Risk Reduction in Major Construction Projects Through Cooperative Project Structures
For decades, construction projects in Germany have been set up based on the assumption that successful projects are only possible if the project parties are pitched against each other in some sort of equilibrium held together by carefully crafted contractual regulations. Nevertheless, even in this type of project structure, a collegial spirit can develop and lead the project to success if the right personalities are involved. This, however, is often the exception rather than the rule. Often, at least one central project party attempts to optimize its own benefit to the detriment of the project's success by actively and purposely generating claims. In these cases, contractual regulations and risk allocations take effect and, if set up properly, can keep the project out of harm’s way.
Limitations of conventional systematics
This long-established system is increasingly reaching its limits, particularly in large-scale projects. The much-delayed Berlin Airport, Cologne Opera House, and Stuttgart Railway Station projects are recent case studies to consider. Projects with numerous individual contractors are becoming too complicated for many clients due to the numerous and complicated contractual duties, as the individual responsibilities can no longer be effectively monitored, and most of the risk in this constellation ultimately falls back on the client. Outsourcing large projects and their contractual duties in near entirety to a general contractor, and thus outsourcing a large part of the risk, often does not provide a satisfactory solution either. Currently, in the German construction market, it is often not possible to find a general contractor who is willing and able to assume these risks. Even if a general contractor can be found, in very large projects the general contractor usually has such a high degree of influence over the success of the project that a real shift of risk to the general contractor cannot effectively take place. The client simply has become too dependent on the general contractor. Conversely, problems in a complex large-scale project can also push the general contractor into higher risks, which makes any concessions of the contractor to the success of the project even harder. So, how can this gridlock be fixed?
A Possible Solution from Northern Europe, the USA, and Australia
One solution to this unfortunate situation for prospective owners of large construction projects has been prevalent in the USA, parts of northern Europe, and Australia for years and is also slowly gaining a foothold in the German market: cooperative project models that aim to integrate the construction company into the project as early as possible during the planning phase (early contractor involvement) and to create a balanced cooperation and best-for-project thinking through incentives. These models are often referred to as Integrated Project Delivery (IPD), Project Alliancing or the 2-Step-Model.
|Cooperative model||Conventional cooperation|
|Individual contracts||Project Alliancing*, IPD-lite, 2-Step-Model||Conventional GC-structure, Individual contractors|
*The term "Project Alliancing" is sometimes also used synonymously with IPD.
While these approaches are still largely uncharted territory in Germany, the many positive experiences from around the world show that IPD and similar cooperative project structures need no longer be considered unrealistic for the German market either. IPD-type projects from Finland could prove to be a successful model for Germany, as these were undertaken within a comparable European legal framework. IPD brings an opportunity to change the image of public construction works in Germany for the better again.
Risks to the success of the project
Based on the experience of the construction experts in our team and other IPD experts from our network, a list of the most significant construction project risks was created. It should be noted that this only represents an experts' point of view and is not a complete list of all significant risks but should rather be considered a rough sketch of the most important risk clusters:
- Risk of erroneous or insufficient requirements program: Erroneous or insufficient definition and planning of user and operator requirements at the start of the project can lead to faulty technical design and construction over the course of the project. Initial cost calculations can also prove to be insufficient, as they are based on incorrect assumptions of the underlying requirements. This can lead to extensive changes in design and construction, with negative effects on deadlines and costs, as well as to a general failure to meet the project targets.
- Risk of latent conditions of the construction site or existing structures: Negative properties of a construction site (greenfield) or existing structures (brownfield) combined with inadequate time risk allowance can cause rescheduling and/or obstructions with additional costs and delays.
- Risk of uncontrolled change orders: Change requests and orders are not sufficiently limited or change decisions are made based on incomplete information due to incorrectly designed change order management. Increased design workload for the unnecessary evaluation of change requests as well as improper changes can lead to additional costs and delays.
- Risk of unclear or unsuitable distribution of rights and duties between project participants: Unclear or unsuitable definitions of contractual duties and risk allocations between project participants can cause obstructions with cost and schedule effects.
- Risk of excessive prices during the tendering process ("market risk"): Due to the sellers' market for construction services in Germany in recent years and an increasing scarcity of resources, uneconomical bids and contracts may result. This applies particularly when technical design and procurement strategies are not adapted to this situation. This way actual contracts exceed the cost estimates from the design phase resulting in additional cost compared to the budget. Alternatively, delays may occur due to repetition of tenders.
- Risk of inadequate quality assurance of design and construction: Faults in design or construction that are not identified in good time may cause delays for troubleshooting or obstacles to commissioning. Additional costs for building operation, additional repair expenses, and/or a reduced value of the building may result.
Risk reduction through cooperative models
These overarching construction project risks affect almost all major construction projects to varying degrees of intensity, depending on their project structure. IPD and IPD-related concepts can contribute to substantial reduction of these risks. The risk-reducing effect of IPD can be both cause-related (reducing the probability of occurrence) and effect-related (reducing the impact when the risk eventuates).
For almost all typical risks in major construction projects, IPD can offer a new opportunity for substantial risk reduction. It is often suggested that most experts do not believe that market risk in the German construction market can be reduced by IPD. At best, early recognition of resource bottlenecks and, if necessary, flexible redesign and rescheduling could have a risk-reducing effect here. For a noticeable significant reduction of the market risk through IPD in the future, a circle of suitable contractors for IPD will have to be developed through pilot projects.
Outlook for a cooperative future
Returning to the initial question, it can be stated that IPD and related collaborative project structures can contribute to solving some of the major issues that have been plaguing large construction projects in Germany for the past two decades. There are pitfalls to this solution, however. Most importantly, better cooperation amongst project participants in IPD and IPD-type projects, and thus their success, depends heavily on effective incentivization. The incentivization must be properly aligned between the project and its participants as well as in-between the various project parties. Misaligned incentives, especially regarding deadlines and the taking on of additional cost have caused project parties to turn on each other and thus derailed IPD-type projects in the past. Best-for-project thinking must be financially rewarding for all project participants so that they can justify the necessary cooperative procedures and behaviors to their respective superiors or supervisory bodies.
If IPD is combined with an effective, demanding but also achievable incentive system, major construction projects in Germany could once again be completed on time and within budget and thus be accompanied by a positive public response. Since the strategy and project structures are already set up at the beginning of the project, the early involvement of IPD-specific technical and legal expertise is highly advisable for clients who are still inexperienced in IPD. With all those pieces in place, IPD and related concepts could be an important building block for a return of public support for construction initiatives in the German market and thus for the long-term preservation and expansion of our built infrastructure.
© Copyright 2021. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.