Case Study: Relationship based contracting for complex projects

Summary

The section of State Highway 2 (SH2) between Waihi and Omokoroa is one of the country’s most dangerous roads, and the SH2 Waihi to Omokoroa (W2O) project sought to deliver much needed safety improvements as quickly as possible, for the benefit of the local community, wider Bay of Plenty, and those passing through.

This procurement strategy focussed on delivering safety outcomes in the quickest possible time within the funding constraints, which required a delivery partner with shared values and an energised approach to delivery.

Learn how to implement a similar programme in your business by reading our how-to guide.

Relationship based contracting for complex projects case study video

Embedding a relationship-based delivery model to deliver project outcomes

The SH2 W20 project was established to reduce accidents on the state highway through constructing a safer road. Given the complexity and cost of the project, the business case also sought to achieve the following outcomes:

1. delivering the investment objectives in the least amount of time, within the budget.
2. minimising disruptions to travel time for road users.
3. creating a safe and healthy environment for employees, road users and local communities.
4. engaging iwi partners who support the project outcomes.
5. leaving a positive legacy of environmental, cultural, and social outcomes.
6. building capacity and capability in Aotearoa’s Road infrastructure industry.

Waka Kotahi typically uses the Traditional Delivery Model for these sorts of projects, where the design is completed before going to the market with a tender. The contract is usually awarded on a fixed price lump sum basis, which means the clients knows the cost and value of the project from the beginning.

Read more about the Traditional Delivery Model(external link)  - procurement.govt.nz

The SH2 W2O project faced significant uncertainties around relocation of utilities, impacts on properties, geotechnical conditions, existing maintenance contracts, and archaeological, cultural, and environmental risks. These uncertainties made it too risky to produce a design before issuing the tender.

Many of these complexities could not be adequately resolved by the design team alone. It was clear to Waka Kotahi that a highly collaborative approach was required to deliver on the investment objectives, desired project outcomes and effectively managing the project’s complexities. A client-designer-constructor team working together had the potential to work efficiently, with transparency, and confidently make fact-based decisions. The following features set up the project team for success:

1. the project had a sufficient size and duration to allow the team to build relationships based on trust, capacity, and competency.
2. the client engaged early to collaborate with members of the project team, which included the client, designer, builder, and third parties like utility and network operators.
3. the commercial arrangements promoted collaborative behaviors and fair risk allocation.

Procurement Approach

The procurement strategy focussed on delivering safety outcomes in the quickest possible time within the funding constraints, which required a delivery partner with shared values and an energised approach to delivery.

The works to the state highway were broken down into elements referred to as "Separable Portions", to help the project team separate the large, complex project into manageable sections. The SH2 W2O project was separated into nine Separable Portions, split over three contracts:

• Contract 1: Waihi to Trig Road.
• Contract 2: Trig Road to Katikati.
• Contract 3: Katikati to Omokoroa Road.

In the tendering phase the design for Contract 1 was largely complete, and the designs for the other two sections needed further development. Contractors could not provide a realistic schedule of quantities without a completed design, so Waka Kotahi developed a reference design which required tenderers to price a representative set of works 5km long. This reference design indicated the type of works to be delivered along the wider state highway. The tender documents also outlined total available funding and indicative funding for each Separable Portion.

Waka Kotahi used the schedule of quantities for the reference design to evaluate submissions in the tender phase and have informed pricing negotiations.

Achieving value for money

The incomplete designs could not provide confidence on costs, so a novel approach was needed to ensure the project delivered public value. A target cost arrangement enabled the design team and contractor to collaboratively develop the design for each Separable Portion. Whilst a contractor would not typically be appointed at the design stage, the maturity of the design for Contract 1 meant that a physical works contractor could be appointed to deliver Contract 1 while another contractor could simultaneously contribute to the design process for Contracts 2 and 3.

The design team and contractor developed the design to set an agreed target cost which would ideally be less than the cost estimate provided at tender stage. When the works were delivered the actual cost of delivery was compared to the target cost.

When the actual cost for the Separable Portion came in below the target cost, the client and contractor each received a 50% share of the savings. This approach incentivises the contractor to proactively engage with the design process, design out construction risks, and scope a range of solutions to resolve project challenges.

Where the construction costs exceed the target cost, the client and contractor split the cost of this equally, up to the point where the contractor's entire profit margin could diminish. The client is responsible for all additional costs, to ensure the contractor does not lose money on the job. This approach keeps the contractor engaged with the project's intent even when things go wrong, as their direct costs are always covered.

A provisional amount is paid out to the contractor after each Separable Portion is completed, and at the completion of all nine Separable Portions there is a final wash up based on the project's total costs.

To ensure confidence in the solution, the Waka Kotahi project team "checked-in" on the progress of the project on cost-based milestones, i.e., there is a check-in when 50% of target costs were met, then at 80%, and finally at 100%. During the check-ins the project team had to be satisfied design options would achieve the safety outcomes and be deliverable within the available funds, and the delivery team had to embrace design and constructability challenges to achieve the project outcomes.

A Measure and Value approach was considered but the team felt the target cost arrangement approach would provide the project with greater cost certainty.

Read more about measure and value contracts [PDF](external link)  - procurement.govt.nz

Outcomes and benefits of relationship based contracting

As of September 2022, 29.4 km (84%) of the project is completed, the project is expected to finish under total available funds, and most importantly the safety objectives are on track for delivery.

The innovative procurement approach is helping the project to progress faster and cheaper than expected, even after accounting for COVID-19 disruptions and cost escalation for materials. Some of unexpected issues were managed through the contract allowance from Waka Kotahi’s quarterly price indices, however most issues were resolved from improved productivity and collaborative problem-solving between the design team and third parties.

Some of the key benefits of this procurement approach include:

• Cost effective delivery – with works being delivered faster and more efficiently, this has freed up budget for more safety initiatives and improvements.
• A positive and productive team – the contractor's team has felt empowered to get things done and make a difference. The culture encouraged people to stay in the team and continue to learn and contribute.
• Avoiding duplication and disruption - additional scope was added to the project to integrate other national initiatives. For example, to avoid duplication and disruption to road users, Waka Kotahi’s national pavement renewals programme was integrated.
• Efficient delivery of utilities works - the contractor could engage with utilities companies early, so utilities relocations, protections, or upgrades could be properly planned and coordinated with the project works.
• Managing interfaces with other contractors - WSP and Downer are delivering maintenance projects for the State Highway network, so workshops were held to understand their maintenance obligations and the project needs. These were captured in a Memorandum of Understanding to ensure mutual understanding of the crossovers and allocating the most appropriate organization to complete each deliverable. As an example of managing interfaces, this project contracted Network Outcomes Contracts (NOC), to deliver safety improvements while NOC was undertaking pavement renewals. Coupling the projects ensured work could be done efficiently and effectively.

How the client saw it

"There has been remarkably less disruption than initially discussed at commencement of construction. Award winning project and team! The team continue to learn as they go and apply the lessons learnt." Nigel D’Ath – Waka Kotahi Journey Manager Bay of Plenty , Transport Services.

How the contractor saw it

"What excites HEB Construction the most (aside from safety, of course), is the collaborative nature of the project. Fuller credits the harmonious relationship between HEB Construction, Waka Kotahi and Beca for the project's triumphs, as they all share a common goal to achieve the best outcome." Brian Fuller - Contract Manager for HEB (interview with New Zealand Infrastructure Review).

Lessons Learned

• Engage early with the contractor – in the early stages, the design and contract team refined the procurement model which set the project up for greater efficiency and productivity.
• Engage key stakeholders - engage mana whenua, other contractors impacted, utility companies, local authorities and consenting authorities early. With this early awareness and collaboration there is greater opportunity and time to work with all parties.
• Planning focus for consenting - the project established a Consenting Forum to align the consenting effort but struggled to gain traction. Further persistence in activating the Consenting Forum may have prevented subsequent consenting challenges.
• Innovate – the project team have seen the benefits of striving beyond the minimum requirements in the Code of Practice for temporary traffic management.
• Be Bold - the key is really empowering senior staff to encourage and support their teams to speak freely. If the project team is surrounded by the right people, you can challenge thinking and create an environment where innovation can thrive.

Learn how to implement a similar programme in your business by reading our how-to guide.

Read more about the Waihi to Omokoroa project(external link)  - nzta.govt.nz