Rebuilding the Owner/Contractor Relationship

Issue 1 and Volume 120.

By James Cravens, Pathfinder, LLC

An engineering and construction project is typically the culmination of a two-step process that starts with owner business objectives and a statement of scope for a particular project. Subsequent to internal planning and project definition, the emphasis shifts to selection of a contractor to carry the project to the finish line. This sequence is the natural progression whereby the owner organization achieves efficiency by leaving the design and physical construction to specialists, rather than trying to develop internal capabilities that are only needed on a temporary basis. While history provides a number of exceptions where owners have essentially become their own contractors, it’s safe to say that the majority of projects have been executed using this partnering approach whereby each party is focused on their area of expertise. Unfortunately, the past ten years have represented a period of turbulence in which many long-standing owner/contractor relationships have deteriorated, leaving unpleasant circumstances and an uncertain path forward.

A recent power industry survey suggests that a majority of owner organizations are dissatisfied with large contractors who are currently providing engineering and construction support. The root causes of this circumstance are likely embedded in a few overarching conditions present in today’s business environment: 1.) The emergence of a global economy and the associated economic pressures have turned up the heat on all business relationships. 2.) Downturn in power demand and confusion related to future energy strategy has interrupted capital spending, leaving many contractors with reduced workloads and requirement to cut staff. 3.) The shift to renewable energy and focus on T&D spending has shifted the core competencies required for large contractors to participate in many projects. 4.) The Industry shortage of qualified resources has impacted the owner’s ability to satisfy their role in project development, as well as the contractor’s ability to perform in a satisfactory manner.

The above factors contribute to a deteriorated business climate for both owners and contractors. For the most part, they represent transitional impacts that will eventually be solved as a more certain path forward becomes evident. Contractors must focus on the changing business environment with a realization that client satisfaction is paramount, and that it will only be achieved by adjustment of their values and competencies to match the changing needs of owners. Both sides must recognize that their best opportunity for success is tied to mutual respect and a focused effort to function in a manner where they complement each other and facilitate shared efficiency and growth.

The path to better and more productive relationships starts with recognition by both sides that all contractual opportunities have both a long and a short view. An owner who blindly proceeds with a low bid, knowing the bidder misunderstands the scope, is facilitating future conflict. A contractor who structures a bid with the strategy of setting the stage for change orders is equally guilty of reducing the opportunity for a successful project. History has demonstrated that success is far more likely when both sides take the long view with focus on reasonable terms and balanced risk and reward.

There are various best practices that industry leading teams use to encourage effective relationships: 1.) Assure the owner has fully defined the scope of work and eliminated any gaps or ambiguity in the Request for Proposal (RFP). 2.) Clearly define in the RFP, and the final contract, all the owner-desired support activities (i.e., project execution plan, project control, staffing, etc.). 3.) Ensure project risks are continuously addressed by both the owner and contractor team representatives and are fully transparent in all status reports. 4.) Define the owner’s role in the selected contract environment. Know when to intercede and when to let the contractor do their job. 5.) Establish a team culture. 6.) Promote shared rewards (incentives and target price contracting) in a manner that encourages optimum performance. 7.) Establish the change philosophy in the contract and implement an effective change management process. 8.) Address cost and schedule variances within the month they occur and assign owner/contractor resources to address the correction. 9.) Encourage consistent and effective communication to avoid the negative impact of misunderstanding and prolonged time to resolve open issues.

The Construction Industry Institute (CII) has developed a number of processes that promote team building and alignment of objectives. These tools have proven effective in creating an environment in which project participants focus on successful execution rather than resolution of conflict.

Deterioration of owner/contractor relationships is an outgrowth of changing market conditions and financial pressures. Improved interface can be facilitated with reasonable contracting and focus on alignment, communication, and team-building.