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Balancing accounts

Incentive

A massive incentive for contractors to save expense while producing a quality product lies at the heart of Channel Tunnel Rail Link's unique target cost contract form.

Where the final cost works out below the target contractors stand to win a hefty 25% of all the savings.

Should a contractor complete a job at less than 90% of the target cost it would be paid 50% of any savings below that figure.

But if costs are allowed to escalate there are corresponding disincentives.

A firm that exceeds its agreed target cost will not be entitled to its fee and will have to pay employer, Union Rail South, 25% of the overrun up to 120% of the target and 10% of any excess beyond that.

These numbers explain why CTRL is running under budget and pretty well on programme some 18 months after the first contracts were let.

But the incentives are just part of what for UK civil engineering is a revolutionary way of doing business. The nonconfrontational contract demands exceptional transparency between the parties.

Some ideas are borrowed from the petrochemical industry and some from design, build, finance and operate projects. They are being applied to a project for which the contractor is not the designer.

The actual contract form is properly titled CTRL Standard Conditions of Contract. It is based on the New Engineering Contract, Option C, Target contract with activity schedule, now known as the Engineering Construction Contract (ECC). But it does not follow that precisely.

Because the reward or penalty is so tightly geared to the target cost the initial negotiation and agreement of this figure was crucial to success of each contract.

Once on site, both contractors and RLE's supervisory staff found themselves facing the novel experience of total openness - shared offices, shared databases, shared cost information including project-relevant head office expenditure by the contractor.

RLE's staff have access to and take a continuing interest in statistics that are not normally of immediate concern to the client's project manager: productivity, the plant, number and quality of people employed by the contractor. There is even shared access to the contractor's bank account.

Bank accounts had to be specially set up for managing each contract.

They are kept in the black due to the system of payment balancing seven weeks predicted work and the past four weeks measured work. URS collects the interest.

There is only one project programme for each contract. It is held on the Primavera software specified by RLE. All parties have common access to the data.

The traditional resident engineer versus contractor attitude has gone. On Contract 350/410 RLE's contract manager Alan Myers challenges visitors to tell the difference between his staff and contractor Eurolink's.

Meanwhile at Ashford on Contract 430 the people working for RLE's Alasdair Cathcart seem even more like contractors than Kvaerner's team.

Progress reporting is four weekly rather than a true monthly cycle, matching Railtrack's accounting system.

The progress report has to summarise project value: listing what has been done against what should have been done in the programme. It also has to summarise project cost: what should have been spent against what has actually been spent.

One basis of the contract is that risk is borne by the party best equipped to carry it. Hence natural ground risk is carried by the contractors and artificial, or manmade, ground risk remains with the Employer. Claims as such do not exist - the words 'claim' and 'dispute' were never uttered during NCE's lengthy and very open access to the project last month.

But there are things called compensation events which have to be dealt with as work proceeds, not at the end of the job.

A compensation event is an occurrence accepted by RLE as something beyond the control of the contractor that may change the target cost. A design variation or failure by RLE to produce drawings on time could qualify. It follows from the sensitivity of the contractor's reward to performance against the target cost that compensation events are very significant.

The contract sets out specific instructions to both parties as to how these are to be dealt with by RLE in a timely way within six weeks of notification by the contractor (see diagram, page XI).

Project managers have delegated authority to agree individual compensation events up to £75,000 in value. Larger sums go up the management chain.

Not surprisingly, a large amount of effort goes into processing compensation events and their impact on the overall programme.

The ECC requires the future impact of any compensation events to be estimated at the time of discovery. But after 15 months work actually on site RLE and the contractors have backed away from recalculating the programme monthly. Now they 'status they progress of the programme' every four weeks.

'We initially changed to a quarterly review of the programme but now we report the trends quarterly and update every six months, ' says RLE's Section One project manager Rab Brown.

After a slow start, there has been a concentrated effort to deal with a backlog of outstanding compensation events.

'We're moving a lot of compensation events forward, ' says Brown. This process is eliminating nonsenses such as the compensation event discovered working its way through the system with an estimated value of a mere £56.

The specified tight schedule for agreeing compensation events is also proving hard to manage. But Brown says that: 'Less than 10% of the money so far spent is under discussion as potential compensation events.'

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