Contracting method is best suited to larger, multi-year projects, he says
As Canadian infrastructure projects grow larger, more complex, and riskier, collaborative contracting is an increasingly attractive option, says Josh Van Deurzen, a partner at Torys LLP.
In traditional contracting models, the government entity, procuring agency, or owner typically holds broad decision-making power and contracts with various other parties, such as construction companies, engineering firms, and designers, to deliver individual aspects of the project.
Collaborative contracting involves a joint governance structure where certain decision-making, risk, and reward are shared among the owner and key project delivery partners. In addition to construction, engineering, and design partners, the key project deliverers could also include subcontractors and suppliers, depending on whether, due to the project's particulars, they have a crucial role in the project’s successful completion.
“It's on the rise because these projects that are coming to market now are so big. In many cases, it's probably not possible to do those under the traditional contracting models,” says Van Deurzen, who advises clients on commercial agreements for the design, construction, financing, operation, and maintenance of infrastructure and public-private partnership projects (P3s) in Canada and the US.
Collaborative contracting is best suited for the biggest and riskiest projects. In contrast, he says that contracting models such as P3s and design-build-finance-operate-maintain (DBFOM) are more appropriate for smaller and less risky projects.
“This isn't the solution to every project. It's one tool in the toolkit for procuring major infrastructure projects. There is still scope for other contracting models.”
The collaborative process’s joint governance structure involves multiple management teams to decide by consensus on day-to-day issues, strategic matters, and to troubleshoot the problems as they arise, according to an article Van Deurzen wrote with Torys colleague Krista Hill. When consensus is impossible, a vote of the executive board or senior management team decide the matter, and there are certain issues on which the owner will retain the power to decide or override a vote, said the authors.
Van Deurzen and Hill write that parties will devise a “risk/reward-based payment mechanism” in collaborative contracting to incentivize a collaborative spirit and “cost and schedule discipline.” Parties receive base costs, but a portion of the contract price goes into “risk/reward pools” to fund arising issues. At the project’s completion, the remainder of the pools are divided among the project delivery partners.
“If we come in under budget, we're going share in the savings. If we come in over budget, we're going to share in the overage,” says Van Deurzen.
The authors say this aligns the parties to “resolve issues quickly and on a best-for-project basis.” They add that consideration of the project’s scope, scale, and risk profile will determine the size of the contributions to the risk/reward pools.
This extra front-end work devising a collaborative scheme that effectively shares responsibility, risk, reward, and decision-making power makes sense for massive, multi-year projects such as Ontario’s GO Rail expansion, Toronto’s Ontario Line subway project, and the Toronto-to-Quebec City high-frequency-rail project, says Van Deurzen.
“Selecting the right parties to be part of the project group, setting up the project governance, and setting up the risk-reward payment schemes – it's a lot of work to do that… It takes a lot of negotiation, and a lot of thought to structure the project in a way that makes sense.”
“The team, the governance, and the risk-reward sharing scheme need to be tailored to reflect the needs of the particular project.”
To execute the model effectively, he says parties must approach it with a “collaborative mindset” and avoid applying a zero-sum or adversarial logic to the process.
Van Deurzen adds that infrastructure owners considering embarking on a collaborative contracting process must not underestimate the effect required to tailor an approach that meets the project's specific needs.