Facilitated Negotiations – A Best Practice for Contract Administration?

During the last three years, many projects and programs of projects with which I have been involved have used an increasingly popular and effective contract administration technique called Facilitated Negotiations – especially when the contracting methodology employed was some version of unit price contract or cost reimbursable contract with multiple contractors or a construction manager.

These forms of contracting methodology were extensively used before the current global recession when there were global shortages of resources – contractors, equipment, commodities and labor. The shortages led to sharply escalating prices with no guidance on how to anticipate increasing prices one, two or more years out.

Most significant (and mega) projects and programs could only engage Engineering & Construction (E&C) contractors by sharing the cost escalation risks and executing their projects on a fast track basis (for example, starting construction on early phases, such as foundations before the design of mechanical and electrical elements were complete). This led to less time for completion (less time for prices to escalate), but the owners took on the risks involved with using a Construction Manager or having to coordinate multiple contractors in the face of constant change in their designs. Contractors could not estimate a fixed price and enjoyed the benefit of many change orders.. The program or project owners had to use processes which enabled them to “manage” the fast track project execution and thus minimize the resulting cost increases.

I have observed Facilitated Negotiations used successfully, though with slight variations, on projects executed in the Oil & Gas, Power and Infrastructure sectors. So what is a Facilitated Negotiation? It is a process used to resolve differences between contracts as project circumstances change – including changes in design, productivity targets; conflicts in the performance of various contractors, etc.

The process employs a “mediator” who is used like a facilitator from the construction dispute resolution arena. The facilitator is familiar with the parties, their contracts and the changes which have occurred. This 'facilitator' encourages and promotes commercial resolution between principles of the parties involved in the negotiation.

Openness was common to all of the projects in my samples, that is, an openness fostered by complete factual disclosure between all stakeholders on the project. That openness made sure that the shared problems were addressed in a common and less costly manner. Many of the change issues and the party impacts in the past would have been subject to standard claims and disputes procedures. The projects benefited from attacking problems as they arose instead of after-the-fact when the solutions typically become standard Dispute Resolution issues, and their ultimate resolution is very costly and time consuming.

The end result of a facilitated negotiation process is NOT a project free of change or disputes, but one in which the parties are forced (encouraged) to seek and adopt solutions which take into account the various parties' issues be they good or bad.

As I have thought about the process it is akin to the older concepts of alternative dispute resolution. Arbitration has become more complicated and costly in some instances than the litigation which gave rise to the arbitration alternative.

Arbitration was originally conceived as a commercially expedient way to resolve commercial disputes by individuals knowledgeable is the “industry.” In the construction industry in the last 40 years, attorneys and claims consultants have thrived as the process has become more and more cumbersome. In the last 20 years various alternatives to arbitration have been developed including mediation. These alternatives all suffer from the same result – they cannot be used in a daily and on-going process to support project management. The process of Facilitated Negotiations and an open, on-going factual disclosure combines the benefits of expediency and efficiency with real project management needs.

As the economy improves several new realities must be faced:

• The last 15 months have seen public projects become the most visible construction projects and thus we have seen a surge in Fixed Price contracting methodologies.
  
• Alternative Disputes Resolution options are very complicated, costly and time consuming despite attempts to improve (or turn back?) the traditional processes developed by the American Arbitration Association/International Centre of Dispute Resolution.
  
• The cost of attorneys and claims consultants cannot be borne by cash strapped owners and contractors for the foreseeable future.
  
• Sharing of risks and rewards to achieve the ultimate project goal – Facilitated Negotiation's intended function – at the most reasonable cost under all circumstances will benefit the great majority of stakeholders.
  
• Resource scarcity issues will continue to grow under the current global project demographics as recovery becomes more and more widespread. 
  
  
  
  Facilitated Negotiation in its various forms will benefit all parties from its application as a tried and true, on-site dispute resolution process of project management/contract administration. As this new process is used the owners and contractors should not allow it again to be hijacked by the very professions whom stakeholders originally turned to bring their dispute resolution expertise to complicated projects. Facilitated Negotiation is a Best Industry Practice and not another form of alternative dispute resolution. I expect to see more use in the future.
  

Infrastructure Sustainability, a Greener Future and Engineering in Construction – Stimulus Funding Isn’t a Substitute for Vision

Howdy!

In the middle of October I attended the ASCE (American Society of Civil Engineers) Industry Leaders Council meeting in Washington DC. Generally the discussions were centered on issues of infrastructure spending and sustainability. The ASCE 2009 Report Card for America’s Infrastructure had given the nation’s infrastructure an overall grade of “D – Poor.” the report was widely quoted by politicians as a justification for spending additional stimulus funds on public works projects earlier this year.

On the topic of “sustainability” there was discussion on how the ASCE could more adequately get owners, public and private, to accept responsibility for and pay for sustainable infrastructure. ASCE leadership, military representatives and local and national government agencies were joined by a virtual who’s who of some of the largest engineering, consulting, E&C contracting companies in North America. Thus, this group was to share their collective strategic wisdom to the infrastructure sector of the economy.

One of the underlying themes of attendees was related to the ASCE 2009 Report Card for America’s Infrastructure (see www.asce.org/reportcard ) and the $2.2 Trillion that is estimated to solve the nation’s infrastructure crisis. That led me to ask myself this question, “Will the current heightened awareness and spending on infrastructure from the “stimulus funds” lead to a sustained funding for infrastructure engineering and construction?”

The attendees did have a healthy discussion on the concepts of sustainability. Some of the discussions nearly got to the real problem. But engineers generally think about the problems in executing design and construction of capital projects. They are very good at identifying problems in publications like the Infrastructure Report Card, or solving the compliance difficulties presented by carbon reduction mandates. Getting from concept to execution is a different matter.

After listening to most of the industry leadership I submit that their answer is a resounding no, though not from a lack of money. There was considerable concern over what will happen after the Stimulus Funding expires. In fact, it is estimated that $35 trillion will be spent globally in the next two decades with $180 billion annually in all of North America alone. The main issue continues to be a unified lack of vision.

Green building 'LEEDS' the discussion.....

The discussion turned from sustainability to green building concepts such as the LEEDS design standards. Everyone recognizes that LEEDS standards only applied to design, predominantly in the area of energy use reduction – an important consideration as 40% of all energy US is used to heat, cool and operate buildings. However, there are no execution and operation standards within LEEDS to assure long term compliance with energy efficiency mandates. There are no metrics provided to measure the effects of energy reduction, and certainly no recognition that energy reduction is not synonymous with infrastructure sustainability, only partially so. I should note here that the ASCE will be announcing sustainability definitions applicable to infrastructure this week.

The group did not display a convincing vision of infrastructure in a sustainable, energy reducing and “green” future. It is a fine example of not thinking out of the box – a passé catch phrase – but appropriate. Even firms in the energy sectors (Power Generation companies and the Oil & Gas industry) are thinking more expansively!

For example through the use of good engineering practices the nuclear power industry has improved efficiency, adding the power generation equivalent of 26 new nuclear generating facilities. These improvements have also enabled the US Nuclear Regulatory Agency to increase the useful life for our older plants from 40 years to 60 years. But the real result is that we did not have to build 26 plants powered by any source of fuel.

In Oil & Gas boardrooms we are seeing executives being instructed to re-visit strategic business models. As a result the largest investment in green energy has been by these energy companies. These changes might be driven by various economic factors but each has in common the fact that societal perception drove the initial changes from the bottom up, not the top down. Thus my concern about the lack of a unified vision for the future.

For instance, our perception of smoking cigarettes and using seat belts were changed by a generation of younger activists “getting on our case.” Now they have turned their attention to green power and energy efficiency. Do they possess a common vision and a set of goals which our contemporaries do not have? Our actions in the future will tell.

I addressed the issues of “just doing the same old things” in a keynote address in Japan (see A Management System for Infrastructure Construction; Meeting the Needs of the Next Two Decades at the International Symposium of the Society for Social Management Systems, in Kochi, Japan, March 5-8, 2009) in regards to infrastructure engineering and construction).

If our response to mandates for infrastructure sustainability, green power and fuel efficiency standards are merely to re-write the standards of the past, we will fail to provide the sustainability and green future that people desire and need. Remember that our grandparents rarely traveled 300 miles from their homes. Now we ride high speed rail and cover 300 miles more quickly than if we drive to an airport, park, wait through the security delays, suffer schedule delays, and then travel from the airport to our final destination.

We need transformational concepts for engineering and construction so that we truly meet the mantra of ASCE – “Building the quality of life.”

Governance is Only Management Coupled with Good Sense

Good day!

Last week during 2 intensive days of Governance certification training on the concepts and responsibilities of a Board of Directors in governing an organization, I found myself reflecting on all the current media rhetoric regarding the way businesses have let the world down. Their conclusion: The abused world must have more government intervention and regulation to protect us in the future.

I realize that much of the world blames the business world for the economic debacle.

Yet the message from our trainers was loud and clear. Directors are the most viable and informed protection for shareholders and stakeholders, regardless of the regulatory dictates. We spent considerable time going over Governance and the role of the Board as a whole along with the roles and responsibilities of various Board committees. We explored various actions that were considered good versus bad under varying scenarios.

What I came to realize was that while the management focus rang true, the methods were not rolled deeply enough into root concepts. No matter what the focus of an organization – for-profit business, non-profit or philanthropic organization, professional association, etc. – the Directors guide and tweak the organization’ strategy and assure the stakeholders that the organization is served well. Long ago I learned that the Directors assurance role is much linked to what I know about Quality.

A total system of Quality Management contains three elements: The Product or Service, Quality Control, and Quality Assurance.

The Product or Service is the responsibility of the entire organization. The organization’s Management is responsible for guiding and controlling the organization sufficiently so as to not denigrate the organization’s primary responsibility for Quality Control. Directors have responsibility to see that there are procedures or processes in place to fulfill the Quality Assurance control function: to measure quality and measure actual performance. If concepts of Governance had been put in these terms, I might have learned many of my life "lessons" more rapidly.

Upon further reflection I realized that the root causes of the current global economic woes was not a total lack of Quality Management. Maybe there could have been better definitions of Quality, Quality Control, or Quality Assurance, and more adequate tools or metrics. But Quality Management was in place.

The failure occurred because we did not see the elephant in the room and tip-toed around it. I was taught this about Quality: you cannot define it, but you know it when you see it! If the actions of the financial industry were, for example,“too good to be true,” then as Directors, we were blissfully tip-toeing around the elephant when instinctively we knew that there was no sustainable quality there.

We did not bring our “street smarts” to bear, and management let bliss lure us all into a false sense of security.

That is what Governance is all about. As directors we should not let a new regulatory regime lull us again into thinking all will be well. We cannot assure our organizations that we are creating a quality product or delivering a quality service merely because everyone is in compliance, that the procedures and processes in place are being implimented. We can not ignore the elephant in the room merely becasue all is being done according to the management systems that are in place.

Governance is about applying what we as directors have learned throughut our careers, and metrics are as important as instinct, intuition and experience. If our instincts tell us that something smells even if our metrics are good, we have a duty to assure all parties on behalf of the stakeholders who entrusted us with their success that the smell is bad.

KRN