Collaborative property services contracts: Can they happen?
RODNEY TIMM, director of Property Beyond, questions whether there is any hope of collaborative contracts for property services emerging, or if property services are by their nature not suitable for collaborative type contracting, and explores the shared objectives and outcomes.
There have been ongoing discussions about collaborative contracting arrangements for building services. These discussions tend to commence at the early stages of the outsourcing voyage of discovery. But, as reality sets in – particularly in the form of commentary from the legal and procurement departments – thinking starts to change.
However, the idea often lingers on in spirit and, as a compromise to stakeholders, the title on the front page of the property services contract includes collaborative or alliance contracting words. Yet, with brief perusal of the key terms of the contract content, it is quickly evident to the reader that the usual master-and-servant relationship prevails yet again.
But, is this really surprising? The nature of building services requirements are that certain services are to be carried out in a fee-for-service contracting arrangement. And, as can be expected, if these services are not provided in terms of the specification and the contract performance requirements, then it is reasonable to expect the client to invoke some remedy. This may include a payment rebate or penalty, thus entrenching the master-servant relationship.
So, the debate continues. Is there any hope of such collaborative contracts for property services emerging? In these types of contracts, are there possibilities of shared objectives and outcomes between the parties? Or is it more realistic to recognise that most property service contracts are fairly simple, underpinned by the basic principle that the client contracts to pay a fee in expectation of the delivery of services in accordance with performance standards? Are property services by their nature not suitable for collaborative type contracting?
PRINCIPLES OF ALLIANCE CONTRACTING
Alliancing or collaborative contracting has evolved with major infrastructure projects as a method of procuring and providing ongoing management for major capital assets. Typically, in these contracts the risks of project delivery and management are shared in some form between the parties, and revenue splits are commensurate with the risk-sharing arrangements.
In this form of contracting it is generally understood that the relationship between the parties needs to be characterised by openness, genuine mutual respect and acknowledgement of the risk-sharing. The key features require the parties working together as an integrated, collaborative team in good faith, acting with integrity and making best-for-project decisions related to delivery matters to achieve common goals. The parties should not be operating as two separate groups and potential adversaries.
Projects that are best suited for delivery in alliance contracting generally have some of the following attributes:
- projects requiring to start before the risks can be adequately detailed or defined
- prohibitive pricing premium being likely for contractual risk transfer obligations, and
- the client being willing to accept suboptimal pricing to achieve an early project outcome.
There is generally also a requirement that the client has the knowledge and skills to participate in the project scope development and ongoing delivery management of the project. In these circumstances, it is expected that this collaborative approach can produce a better result by usually achieving an earlier project outcome and delivery date. But how can these principles of alliances contracting for project delivery contracts be applied in the world of property services contracting?
If we examine the primary reasons why clients outsource property services, these will generally relate to considerations such as:
- reducing financial costs
- the ability to focus on core business
- service level improvements
- transparency to comprehensive portfolio information and data
- access to trained and skilled technical expertise, and
- the transfer of facilities performance risk.
To achieve the service delivery standards, in the contract, specifications will define minimum performance standards, improved stakeholder communication and performance reporting requirements, as well as ‘value for money’ portfolio management outcomes. And, in selecting a service partner to deliver these building services, it is likely that proven track record, financial stability and corporate cultural compatibility will be paramount.
Usually the main portfolio issues faced by clients as they head into the uncharted territory of outsourcing property services are a lack of portfolio information and details related to asset conditions. Often, there will be a significant maintenance backlog, but an internal financial management drive to reduce facility costs. Can these requirements be the foundation for collaborative contracting?
SERVICE PROVIDERS’ OBJECTIVES
To enable mutually beneficial contracting outcomes, it is important for the client to recognise what may be important to the service provider in the relationship. Besides achieving the usual fee-for-service contract arrangements, service providers are also motivated by:
- payment incentives and bonuses
- rapid and consistent decision-making
- consistent service delivery expectations across all client stakeholders
- the ability to earn contract term extensions, and
- the ability to be able to extend the contact to encompass the delivery of additional fee-earning services.
But, these are all fairly usual and well-known in property service arrangements. So, what are the other contractual aspects and innovations that will motivate excellence service delivery and deliver cost savings?
All property service providers are continually striving to grow the portfolio they manage and service to benefit from increased scalability and presence. Having exercisable options to extend initial contract terms based on achieving success in performance reviews gives the contractor a real right and motivation for performance excellence.
The key test for collaborative arrangements is probably based on having workable ‘reverse’ performance indicators in the contract that clearly demonstrate whether the client is contributing their part in enabling the contractor to be able to perform the contract duties. This is a twist on existing performance management frameworks that is often spoken about but seldom implemented.
Being willing to co-create, support and test new innovative processes and service delivery ideas represents a further good foundation for a collaborative partnership. This may include jointly identifying the risks that are best suited to be transferred to the contractor and accepting there will be a justifiable price premium payable, but this will provide the best outcome for both parties. Going further and becoming a proactive advocate for the contractor’s services requires real client commitment to be effective and enduring, encapsulating the spirit of the collaborative relationship.
ACHIEVING COLLABORATIVE PARTNERSHIPS
Property service areas that are probably best suited for collaborative contracting and delivering value for money outcomes for both parties will likely be related to maintenance planning and comprehensive contracting. This is also likely to be the area, particularly in owned portfolios, in which the client has the least knowledge to be able to share with a service provider prior to the award of the contract.
As such, when the contract is being defined, the scope of works to be priced will not be able to be ascertained. Based on a collaborative approach, the contractor who has access to the appropriate skills will be able to define the conditions and maintenance backlog, define the scope and price the ongoing performance risks. The challenge will be the client’s willingness to accept the maintenance budget to eliminate the backlog maintenance, the cost to move to a future proactive plan and the contractor price premium for risk.
Ongoing contract profit will always be paramount to the service provider’s business performance, but there may be contractual arrangements that will motivate improved performance without commensurate increased financial outlay by the client. To achieve a more collaborative partner relationship, there needs to be shared vision and alignment of objectives in the asset management and maintenance strategy underpinned by a trusting and honest relationship with clear and open communications. The parties need to understand how each other operate and to clearly understand what each are trying to achieve out of the contract.