Top 5 reasons for nasty commercial surprises and how to avoid them

I like to ride my bike up mountains

A few weeks ago I made a good, if painful account of myself in a race in Belgium, and so when I went to my first ever proper independent fitness assessment last week, I was feeling confident.

After a short but painful session on a stationary bike I was ready to receive the good news … except it wasn’t.  Science has proved that I generate only marginally more power than an asthmatic beetle with a sore knee.  But what about all those miles I put in?  The training?  The weights?  The diets?  I thought I was doing all the right things but obviously I wasn’t.

Pain in major projects:

Operating major construction programmes as a client can be even more painful.  You think you are doing all the right things.  You have everything in place and there is a good partnership feel about the client and contractor teams working together.  Your managed service provider or your internal team is not signalling any major problems.

But still…

You may have a vague sense of unease or uncertainty.  There may be signals that things are not what they should be.  You may be receiving conflicting or unreliable reports.  When you ask for information you may not receive it or you may get something you didn’t ask for.  Your managed service provider may not be providing you with the best and brightest but putting “bums on seats”.

Worse still, you may have been surprised.  The final cost of the job may have increased unexpectedly and without proper explanation meaning you have to seek further funding and are forced into difficult conversations with your stakeholders.  Your ability to manage may have been taken away by the surprise and you may now have to do the same to your boss.

The source of the pain

Sometimes commercial problems like late changes in the brief or a key subcontractor becoming insolvent are difficult to foresee.  Others are more predictable.

In our experience these are the top 5 reasons:

A failure to spot issues…

The people employed on many major projects to check costs or commercial processes are rarely trained and experienced auditors or accountants.  Often they miss things or become bogged down in smaller issues without being able to see the bigger picture.  Quantity Surveyors, for example, do not study auditing as part of their qualification and very few, if any, QS firms provide effective in-house training or guidance on how to audit.  (Don’t get me wrong.  QS’s do many other things brilliantly!)

A lack of independence…

We have seen instances where a managed service provider has undertaken commercial negotiations with a contractor on behalf of a client where it is also acting either as a supplier to or in a joint venture with that same contractor elsewhere.  These conflicts of interests are not always declared.
Where a client relies on in-house teams, there is a risk that the people doing the checking may, “go native”.  This is particularly a risk in longer term relationships.

Contractor competence and behaviours…

Not all contractors are the same.  Some operate in line with their contract and run robust commercial processes.  Others don’t.  Some contractors are commercially aggressive, perhaps due to pressure from head office to achieve a target margin or make up for the fact that they have under-priced to win a contract.
In some cases contractors don’t run effective commercial processes.  Processes may be poorly designed and inadequately resourced.  Poorly managed change for example, can result in backlogs of cost building up and loss of opportunity to mitigate its effects.

Weakness in reporting…

Many of our clients use earned value techniques to control their projects.  It provides easy to understand measures and is a great way of knowing whether you are going to deliver on time and on budget.  Earned value management relies heavily on the generation of information at the contractor or even sub-contractor level.
Where the information provided by the contractor is unreliable, client staff or managed service providers are often forced to take a view and amend that information.  That amended view of the state of the project may give a false picture.

Fraud…

By its nature fraud is hidden and it can have a devastating commercial effect on the successful delivery of a contract.  Even if it is identified, clients can be left with uncertainty as detailed records may be lost as the fraudster attempts to cover his tracks.

The impact of these issues

The impact of the five sources of pain are that clients may not receive value for their spend and may be exposed to unnecessary commercial risks. Ultimately this can give rise to unwelcome commercial surprises and avoidable disputes.
The longer problems go unnoticed the worse they get.  Finding and correcting an issue at the start of the contract is much easier than dealing with it at final account stage.  By then the contractor will have reported its margin, paid bonuses and these will form part of its statutory accounts.  It will therefore be far more likely to fight its position.

Complacency:  The biggest risk to major construction projects

Even if you have done all the right things and put all of what appear to be the appropriate safeguards in place, commercial problems can happen.  The biggest risk of all is complacency.

The importance of independent and expert review

To make sure that as a client you are receiving value for your spend and that you are not facing unnecessary commercial risks you should consider some form of regular and targeted independent review of your project.  This will provide you with a reliable understanding of what is going on in the commercial management of your project.
The transparency an independent and expert review will provide you with will allow you to take action on problems before they get out of hand and help avoid unwelcome surprises.
Any programme of independent and expert reviews can be targeted to those areas of greatest risk and in our experience, will pay for itself many times over.