Practical Law

“Innovation” and “collaboration” are the kind of buzz words that are batted around very frequently. Unfortunately, the more often I hear them, the less sure I am of what their importance is in an infrastructure context. Some of the answers can be found in the report, Innovation in the Supply Chain, which was published following a joint investigation by Costain, the University of Cambridge and Pinsent Masons LLP into construction practitioners’ views on innovation and collaboration in construction contracts.

This report provides an interesting snapshot of how industry practitioners view the contractual status quo and what can be done with current contracts in order to get the industry to collaborate and innovate more.

What do we have now?

In common lump sum contracts, there is no incentive for the contractor and employer to co-operate in identifying innovation. Some standard form contracts have attempted to embrace innovation, collaboration and value engineering. For example, under the NEC3 ECC, Option C, parties are encouraged to achieve savings as they will both share the gain. Under the FIDIC Red Book, there is a value engineering provision.

A useful start but is it enough? It is worth looking at what is happening on some projects and there are a number of interesting case studies within the report.

For example, Crossrail created an innovation pool called “Innovate18” in which all major contractors contributed £25,000 each. These financial contributions ensured a mutual interest in engaging with innovation. Innovate18 sent a message to the supply chain that it was both acceptable and positively encouraged to generate new ideas. The initial innovative ideas related to safety but, over time, spread to a wide variety of other areas. Contracts also played a role in permitting such innovation as they were procured under the umbrella of the NEC3 agreement (in which there was a 50% gain/pain share arrangement).

Another example is the “Innovative Contractor Engagement” process pioneered by Transport for London on its major upgrade project at Bank Station. This ensures that the good ideas the market had in response to project requirements could be proposed and developed with the client as soon as possible for maximum benefit.

What does the industry think?

Through a series of workshops, interviews and a questionnaire, the Innovation in the Supply Chain report provides an insight as to what people really think about contracts and whether can they create the collaboration that leads to innovation. The research shows that industry practitioners value detailed, clear and enforceable contracts as opposed to loose frameworks of agreement. However, at the same time, there was also strong support for the idea that contracts should be flexible and renegotiable if circumstances changed.

Practitioners also believe that contracts have become more collaborative over time. However, some practitioners believed that this move has not been without costs as well as benefits, and that collaboration sometimes is used as a way to reduce costs.

These findings are not surprising and the industry still has a way to go before it fully embraces collaboration. The good news is that things are better than they used to be. Also, it tells us that contracts have to be flexible enough to deal with innovation, which by its very nature is risky and uncertain, but of course represents a great potential for positive change.

How can we get more innovation?

The study suggested a number of proposals that were to be built on a foundation of cultural change, behavioural adjustment and an alteration in mind set. At the same time there are some changes that can be made to the contracts that we use.

In terms of changing the culture, the most important proposals, in my opinion, are:

• Employers need to acknowledge and promote innovation by making it clear they are willing to share the costs and risks, not just the benefits.
• Innovation should be promoted by creating industry innovation platforms, recognising the social benefit of innovation and putting in place innovation champions.
• The best potential for innovation is on large mega-projects, and such projects need to co-operate and share their findings and research.

Being lawyers, we can of course also try to use the contract. Including an innovation clause, as opposed to simply looking at value engineering, would encourage innovation and provide the certainty that people want with regard to the way innovation proposals would be covered by the contract. The report provides some examples and no doubt others will be able to come up with even more ways to incentivise innovation.

My conclusion?

Watch this space. Smart roads and cities will change how we live and that will not happen without innovation. It’s an exciting time for the construction and infrastructure industry.