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SoCLA National Conference 2022

"Getting Risk Right” Hobart 5 – 7 May 2022

How to Choose a Procurement Model

Kiri Parr 2022 / NC 8 www.scl.org.au

How to Choose a Procurement Model Kiri Parr, April 2022

Abstract Current business norms give rise to narrow and limited approaches to how procurement models for projects are selected and used on projects. In this paper I will set out a 4 stage methodology owners and project proponents can use to design how they select and implement a procurement model. The methodology is designed to deeply impact a team’s understanding of their project and the problems they will need to solve during its delivery, why they have selected a particular procurement model and how that model will deliver their goals. This methodology is designed to shift the delivery team’s perspective of their procurement model from being a fixed monolith (living in the bottom drawer and only brought out in times of need) into an active and understood tool whose functions and purpose is known and communicated. The methodology combines design thinking and complex systems thinking and is built with a view to using the process of selecting a procurement model to not only design a richer model but to connect that model with its users.

Introduction In 2018, whilst lecturing at the Melbourne Law school on Major Projects, a student asked a seemingly simple and supposedly answerable question: “How do you choose which procurement model to use?”. My answer left me disappointed. I repeated the usual references to various comparative analysis of the common contract models, the time/cost/quality triangle, quantitative comparative analysis techniques and my general project experience. What a constrained perspective my construction law training had given me to answer this question. And my answers also failed to address the recurring issue of projects being delivered in procurement models that were inappropriate and not well understood by their users. After pondering this question for quite some time, I developed this methodology to provide a better answer to the question. The goal of this methodology is not to tell you what the procurement model should be or to take away from much of the work currently done to select and develop procurement models. The focus is instead on crafting a process which closely connects the procurement model with the problems it needs to solve, and which is well understood by its users.

What we usually do. We need to start our journey with how we commonly select procurement models. Our paths are well trodden. On a simple project with a known client, an approach might look like this: Client calls their local construction lawyer: Hi Peter, how are you? Well, we are about ready to get going with our next project. It’s a multi-story residential apartment this time. We’ve pretty much closed out design. Largely same team who did the factory for us last year. Do you think we could organise a briefing next week and get the documents put together by the end of the month? A week later the lawyer meets with the Client and the project manager. Half an hour into that meeting the lawyer puts the solution on the table: Yeah, I pretty much know what you're doing. Let’s take the D&C contract from last time and we can just tweak it to fit. The lawyer returns to their office and delegates the drafting task to a junior lawyer in the team. The contract is checked and sent off to the client. As things get more complex, there is a chance that the project management team will apply more complex approaches, such as a multi- criteria analysis tool to recommend a contracting strategy. And with the ever-increasing rise in mega projects1 external consultants are engaged to write extensive business cases which include a necessary chapter on the recommended procurement strategy. As commentary on the effectiveness of our approaches, I will perhaps begin and end with Bent Flyvberg’s observation [my emphasis]: combine the large cost overruns and benefit shortfalls with the fact that business cases, cost-benefit analyses, and social and environmental impact assessments are typically at the core of planning and decision-making for megaprojects, and we see that such analyses can generally not be trusted.2 Our typical pathways reveal some common patterns: • Starting points are often the last or most familiar contract used by the advising consultant. • We are biased towards more popular models. • We use narrow project focused perspectives. • We rely on our instinctual views as to which approach to take. • Disproportionate weight is given to the legal and financial perspectives. • There are many unknown and undeclared assumptions in our advice.

Marion Terrill, Owen Emslie, and Greg Moran, ‘The Rise of Megaprojects, Counting the Costs’, Grattan Institute, November 2020. 2 Bent Flyvbjerg, ‘What you should Know about Megaprojects and Why: An Overview’ (2014) Vol 45 (April/May), Number 2, Project Management Journal.

There are a range of observations that could be made about why we continue to follow these patterns: • Client concerns about up-front costs, are in turn indirectly managed by using timeconstrained and narrow processes. • Inadequate training and attention on how to structure a project for success. Legal training is focused on what happens when things go wrong, not how to make things go right. • Procurement advice is rarely challenged. • There is limited understanding of the models and why certain models are favoured at different times. We can then combine these observations with a range of influential behavioural biases3: •

Mazlov’s Law - There is a saying that ‘To the man who only has a hammer... everything he encounters begins to look like a nail.’ This saying relates to a cognitive bias that means we become overly reliant on familiar tools.

•

Loss Aversion - Loss aversion is the bias that makes us driven more strongly to avoid losses than to achieve goals.

•

Availability Bias - Availability bias tells us that the process of judging frequency of an event is by the ease with which such instances come to mind.

•

Hindsight Bias - Hindsight bias leads observers to assess the quality of a decision, not by whether the process was sound, but whether the outcomes were good or bad.

The impact of these biases is that the experts – lawyers, engineers, project managers, consultants are overconfident that the procurement models they put forward will deliver positive outcomes. Even when evidence tells us this is not the case. There is without doubt a groundswell of conversation in the Australian construction industry expressing frustration in the current approaches to procurement. We follow the same deeply rutted paths again and again despite our knowledge of the deeply compromised outcomes we are achieving.

The theory behind the methodology Without undue time spent on theory, I want to note the two key academic theories behind the methodology I put forward– design thinking and systems thinking. Design thinking is an approach to problem solving that is focused on the process of problem solving, with a strong emphasis on exploring issues more widely, diversely, and deeply and from a variety of perspectives. In the approach I’ve developed, I have particularly relied upon the Design Council’s Double Diamond Framework4 because of its emphasis on reflection and iteration. 3

For more comprehensive analysis on this topic see generally Daniel Kahneman, Thinking, Fast and Slow, (Farra, Strauss and Giroux, 2011) and Bent Flyvbjerg ‘Top Ten Behavioural Biases in Project Management: An Overview.’ (2021) 52(6) Project Management Journal, 531-546. 4 Design Council, ‘What is the framework for innovation? Design Council’s evolved Double Diamond.’ (Web Page) https://www.designcouncil.org.uk/news-opinion/what-framework-innovation-design-councils-evolveddouble-diamond

Systems Thinking is interested in how complex systems works. What distinguishes complex systems is that they are not capable of being reduced to their component parts (reductionism or Newtonian thinking). Instead, complex systems can only be understood as a whole and through the interactions of the system. Complex systems are not linear and there are not direct relationships between cause and effect. Changes to one part of a system can have unintended consequences elsewhere, new properties emerge out of them, and they tend to drift into failure over time. In the paper “Systems & Design Thinking: A Conceptual Framework for their Integration” (Pourdehand J., 2011)5 the authors explicitly explore the value of using a complex systems lens within a design thinking methodology: One thing that design practitioners using systems approach bring to the table is ability to help an organisation take ownership of the ideas that emerge through the design process.6

The Methodology The methodology is made up of 4 stages which can be broadly described as follows:

The methodology starts with an open process designed to explore the project and the risks and opportunities it will face. It then shifts to examining the potential solutions to those risks and opportunities, followed by testing, and refining the solution before a model is chosen, implemented, and communicated.

John Pourdehnad, Erica Wexler, and Dennis Wilson, ‘Systems & Design Thinking: A Conceptual Framework for Their Integration’ [2011]. Organizational Dynamics Working Papers, 10. 6 Ibid 10.

The methodology: • allows the owner to design a process that meets its needs and skills, • does not undermine or replace other analyses being used, and • delivers value through investing in the knowledge and understanding of the people delivering the project. What this methodology provides is a pathway for organisations to achieve procurement reform. To explore each of these 4 stages in more depth.

Explore The first stage is centred around exploring the project before you. The purpose of this phase is to broaden a team’s understanding of a project, the context in which it is being delivered and the issues and opportunities it presents. The point is to constructively challenge usual pathways and thinking and to create more visibility of the project and the context in which it is being delivered. There is no definitive list of the things you might choose to explore during this stage but as a starting point the following strategies and questions will assist.

1. What is the actual problem being solved by this project? This is an important question because we can offer see delivery teams get caught up in to thinking that the problem is to deliver factory X whereas the business’ actual problem might be something quite different - like meeting market demand for locally manufactured product. Stepping back from the physical asset allows you to gain clarity about the actual problem you are trying to solve.

2. What are the project’s opportunities? By this question I want to emphasize the underexplored need to explicitly consider the opportunities that might arise. If unconsidered, the ability to seize them during the project’s lifecycle diminishes.

3. Apply short, medium, and long-term perspectives. By applying different time perspectives, we can avoid a narrow focus on the singular project before us and consider the context of the project over longer time frames. This change in perspective could shift a conversation from which project management company should be hired to how this project can be part of a long-term strategy to develop internal project management skills needed to deliver a 10-year pipeline of projects.

4. Obtain micro and macro perspectives

The micro perspective looks at the project as an individual and distinct project. We typically spend a lot of time here. The macro perspective asks us to come up out of our project and look at what is going on around us. How is the market shifting? What are the political, economic, social, technological, and environmental contexts in which this project will be delivered and how might they impact the project? For example, we could here analyse who else is competing for contractors in the market. This analysis might reveal assumptions we had made about what contract models will be attractive to the market. 5.

Apply inside and outside lenses

This concept is about balancing the perspectives of those close to a project, who are likely to be impacts by a range of behavioral biases, with those outside of the project. This is important because optimism bias and the planning fallacy lead us to consistently underestimate tasks before us. To counter these biases, you need to apply strategies that make your planning for the future more robust. Strategies in this area should focus on understanding past similar experiences, aggregating the views of multiple experts, and breaking down problems into parts for individual analysis. Reference class forecasting for example is an emerging practice focused on using past experiences to predict the future.

6. Leverage diversity and constructive challenge. The simple point here is that a full exploration of a project is naturally supported by diversity of thoughts, experiences, and skills. By the end of an effective exploration process, the output should be a broad set of problems, risks, and opportunities that the project will need to tackle. These items can be broken up into logical groups, such as organizational goals versus project specific goals. Some issues may lend themselves to be categorized by likelihood and significance. There may be issues that can clearly be dealt with inside the contract versus those issues which require strategies outside of the contract.

Narrow Having built the map of problems, risks and opportunities, the next stage is to start exploring the potential solutions and strategies. In this vein, I want to make the point that not all the solutions or strategies are resolvable in the contract itself. The contract is just one tool– you may need any number of interrelated strategies in areas like governance, leadership, technology, data, research, and people. During this phase, you may want to do the exercise of narrowing to two or three models (provided they are clearly understood) and consider the ability of each model to solve each problem or issue. A heat map or relative ranking scales might be useful in this task.

Objectives of this exercise is to work out: • the relative strengths and weaknesses of different models, • which procurement model to recommend and why, and • which issues the model will be poor at solving and what you can do about that. At this stage consideration can be given to adjustments that can be made to the model and other strategies that can be put in place? This last point is key because contracts cannot resolve all issues and there is rarely an incentive for a counterparty to lessen its commercial position to resolve your risk or opportunity. Economists call this the ‘hold-up problem’. In a typical construction contract once commenced, the contractor has the residual power over the completion of the contract as it is written. 7 The power of your procurement model is potentially how fast your organisation can recognise scenarios that can’t be resolved within the contract and act.

Test and Adjust Having developed a proposed procurement model, value then emerges through challenging and testing that model. Ideally this process involves the people delivering the project and, importantly, tests the model against multiple concurrent risks. By running live workshops, with people appointed to playing specific roles and responding to real-life scenarios, the procurement model starts to become visible and understood. The advantages of investing in such a testing process are: • You get visibility into how the model will work in practice. • You start to build a shared understanding of the model and how it works. This in turn empowers decision making and reduces future dependencies on external advisors. • You can shift people's understanding of the model and make visible underlying assumptions. • You can see what happens when multiple issues arise and get insight into the cumulative impact of risks. • You can start to see the scenarios in which the model will fail.

Decision - Understanding - Communication Stage four is the final decision on the model together with planning how you will teach and communicate the model across the project life cycle. This is the opposite of the contract in the drawer approach. The goal is a knowledgeable delivery team who understand the procurement model as the tool designed to assist them deliver the project successfully.

Season to taste This methodology is flexible. Some observations that have arisen in discussions on its use so far:

Oliver Hart, ‘Incomplete Contracts and Control’ (2017) 107(7) American Economics Review, 1731-1752.

• • • •

You can easily scale the approach to the needs and complexity of your project and your organisation’s skills. A single workshop on a small project might be sufficient to shift people’s understanding of the project and its procurement strategy. The way you capture the process and decisions can enhance your ongoing monitoring and assessment of the project. It also provides a useful framework to assess at the end whether the model worked as predicted. The real value of the framework is in how you use it to connect the people with the systems and practices they will be working within. The methodology can be applied at various levels, from single projects to entire programs of works.

In Real Life From the banal... A story I commonly share is in connection with a workshop I ran for a client a few years back to explore their procurement options for a pilot factory using new-to-market technology. The workshop included a wide range of participants including board members, legal advisors, engineers, and the commercial manager. At around the 20-minute mark the external lawyer put their solution on the table – perhaps not unsurprisingly the advice was to use a D&C model that transferred all project risk to the Contractor. The lawyer left the meeting about an hour and a half in. At the 3 hour mark the core commercial imperative came to light from the commercial manager whose defining problem was how fast he could demonstrate to customers how the factory worked using a testing area inside the working site. The key driver was how soon sales could be made upon completion, not how fast the plant could get to completion. The difference between the problem the business was trying to solve was markedly different from the problem the lawyer had assumed they would want to solve.

to the change agents… In the Australian market, there are two current and significant examples of major procurement reform, Sydney Waters Partnering 4 Success Program8 and the reform by Major Roads Project Victoria Project Delivery Approach9. In the context of the methodology set out in this paper, these case studies contain excellent examples of: • The value in understanding and articulating what problems you are trying to solve. •

Explicit communication campaigns to build understanding of the procurement model. Sydney Water In July 2020 Sydney Water launched its Partnering 4 Success.

Sydney Water, Procurement Approach (Web Page) https://www.sydneywater.com.au/about-us/oursuppliers/procurement-approach.html 9 Major Road Projects Victoria, Program Delivery Approach, (Web Page) https://bigbuild.vic.gov.au/projects/major-road-projects-victoria/about/program-delivery

The project began with extensive global research into procurement practices, including the Project 13 initiative led by the Institute of Civile Engineer’s which is an enterprise-based approach to procurement, as opposed to traditional transactional arrangements. 10 In a presentation given by Mark Simestra, Head of Program Delivery at Sydney Water, at an APCC and Austroads Webinar on 2 June 2021, Mark explicitly walked the audience through the extensive process they went through to understand what Sydney Water’s objectives were in designing their new procurement framework and an assessment of the ability of various forms of models to meet those objectives. That assessment went well beyond the usual range of project specific risks to systemic issues like designing a procurement solution that was: • collaborative, • straightforward to administer, • scalable and flexible, • of interest to the market, and • a lower cost per contract to draft. Major Road Projects Victoria Major Road Projects Victoria (MRPV) reformed their delivery approach at the end of 2018 when, as put by Danny Benjamin, Project Director Major Roads Projects Victoria when speaking at the Lighthouse Club Victoria in October 2021, the agency identified ‘Value for money was being eroded by high-risk premiums, lower competition, claims payouts, inefficient tender processes – procurement change is required.’ In response to this problem, MRPV developed a project delivery approach which built alliance features (particularly in its pricing model) into a D&C format. What is notable in the approach taken is the way the agency developed a set of wide and long-term goals that informed their reform project, specifically to: • • • •

create a more sustainable contractor and design market, reduce procurement time and costs, better integrate project planning and project delivery, and improve collaboration and provide financial and future project opportunities.

MRPV have also adopted a very open and transparent campaign about what they are trying to achieve and why.

A call for change Without a new approach to procurement, the same rutted paths will be followed with the same rutted outcomes. It is time for us all to engage in the difficult task before us of building better procurement models.

Mark Simestra, ‘How Sydney Water is leading the way using NEC 4 Contracts’, Built Environment Economist: March - May 2020 edition by Australian Institute of Quantity Surveyors (Web Page). https://issuu.com/aiqs_be/docs/bee_march_2020_online/s/10308708

The methodology set out in this paper is designed to deeply impact a team’s understanding of their project and the problems they will need to solve during its delivery, why they have selected a particular procurement model and how that model will work in practice. Procurement models, including their contracts, should not live in the bottom drawer and only be brought out in times of distress, but be active and well understood tools designed for their users. A better approach to procurement starts not with the hammer, or even the nail, but the house we are collectively seeking to build. Only then we can understand what nails and hammers to use.