These are historic times: the rapid spread of COVID-19 is shaking economies worldwide, restrictions have been imposed on social life and industries are switching to crisis mode – all of which have far-reaching consequences. The Asian Development Bank reported in May 2020 that it considered the impact of COVID-19 could cost the global economy between $5.8tn and $8.8tn which equates to between 6.4% - 9.7% of the world’s economic output. Despite the introduction of roadmaps and Government initiatives to guide industry and economies out of lockdown, how confident can we be that these will work?
Although many countries have moved into a new phase of post-COVID-19 recovery, the risk of disruption remains: the construction sector is experiencing significant challenges with record falls in output – delayed project starts and completions and increased fixed costs threatening to sap the strength of the industry. This increased sensitivity to risk is likely to be reflected in higher hurdle rates on investment returns, more demanding contract terms and greater project selectivity. These factors will determine how many projects proceed and how quickly they commence, all of which will influence the shape of recovery and future market conditions. Further, social distancing and movement restrictions have affected the use of infrastructure services, such as transport, the use of which has fallen dramatically, inevitably leading to lower revenues. For example, the Deutsche Bahn in Germany has announced a loss in income of up to 90% in fare revenues.
What Next?
Less income inevitably leads to less investment and budgets become tighter or disappear altogether. It is foreseeable that current and future investments will be tested and priorities will be redefined with cost certainty and adherence to schedules becoming even more important. Investors and developers will need to use the less-available funds more effectively and efficiently.
One thing that remains unchanged, however, is the complexity of many construction projects, especially in the infrastructure sector.
Therefore, despite this unexpected change in landscape, an opportunity has arisen for clients who are ready and able to work with their project teams to bring forward de-risked and deliverable projects. Indeed, Governments and industry bodies have urged the construction industry to demonstrate responsible contractual behavior, encouraging a collaborative approach to projects. Against this backdrop therefore, one solution is to utilize cooperative partnership models that integrate all of the key participants and create common goals. The harmonisation of interests and common alignment with the project model can create a basis for achieving project success, with the potential for significant cost savings in a period of austerity. Conventional procurement models cannot offer this in complex projects and continuing to use these will not bring the change that the current economic crisis requires.
Alliancing - A Joint Approach to Success
The collaborative development of technical solutions, project optimisations and transparent handling of project risks are suitable measures to increase cost security significantly. All those involved can achieve their goals and be successful together, however, this requires an early collaboration of design and construction competencies. With an appropriate project culture, meeting project goals is not demanded, but rather encouraged, for the benefit of all involved. The success of a project depends on the composition of project culture, organisation, working methods and contractual framework. All participants are jointly challenged to successfully master complex construction projects, even under the unexpected new conditions.
Alliancing offers a very good starting point for this. The model, which has already been used for many years in countries such as the USA, Australia and Finland, is specially tailored to the needs of the client but without ignoring the interests of the key players, such as designers and construction companies who are integrated in an appropriate manner. A risk sharing, incentive-based, cooperative project culture based on knowledge advantage through joint action can be helpful in successfully completing complex projects and providing investors with a significantly higher level of reliability on their investments.
Alliancing contracts have been used worldwide with extremely successful results and are increasingly gaining traction, although a more widespread shift from the traditional approach to projects will no doubt take some time. However, as we enter an unchartered period where growth and investment are uncertain, the industry must look at how it can move forward, consider the benefits of the alliancing model demonstrated by proven results and consider embracing that innovative approach to projects.
