcontractors and suppliers to reduce their costs. This would undermine the commitment of those subcontractors and suppliers to a collaborative approach and leave them more likely to recover their losses by compromising safety or quality.
The base point for operating a pain/gain incentive needs to be accurate and should follow sufficient preparatory work by team members, for example coming after the analysis that forms part of Supply Chain Collaboration. A pain/ gain incentive depends on transparency which provides all parties with a clear understanding of how, where and why incentives are earned and paid. In order to provide a valuable incentive, shared savings should be earned through collaborative activities rather than automatically as a windfall against an arbitrary starting figure.
The prospect of shared savings may also tempt a contractor to set its target price as high as possible. The JCT Guide to its Constructing Excellence Contract states that 'Normally a client will retain the option not to proceed to the construction stage so as to provide some commercial pressure on the contractor not to pitch his assessment of the target cost for the construction period too high'.
Before agreeing a pain/gain incentive, a Client and its advisers need to answer the following questions:
■ How far the project cost plan should be developed before it can be the basis for calculating shared savings or overruns
■ Whether cost certainty and cash flow may be delayed while incentives are being calculated
■ When the actions and ideas that generate cost savings should be recognised and rewarded compared to when they should be treated as a team member simply doing its job.
Shared pain/ gain is not the only incentive for collaborative procurement, and a Client and its advisers should also consider other incentives. For example, a team can be motivated by:
■ The collaborative agreement and integration of the scope and nature of their services, works and supplies based on a clear statement of the Client's brief and expectations
■ Agreement a fair profit and an appropriate contribution to overheads and other costs.
These commercial basics can incentivise a team to concentrate their efforts on the best interests of the project or programme of work, knowing that their time will not need to be spent unproductively in devising tactics to prepare the ground for later claims and disputes. Instead, they see open and well- structured working relationships that will help them to:
■ Avoid losses
■ Minimise wasted cost, time and resources
■ Enhance their reputations
■ Avoid disputes.
Example: On the SCMG Trial Project, Hackney Homes and Homes for Haringey used the Core Group and independent adviser to resolve 'potential disputes with the benefit of full cost and time information plus the motive to retain long-term relationships.' |
Incentives on a single project are limited by the value of that project and a team member's share of that value. Incentives can be more attractive and effective if they are agreed at a strategic level and linked to the performance of successive projects or tasks under a framework alliance or term alliance, as considered in Sections 10.2 and 10.3. Incentives relating to the award of additional work can also recognise where performance is impaired by limited capacity, and contractual systems can enable adjustment of the workflow if certain team members become overloaded. A framework alliance or term alliance should state the success measures and targets that determine the variable award of work, and it should also state who evaluates the alliance members' performance and capacity for these purposes.