An Introduction to Collaborative Construction Contracts for Large and International Projects

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Where there is construction, there are contracts. Typically, these contracts are obtained through a competitive, hard-bid process, which is often criticized for causing adversarial relationships and driving continuous change orders and disputes. In response, collaborative project delivery models have been developed to optimize owner-contractor collaboration and focus on dispute prevention and early resolution.

Once considered a niche model, collaborative contracting has recently experienced an increase in demand due to market forces and global trends. Mega projects require close collaboration. Major contractors are growing more reluctant to enter hard-bid contract environments, preferring instead to participate in procurements with owners and stakeholders with whom they have established relationships.

Because collaborative contracting differs substantially from traditional contracting, questions frequently arise concerning its use.

1. What is collaborative contracting?

Collaborative contracting requires mutual trust and cooperation throughout a project’s life cycle, especially for complex construction projects and long-term development programs that demand close collaboration. Frequently, a single contract may offer incentives for various cooperative practices and behaviors, rewarding the unique strengths and capabilities that owners and contractors each bring to a successful project. Collaborative models can be placed on a continuum between full-on project alliancing and Integrated Project Delivery (IPD) on the one end and traditional contracts with specific collaboration elements on the other.

2. How did these model develop?

Collaborative approaches were first used in the offshore oil and gas industry to expedite construction and avoid delay. Similar forms appeared in retail, healthcare and the financial sector. The models got introduced on construction projects in the ’90s after reports were published in the U.K. concluding that the prevailing adversarial process, which prioritized individual company gain, was undermining the industry.

3. Why are these models experiencing increased popularity and wider adoption?

Increased discontent with the adversarial process and the greater need for collaboration in many fields have spurred experimentation with collaborative contracts. Consider the following:

• Projects are ever larger and more complex. The size, growth and associated financial risks of the fixed-price design-build and public-private partnership (P3) contracting models are exponential.
• Good contractors are hard to find. Some contractors are increasingly unwilling to participate in procurement using hard-bid models, while others drop out of the procurement process early. 
• There is greater financial and reputational risk. Project failures bring reputational risk and, due to their size, may cause potential bankruptcy for contractors and their supply chain. 
• Long-term relationships are beneficial. Increasingly, new programmatic project types can result in decade-long projects that require future-oriented, relationship-centered approaches.

4. Who uses this approach?

Collaborative models are becoming the dominant choice for many large private construction markets in North America, notably commercial real estate and oil and gas. Australia, the Netherlands and the U.K. also recognize the strategic advantage of this model in the development of complex road, rail, dike, waterway and LPG (liquefied petroleum gas) infrastructure.

5. Does this model really improve project success?

Research and project reviews confirm that collaborative practices improve project performance, and anecdotal evidence corroborates this. 

Early experiences with collaborative contracting in the Netherlands reportedly yielded significant cost savings and better relationships. These benefits have increased the demand for collaboration and have influenced the selection of contractors for a major dike reinforcement and a riverbed renovation program.

Factors driving project success include the following:

• Fairer apportionment of responsibilities and benefits
• Increased transparency
• Delivery mechanisms centered on trust and partnership
• Improved working relationships among project stakeholders 
• More efficient, effective construction 
• Fewer disputes 
• More effective conflict resolution
• Optimized, enhanced financial returns

6. What are the top tips for collaborative contracting?

For major-project owners to successfully bring diverse interests together under the umbrella of collaborative contracts keep the following in mind:

• Success depends on how well the collaborative approach is implemented and maintained. Collaborative contracting is not simply a label; effectiveness requires particular behaviors. To succeed, parties should jointly engage in the formulation of objectives, and performance management must be done collaboratively and consistently at a systemic level.
• Owners must incorporate contractors early in the process. They must share expectations, select the right contractors, clearly articulate potential incentives and then work collaboratively with selected contractors to develop, apply and standardize best practices. 
• Everyone on the project—from owners to primary contractors to subcontractors—must articulate a shared vision of what defines success. All decision-makers must be on board, not only at the top but also at mid-management levels.
• Collaborative contracting requires investment in collective benefits. Contractors must be allowed to earn a reasonable return on the work, and reward mechanisms must be accurately set. Aligning incentives to the expected outcomes must be part of goal setting.

7. What are the biggest pitfalls and challenges?

Because this model is relatively new, its novelty brings several challenges: 

• Unfamiliarity with the concept: Project owners, financiers and contractors may be unsure about how to draft or perform collaborative contracts, or they may not be able to find partners who do. Also, local public procurement rules may pose obstacles to such contract models.
• Bad implementation and old habits: Calling something a collaborative contract without sufficient input or maintenance—talking the talk but walking the traditional adversarial approach—invites disappointment. Factors that undermine success under this approach occur at startup, so careful implementation and early monitoring are critical; otherwise, this nontraditional contracting approach may fall victim to bad habits, such as attempting to maximize personal profit, which can undermine trust and collaboration. 

8. How does cooperative contracting reduce disputes and improve dispute resolution?

Collaborative contracts can improve coordination, prevent miscommunication, encourage early warning, foster a team attitude and trust, and make it likely that frictions are detected and resolved before they evolve into legal disputes. Yet disputes are not prevented by a contract alone; a collaborative culture must be cultivated and maintained by the parties.

The success of a collaborative approach also depends on carefully crafted dispute resolution provisions, such as a layered system of negotiation, followed by mediation and, if needed, arbitration. Alternatively, for example, on a tunneling project in the Netherlands, the French contractor and Dutch project owner agreed to appoint a dispute resolution board (DRB) to resolve disputes by mediation, providing expert opinions or arbitration, depending on the issue.

Final Thoughts

Collaborative contracting is an effective and profitable approach to overcoming delivery challenges. Owners in Australia, Asia, the U.S., and Europe are increasingly seeing value in openness and shared risks and costs. Reaping these benefits requires thorough preparation, implementation and maintenance. As this contractual model outgrows its niche status, the industry should see more usage, particularly internationally. Thus, attorneys should be prepared to negotiate, draft and resolve disputes arising in this context, nationally and globally. Similarly, neutrals will play increasingly important roles in implementation, dispute avoidance and conflict resolution under these contractual models.

Peter Kamminga is a JAMS neutral and GEC member with 20 years of experience resolving construction disputes, among others, as mediator and arbitrator and dispute board member. He also advises owners and contractors on contracting and collaboration approaches for construction and engineering projects worldwide.