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A new risk landscape is reshaping owner-contractor relationships

A new risk landscape is reshaping owner-contractor relationships

By Steve Smith, EVP of Infrastructure at Graham Construction and Catie Williams, VP of Product Development at InEight

A volatile risk climate worsened by ongoing reverberations from COVID-19, geopolitical conflict, and severe weather events is reshaping the traditional relationship between owners and contractors. Concerns around labor shortages, stagnation and recession, and the political climate all featured prominently among the biggest construction industry challenges in InEight’s recent Global Capital Projects Outlook survey. Others have pinpointed spiraling labor costs, inflation, and interest rate rises as major risks on the horizon. 

This is causing the construction industry to reevaluate traditional divisions of risk and responsibility between owners and contractors. Traditional design-bid-build models where the burden of risk was principally shouldered by contractors are gradually giving way to more collaborative models where risks and responsibilities are more evenly shared. Construction 4.0 technologies are bringing owners and contractors closer together by enabling remote, real-time collective visibility of risks across project lifecycles and helping all parties work together to find common solutions. 

A volatile risk landscape for contractors

The rise of more collaborative shared-risk models is happening against a backdrop of an increasingly volatile risk landscape for contractors. Craft skills shortages have been exacerbated by the mass of experienced workers nearing retirement age and increased demand for a limited labor pool has also increased labor costs. 

Meanwhile, ongoing supply chain volatility has made it exceedingly difficult to source large steel-intensive elements such as bridge girders, electrical and control equipment, and large switch gear tools. Equipment that would previously have taken eight to 10 months to arrive now takes an average of 12-14 months. Other risks are increasing too. Soaring inflation and interest rates are increasing project costs and affecting capital project cost estimates. 

Recent financial sector instability including First Republic’s seizure by the FDIC which was the second biggest bank failure in US history are creating uncertainties around capital projects tied to the financial sector. It is unsurprising that industry players cite unmanaged or unexpected risks (such as supply chain, labor, or safety concerns) as the biggest barrier to project certainty. These risks often cause unforeseen increases in both costs and schedules as well as driving compensatory scope creep. 

A new contractor-owner relationship

Uncertainty surrounding costs and schedules means contractors are no longer willing to shoulder the entire burden of risk through fixed-price construction contracts or delivery models with little owner involvement. Some contractors are responding to this unstable risk landscape by setting very cautious, conservative prices and schedules that load extra cost onto owners. Yet another way of mitigating growing risk is the adoption of progressive delivery models where owners, contractors, and designers collaboratively share risks, responsibilities, and resources.

Industry surveys show that more collaborative shared-risk delivery models are on the rise while traditional models such as Design-Bid-Build are on the way out. The most widely used models in industry are now collaborative Integrated Project Delivery (IPD) methods and Design-Build models where contractors, owners and designers work together to mitigate risks from the design stage. This trend is expected to continue with use of design-bid-build projects set to decline by 9 percent over the next three-to-five years while adoption of IPD models will increase by the same proportion.

Progressive models such as IPD help reduce cumulative risks for all by enabling all parties collectively optimizing project performance to share responsibilities and resources across every project stage.  We have seen projects where owners, contractors, and designers jointly value-engineer designs to mitigate risks finding cost-effective, readily available material substitutes that alleviate supply chain woes to on-site design changes that reduce labor costs.  

These iterative, collaborative models ensure everything from project forecasts and construction processes are collaboratively and continually molded to the realities of their operating environment. Full transparency around design assumptions, labor costs, or supply chain challenges among owners and contractors reduces uncertainty and ensures more realistic targets and predictable delivery. Consequently, these models are the most successful at improving project certainty in an uncertain risk landscape with IPD used by the majority (62 percent) of companies that stay on schedule over 80 percent of the time.

Collaboration is happening at an industry-wide level, too. Some companies such as Graham Construction are participating in peer groups with other major contractors sharing anonymized data on everything from salaries to compensation that aid the creation of industry benchmarks. Industry benchmarks are now being used to improve project certainty almost half the time.

Construction 4.0 is bringing owners and contractors closer

At the heart of the emerging owner-contractor relationship is the digital transformation of the construction industry. Cloud technologies and connected data are giving owners and contractors shared visibility over project risks and driving more proactive and united risk management. Open, interoperable tools are facilitating more collaborative, cohesive projects where all partners jointly monitor and manage risks from planning phase and throughout the project lifecycle. 

Some project control platforms now use live digital dashboards drawing on connected data from multiple stakeholders to provide remote, at-a-glance oversight of costs and risks across entire projects. Moreover, they also offer predictive capabilities that are available to identify early warning signs and indicators that a project is at risk. By highlighting systemic risks such as rising labor costs or supply chain crunches, connected data spurs more collaborative mitigation measures. Consolidating project data across all stakeholders can show how disruption to a single supplier can affect all stakeholders and targets, driving more holistic mitigation measures.

Digitally integrating previously separate project controls is also giving owners, contractors, and designers shared visibility of the complex interplay between all project controls and phases. For example, cost, schedule, and design management have previously been siloed processes but technology is now helping join up those separate systems and data. This is enabling contractors and owners to see how some design options could increase labor costs or how efforts to expedite project delivery might cause overspending.

Construction 4.0 technologies are also providing the foundation for collaborative early-contractor-involvement models that collectively anticipate and avoid future costs and risks. Design-build or construction management at risk models require contractors to find the cheapest design among many options. Previously this would involve many people working intensively and estimating a project up to 15 times. Now, sophisticated 3D modeling and automated estimating software is enabling contractors, owners, and designers to simultaneously simulate hundreds of differing designs to find the lowest cost options without excessive manpower. Similar technologies are transforming risk management. We can now harness historic data to include previously known risks in the estimating phase and create what-if scenarios, forecasting how myriad changes to costs, schedules, or scope would affect project outcomes.

Toward progressive construction models

As a volatile risk climate becomes the new normal, a failure to adopt a more progressive approach to sharing risk can prevent infrastructure projects ever getting off the ground. Where owners continue to insist on a traditional transfer of risk, contractors are setting high upfront prices that jeopardize the feasibility of the project entirely; one project in Alberta was canceled because it was put out to the market and three contractors came back with prices that were significantly above the budget.

Progressive project delivery models and advanced technologies are now helping us find a way to reduce the burden of risk on contractors without unduly increasing the cost burden on owners. Early-contractor-involvement models supported by platforms built around collaboration and data integration are helping owners and contractors cooperatively mitigate costs and risks at planning and design stage. 

Steven Smith, Executive Vice President, Infrastructure, Graham Construction

Steven has over 30 years of progressive leadership in the engineering and construction industry. His expertise covers all transportation and infrastructure sectors including highways, bridges, rail and transit, water and airports. Steven has implemented innovative organizational strategies and has led teams in business development, operations and project delivery functions in diverse business, geographic and economic environments. He has a Master of Science in Civil Engineering from the University of Colorado and a Bachelor of Science in Geotechnical Engineering from the Colorado School of Mines and is an active participant in various industry organizations.

Catie Williams, Vice President, Product Development, InEight

Catie Williams leads as Vice President of Product Development at InEight, focused on digitalizing the industry and being a champion for change management and business process standardization for contractors, owners and engineers. Catie started her career as an application developer and quickly pivoted into the data and analytics space. Fast forward to today, Catie oversees several application products that drive productivity growth in the construction and engineering industries. Catie has a passion for efficiency, solving problems, team building and promoting women in S.T.E.M. fields. In addition to her work at InEight, Catie helped develop both undergraduate and graduate data science programs for a local university, where she also currently teaches.