The collapse of Carillion has been yet another wake-up call to industry on the need for it to get its house in order when it comes to contract management.
While the downfall of the construction giant has made headlines around the world, it is not the first major company to fall foul of poor contract planning and management. With an estimated 64% of capital expenditure projects exceeding budget, it is unlikely to be the last.
Few companies can weather the damage a failed capital project can inflict. A PwC analysis revealed that, following a public announcement of a capital project delay or shutdown, the majority of companies experience a steady decline in share price. By the three-month mark following such an announcement, the decline averages 12%.
Cloud-based technology can be part of the solution, by offering an integrated way to track and manage complex contracts. Yet, many project managers continue to rely on a myriad of spreadsheets, disparate documents and emails to manage multi-million-pound projects.
Carillion’s troubles were caused in part by cost overruns on some of its large contracts. In particular, problems stemmed from three construction contracts that it had been awarded by the government: the £350m Midland Metropolitan Hospital in Birmingham, the £335m Royal Liverpool University Hospital, and the £745m Aberdeen bypass.
The fallout has brought into sharp focus the need to closely monitor and assign responsibility to the appropriate stakeholder when design changes are made.
Failing to allocate and charge-back design change costs is a key area where contractors lose money. This failure is often due to inadequate contract management systems that are frequently not integrated with materials management solutions and the design software tools.
As Keith Cochrane, the respected engineering industry veteran who was parachuted in as Interim CEO at Carillion said at the time: “Tenders have been accepted with a high degree of uncertainty about key assumptions; our ultimate success has been contingent on the performance of others not under our control and we’ve agreed design changes without agreeing incremental cost and value.”
So, why are companies continuing to fail with what should be routine contract housekeeping? What can they do to turn things around?
Even the most iron-clad contract will be changed and updated once a project is underway. Without effective management, this can lead to stakeholder frustrations, project delays and cost overruns as roles and responsibilities become blurred.
It is estimated that 65% of project failures are due to the softer aspects of people, organisation and governance, leaving less room for excuses and indiscipline, and creating greater urgency for organisations to take action.
The complexity of capital expenditure projects, particularly when stakeholders in these projects can be based across several continents, makes it challenging for owner operators and EPC Contractors to gain a clear view of the status of the entire project using traditional methods.
Project Stakeholders frequently resort to collating information from various disconnected documents, cost, finance and scheduling systems in order to get a project status update. However, without an integrated approach, when changes occur, the knock-on effect is often not fully reflected in this information and therefore not understood by the entire team until it is too late.
That’s where contract management software can transform the health of a project. Providing a robust framework that gives project managers timely, real-time insights, enabling them to make informed decisions, improve partner relationships and a clear audit trail. Three core principles ensure best in class contract management software keeps complex projects on track:
Transparency – the single version of the truth
Providing a single channel for the volume of communication between project stakeholders is essential. Informal and untraceable communications and instructions between project stakeholders are major source of commercial risk.
Smart contract management provides a simple system to manage and log all interactions with contractors; providing context around why decisions have been made, roles and responsibilities. It also acts as a valuable audit trail. What’s more, there is clear accountability around contract award and execution.
Tight change management
Without effective change management processes, you can find yourself in trouble all too quickly. With contract management tools, all change orders are initiated, authorised and logged from a central system, while the cost and time impact can be quickly analysed.
Enforcing best practice business processes
Delivering projects on time and on budget ultimately builds trust and enhances reputations. Increasingly, teams that deliver these projects are based on several continents. Clearly the activity of these disparate teams needs to be supported by standard business processes, not left to ad-hoc project-by-project approaches. These processes are delivered in an easy to use manner to these global teams via contract management software.
Best-of-breed contract risk management solutions enable industry operators to proactively manage the contractor and the contract risk. As such, they truly merit a lower cost of capital than those who choose to play a high stakes game.
Clare Colhoun is VP of ProCon Product Sales at AVEVA.
