Improving relationships in capital projects

A disturbingly large share - 90 percent - of megaprojects still fail to be completed on time and within the budget, shows research from the Oxford University. Despite efforts by construction professionals and projects owners, “the industry’s reputation for predictable, consistent, and reliable delivery is uneven,” say McKinsey in Stopping the insanity: Three ways to improve contractor-owner relationships on capital projects.

Despite media attention for major project delays and overruns, results remain disappointing. While McKinsey outlines some of the common root causes, these do not help to understand why mistakes are repeated. There are two underlying drivers of these causes, says McKinsey: First, project owners often adopt poor procedures limiting innovation and change. Second, due to low profitability and weak balance sheets, construction companies have no financial shock absorber that enables failure, restricting innovation further. 

According to the consultancy, the best asset owners create strategic partnerships along their supply chain. While this happens too rarely, any intervention that enhances financial outcome should be embraced. Three approaches can provide such an intervention according to the McKinsey consultants:

  • Relational contracting: Better program and budget outcomes can be achieved by pooling delivery risks and sharing profits with the asset owner, engineers, and constructors.
  • Creative use of insurance: Asset owners can demand their general contractor to take sub-trade insurance, putting a significant repayable premium at risk. This can increase supply chain oversight and drive performance. Fewer insurance claims lead to a larger repayment of the premium, which can be held as profit by the general contractor or distributed along the value chain, for example by paying contractors for avoiding claims.
  • Project production management system: Using lean production management systems, decisions can be made collaboratively across the project and coordinated better.