Contractual – Q2: What are we going to contract someone to deliver and why?

This question brings together all the project specific contract deliverables that will need to be added to the DCE to create the EIR. Contracts can be confusing and overly complicated, especially when requiring the delivery of the digital asset alongside the physical, as this is currently an optional ‘add on’ rather than business as usual.

Starting with the high-level outcome statements, defining what needs to be achieved in the long, medium and short term. These will form the backbone of the contract, as they are the reason for the project in the first place. To gain financing for the project a Business Case Investment Rationale needs to be written, this also builds the case for the information model and the funding that will need to be put in place to deliver it back into the asset management team.

There will be specific digital terms and conditions required for the contract, these need to be drafted in plain language, so that they are easy to understand and implement.

In recent years Intelligent Digital Contracts that are short, written in plain language but are presented in database format have proven popular. This makes them easy to search and understand, removing ambiguity and also making them accessible to all project participants.

To answer this question, the Information Management team should also create a high-level synch matrix with roles and tasks against a timeline, remember to start with the required “digital turnkey” date and work backwards. Remember to include what authority is required and who will need to authorise it.

Start an information management risk register and meet with the stakeholders listed in the synch matrix to ensure they agree with it. Update the Digital Construction Expectations document as required and use this to brief the client project delivery and legal teams so that there is a common understanding as to what needs to be documented to deliver the digital asset.

Legal Implications

The global construction industry and especially the UK, has a long history of problem with its contracts: as a 2018 study showed, a third of projects start without a contract being in place. If we don’t even have a scope, programme and price agreed, how can we know what information needs to be exchanged, with whom, in what format and how the recipients can use that information?

 

The problem we have with contracts is comparable with the problems we have in BIM:

  • Is there an agreement to ‘deliver BIM’?

  • What are the precise terms of that agreement?

  • What do any of those terms actually mean, in practice?

 

The ISO 19650 guidance recognises that the legal and contractual matters of BIM are in a state of flux and development...the standards are not intended to provide prescriptive direction on the composition of BIM contract documents (whether consisting of a Protocol and/or other documents) and are subject to contractual terms agreed between the parties.

Contract Impact

The GCCG BIM Strategy Paper written in 2011 states that the legal and contracts working group has concluded that little change is required in the fundamental building blocks of copyright law, contracts and insurance to facilitate working at Level 2 of BIM Maturity. Some essential investment is required in simple standard protocols and services schedules to define BIM-specific roles, ways of working and desired outputs.

 

As ISO 19650-1 says the BIM concepts and principles... “should be applied in a way that is proportionate and appropriate to the scale and complexity of the asset or project... and the procurement and mobilisation of... appointed parties [project partners] should be integrated as far as possible with existing processes for technical procurement and mobilisation.”

The impact of BIM for project contracts reflects the themes and risks with a BIM-enabled project;

Culture

BIM is more effective when it is backed by collaborative project contracts. It is hard to shoe-horn collaborating on the design and data-sharing into a contract which is otherwise designed to protect the payer at the expense of the provider or has processes which are incompatible with fairness.

 

Data sharing

Construction projects have always required project partners to share information with each other. From the perspective of information sharing, BIM creates new methods of sharing and storing that information for the benefit of all the project partners.

 

Clearly as we move towards digital construction, the use of paper as a method for sharing information becomes less attractive and may result in paper-based projects becoming unmarketable as owners/occupiers understand the benefits of digital information.

 

Technology

The technology behind BIM has existed for many years. So, from that perspective, BIM is not novel. It is the integrated use of those technologies that is novel. Contracts need to take into account the change in risk profile – technology can minimise or remove some known risks but may introduce new previously unidentified risks. Any risks associated with the application of technology for a BIM-enabled project need to be shared and not simply dumped onto the next player in the chain.

 

Process

Although none of the project partners chose construction for the process and paperwork, the processes required for a BIM-enabled project are critical to its success. Poor process will increase the work required (and cost) for everyone, particularly the Information Manager. Processes need to be designed and developed collaboratively so they suit the needs of every project partner, rather than being dictated by a client (or its lawyers) without reference to the real world.

Hierarchy

Essentially, the impact on contracts is two-fold:

  • the use of a BIM Protocol and appendices

  • changes to the project contracts: incorporating the Protocol, requiring compliance with the Protocol and its appendices, as well as dealing with which document takes priority.

 

The project partners need to know whether the Protocol or the contract takes precedence. The drafters of JCT and NEC4 consider that their contracts take precedence. The drafter of the CIC BIM Protocol has nonetheless stated that it should take precedence.

 

When BIM was first mooted, there were concerns that it would adversely affect the risks being adopted by project partners. However, the CIC Best Practice Guide written in 2013 covering BIM and professional indemnity insurance states: “The overarching response to the consultation from insurers has been that there are no issues with level 2 BIM which are sufficiently serious as to require coverage restrictions for consultants which use it, nor will its use, all things being equal, materially alter the risk profile presented by a consultant, and therefore the premium implications will be minimal.”

 

BIM Protocol

The purpose of a BIM Protocol is to:

 

  • Define best practice i.e. to set out rules (standards, settings, best practice) to ensure accurate and consistent data is provided

  • Maximise efficiency i.e. to encourage a coordinated and consistent approach to collaboration, information sharing, technology and process

  • Agree information formats i.e. to set technology standards and file structures to enable efficient data sharing both internally and externally.

 

As the JCT Practice Note states “it is generally acknowledged that the use of a protocol is a most effective way of ensuring the activities of all project [partners] are controlled so that BIM mechanisms and standards are applied from commencement through to the delivery of the project and are of enduring value to the [owner/occupier/asset operator] in the [use or facility management] stage”

CIC BIM Protocol (2018)

The role of a BIM Protocol is to define best practice, maximise production efficiency, and agree information formats. Currently, a BIM Protocol does not add services into the project contracts – it merely reflects how documents and deliverables will be shared. This is more a case of coordination than integration.

The CIC BIM Protocol was designed to be used with BIM Level 2 and throughout the supply network, with the client to secure protocols in substantially the same form with all project partners. It is endorsed by professional indemnity insurers as best practice.

The aims of the Protocol are:

  • Make BIM a contractual requirement

  • Minimise amendments to existing standard forms to deal with BIM

  • Create consistency across the project partners.

 

Using the Protocol

To adopt the CIC BIM Protocol, follow these simple steps:

 

  1. Incorporate it into your project contract using the incorporation clause from the Protocol, adapted as required.

  2. Amend any priority clause.

  3. Ensure the terminology is consistent.

  4. Complete Protocol Appendices 1 and 2 (and 3 if required), collaboratively with all project partners.

 

The Responsibility Matrix

Appendix 1 sets out the responsibility for the model or information production in line with defined project stages. It should include: the specified information to be produced, shared and published, the Level of Definition, and other information to be produced by other project partners. This should reduce duplication and encourage collaboration.

The Information Particulars

Appendix 2 sets out key documents and information that are required for the project, e.g. under PAS 1192 this includes the Employer’s Information Particulars and the BIM Execution Plan.

 

The Security Requirements

Appendix 3 sets out optional extra security measures. Although these Appendices should be completed before the Protocol is appended to the Agreement, they can be reviewed and updated at each defined project stage.

Under the Protocol, the employer has to arrange that the project partner can make use of the Common Data Environment (CDE) process to the extent necessary to perform its contractual obligations. The parties share and publish information using the CDE process.

The definition of a permitted purpose determines how information can be used. It is a based on:

  • the Level of Definition (a combination of the Level of Information and the Level of Model Detail)

  • its status code which indicates its approved suitability

  • its functional state

  • the purpose for which the information was prepared.

Alliancing

Alliancing seems to be a great fit for BIM and digital delivery in the way it encourages collaboration and joint goals. I first came across the methodology being used in the water industry when talking to the BIM4Water team.

An alliance contract is a contractual arrangement between client and delivery partners who agree to collaborate around a common delivery aspiration. Alliance contracts include shared objectives and principles, risk/ reward sharing mechanisms and governance structures to facilitate decision-making about service delivery.

Alliance agreements can be little more than an extended memorandum of understanding, designed to set out a non-binding commitment to work together for an interim period. Or they can be set up as long-term arrangements with detailed governance and risk/reward sharing arrangements built into them.

Key features of alliance contracting compared to traditional contracting are:

  • Clients and delivery partners working closely together rather than operating at arm’s length

  • A coordinated approach to service delivery by providers rather than each provider delivering its services in isolation

  • Adopting a ‘best for service’ approach to delivery across multiple services rather than an approach based on what is best for each individual organisation

  • Risk sharing between parties rather than an approach which seeks to transfer risk from one or more parties to other parties

  • A commitment to resolving disputes within the alliance rather than by parties taking action against each other

  • Open book accounting and transparency rather than closed book accounting.

The shorter the better

It’s been long recognised that contracts have become long winded, complex and only decipherable through employing a lawyer to interpret them. This complexity will increase the risks in the project and also the chances of each party’s legal team interpreting it in different ways, leading to costly disputes in court that don’t benefit either client or delivery partner.

Putting it in a military context, when given a mission, everything stated during the orders group is a positive clear statement on how things will be done, so as a team we achieve the commander’s (client) intent and there are no misunderstandings that will lead to failure of the mission. The more complex the execution (or contract) the more risk of failure!

So, the answer is really to shorten the contract, so that it gives clear, positive guidance, rather than confusing complex clauses in a language that normal people can’t understand.

Technology is starting to help in this area, by instead of writing a document, the contract is a database of Outcome Statements and their associated Critical Success Factors that can be searched and queried. This could still leave things open to interpretation of the search results. So, in this matter technology comes to the rescue again in the shape of artificial intelligence giving a single interface to the contract database. This would allow anyone, whatever their level of legal understanding to ask a simple plain language question of the contract and get a clear, concise and consistent answer.

Imagine the current scenario on site, when a sub-contractor has an issue that has potential contract implications. Instead of having to engage the legal team and await their interpretation, that site operative can simply ask a question into their mobile device and get a legally correct answer that they will understand!

The key is to make the contract simple first, then collaborative and then digital. There is no point making one-sided complex contracts in digital documents as they can't be read or understood either by humans or computers. There is no point making simple but adversarial contracts digital as one party may refuse to comply.

If you want to shorten your contracts and be better prepared for delivering the digital, talk to Sarah Fox at 500 Words, I highly recommend it!

It’s all about the money! – Financial Impact on Digital Delivery

You can have a great collaborative contract and an amazing project to work on, but if there is no money or it is funded at the wrong time or the wrong way, then the whole thing is bound to fail. In the past the most expensive part and therefore the phase that attracts the biggest amount of money is the construction with little investment in the concept or design phases. This is mainly due to our industry valuing concrete and steel the most and seeing the biggest risks during that physical build phase.

With earlier intervention using good quality information we can dramatically reduce the risks of the build, but to do that we need to properly invest in the earlier stages of the project. This is not possible unless the client recognises the improvements that can be made and properly funds the gathering, management and utilisation of information.

Financing the Digital Twin

Transparent, cheap and reliable funding is, if you will forgive the pun and the many more in this section, the cornerstone of construction.

From the moment someone has an idea in the bath to the first shovel entering the sod to a VIP cutting the ribbon, every stage of project construction requires reliable and clean funds at the best price.

No cash – no concrete. It’s that simple.

That goes without saying almost, but the methods and means of financing of everything from mega-projects in major cities to a shopping mall in the suburbs are changing all the time and manifold in nature.

There are more sources of funding, which are more complex and colourful than ever before – blends of equity and debt issuance, for example. Long-tail financial models delivered by virements as projects reach each stage (and of course the penalties that come with not reaching stages on time) are the norm.

The key issue when it comes to funding, for investor, contractor and project-owner alike, is risk.

Risk comes in many forms, is notoriously difficult to calculate and very obviously affects the cost of funding within a wide spectrum.

As in all things in life, common sense rules and construction is among those industries where occasionally excess process and the long contracting and supply chain clash with rather than complement each other. At the extreme, when this clash occurs, work stops.

Once again; no cash, no concrete.

Risk and Profit

How Digital construction could lower the risk, increase the returns for investors and increase profit margins for delivery partners?

Digital Twinning combined with the judicious use of proper data are the common sense in this conundrum. Effectively, the shorter the chain between shovel and ribbon and the better each link understands its role in the big game – the less likelihood of a complete mess and the closer to budget and deadline the project becomes.

And this all adds up to more accurate risk calculation, which, in turn, makes finance more deliverable because, quite simply, it is easier to calculate.

It’s the KISS Principle beloved of instructors the world over; i.e. Keep it Simple, Stupid.

The City of London, colloquially, and the finance markets in general are much beloved of construction. Everyone wants to invest in, and therefore finance, a solid, concrete! Investors can get a solid, reliable and sometimes quality yield for an asset which may have a life of 50 or 100 years or more.

And since many of the investors in major projects are pension and insurance funds, this means pensions get their pensions and insurance company customers get their pay-outs. In short, everyone happy.

It for exactly that reason, because the rewards are high, that the minimisation of financial risk is so crucially important in the financing of big useful things full of people and made of steel and concrete.

Like the digital world at large the financial markets are also undergoing a virtual revolution and have been for a decade or more.

More flexible, less onerous and less expensive methods of agreeing, arranging and delivering finance around the world are being created every day.

Innovation and creativity are as alive and well in the financial industry as they are in construction. For every robot bricklayer and 3D-printed dwelling on a site somewhere there is a boffin innovating ways of shortening the chain, paperlessly, from idea to investment.

One of the more prominent innovations is the growth of exchanges, in exactly the same vein as the London Stock Exchange, the Hang Seng or those which transact business in commodities around the world. Wine, art, cars, even wedding dresses are now traded on exchanges so it follows finance will follow suit.

Using an exchange to deliver finance in the form of rated debt for big projects has three fundamentally helpful effects.

Transparency - Efficiency - Price Clarity

Many traditional forms of finance are mired in old corridors and meeting rooms and create their own long chain on inefficiencies. Too many links in the chain make it vulnerable to compromise, so by eliminating a few and placing the project finance on an exchange, the risk calculation is therefore everyone to see because it is tested daily by the market participants. This can only have a beneficial effect on cost-overruns and budgeting blunders.

Exchanges are efficient because they deliver the finance directly to the owner or sponsor of the construction project. This is particularly appealing in cases where the fiancé has to cross many different legal and regulatory jurisdictions in order to reach it destination. Again, more links from the chain.

Finally, price clarity on any exchange is obvious. If you want to but share sin, say, Unilever, you can see what the market views as its worth on the buy side and the sell side. You can see what sentiment the market has for the future of Unilever – its products, its finances and its management.

You like what you see, you buy. You don’t, you sell. KISS, see?

Impacts on insurance

Construction risk has proven a major headache for insurers and underwriters in the last few years.

The collapse of Carillion in 2018 and the so-called HIM hurricanes (Harvey, Irma and Maria) led to shockwaves in the insurance industry and since then numerous syndicates and large insurers have withdrawn from the construction risk market altogether.

Beasley, Brit, Hardy and Talbot – all Lloyd’s of London A+ rated underwriters with a combined capacity of USD202bn pulled out of the CAR (Construction All Risks) market in 2019 as did major insurer Royal & Sun Alliance (USD120bn). They were not alone.

Though some mainstream insurers remain in this market they are all of an engineering heritage and understand the ‘long tail’ nature of this class of insurance and have successfully underwritten during hard market cycles.

The simple fact is those who have withdrawn from the CAR market found it too risky.

And as more participants pull out, the market shrinks and so does price competitiveness.

Risk is all about the unknown, so to de-risk a project which relies on a long and disparate chain of suppliers and skills means you have to focus on the known – quite simply no-one knows when a hurricane or a global pandemic is around the corner.

This is where Digital Twinning and effective data modelling really come into their own. Better data and better, clearer analysis in a uniform manner understood by all of the participants in a construction project can only help to de-risk a project and in turn make more investable and more insurable.

And there are a great many participating and diverse sets of skills involved in the completion of a construction project. There’s engineering, architecture, surveying, insurance, accountancy, the law, investors, contractors in innumerable specialisms, regulators and on and on.

If they can all speak and hear exactly the same language at exactly the same time – how can that not be good news when it comes to insuring the thing. 

It is the same whether you are at the beginning, middle or end of the lifecycle of your asset / project or whether it relates to a building, a tunnel, a railway, a bridge or a pipeline, the cost of your premium is calculated using risk data to understand the likelihood of a specified event happening.

 

Alongside information about the activity or object needing insuring, the provider will take two important factors into account:

  • How likely is it that you will need to make a claim?

  • Are you a bigger or smaller risk than the average insurance customer?

We have briefly looked at both of these factors in the Asset Tagging strategy section but there are many other pieces of data that need to be taken into consideration. Collecting, managing and making available trusted data that could be used by insurance providers should be an integral part of our BIM/ Digital Twin activities.

Measuring, monitoring and updating a risk factor in near real time, is something that the motor insurance industry has been doing for many years now. The information may not directly impact an instant reduction in premiums, but they do relate to follow up discounts and ease at which insurance will be acquired.

At this moment in time, the exact pieces of information have yet to be standardised but the work behind them is being coordinated by the LEG and IMIA in a joint BIM working group coordinated by Andy Chisholm. Watch this space for some significant changes in the future!

Project Bank Accounts

You would have to have been living on the dark side of the Moon for a generation not to know the banking industry has undergone considerable transformation in the last decade.

Their ability to lend, borrow and deliver services have all been demolished and rebuilt in the last decade. In some cases, the banking industry simply dusted itself off and rebuilt itself as a more rugged, allegedly safer, more highly regulated facsimile of its former being.

Yet the rise and continuing growth of digital-only ‘disruptor’ banks around the world is pushing financial innovation to its limits.

Of course, this new industry, like any other, is not without its critics and even casualties. Mistakes have been made but at its best a digital bank has no real estate to manage and is therefore more competitive when it comes to pricing.

As we have already discussed, digital innovation continues to transform the relationship between construction and finance and banking is no different.

Once again, it is all about shortening the chain.

An account which produces an instantaneous Profit & Loss account, updates the Balance Sheet, immediately tracks all transactions and uses blockchain technology to protect and facilitate the movement of each individual transaction, can only help to improve efficiency.

No doubt as we write, further innovations are being made in the world of transactional banking, but the concept remains the same. The simpler the solution, the faster the money reaches the project and the sooner the VIP gets to cut the ribbon.

One of the success stories released as part of the governments drive to improve efficiency in the construction industry was Project Bank Accounts.

For many decades the money that is put into the project by the client doesn’t generate profits for the delivery partner on their own. This has been done by that Tier 1 contractor using this money on the stock market, buying and selling shares. This can lead to many unfortunate issues:

  • It’s in the interest of the contractor to slow the project down, therefore getting that maximum amount of investment time from the project funds!

  • It is in the interest of the contractor to slow payments of the supply chain down to ridiculous levels, such as 120 days after they are invoiced!

  • If the contractor collapses, the money can potentially be lost!

Project Bank Accounts (PBA) are a simple piece of legislation written for the UK Cabinet Office, that provide a ring-fenced bank account from which payments are made directly and simultaneously by a client to members of his supply chain.

PBAs have trust status which secures the funds in it and can only be paid to the beneficiaries – the supply chain members named in the account. Payments out of the PBA are made simultaneously to all parties.

The account is held in the names of trustees; likely to be the client and lead contractor (but could also be members of the supply chain). The advantage of trust status is that in the case of insolvency monies in the account due for payment to the supply chain is secure and can only be paid to them. PBAs are suitable for a very wide range of project values – even for projects as small as £1m or less, depending on the size of the supply chain.

In a BIM world these payments could be tied to a task and the trigger for payment a part of the acceptance criteria in the Task Information Delivery Plan (TIDP). Simple though the concept is, PBAs directly deliver against a range of the aims of the Government Construction Strategy. By addressing unfair payment practices, benefits will accrue to the whole supply team, by ensuring transparency of and certainty of payment.

In particular, for the small businesses down the supply chain, PBAs will protect their often very fine margins, obviate the need for unnecessary borrowing and can lead to a much more balanced trading environment, hence supporting growth. Cost savings accrue from supply chain members not having to chase payment or having to finance lengthy credit periods. PBAs eliminate payment disputes and the costs associated with them (which ultimately feed back into costs for the client). They also help the supply chain concentrate on the job in hand and reinforce or facilitate team working. Increased trust leads to greater collaboration, which in turn incentivises innovation. It is estimated that fully implementing PBA will save the project 1% of the overall cost in construction and significantly lower the risk.

If you are looking for more information about financing the Digital Twin or streamlining your project finances for digital delivery, please get in touch with Pete Jarman or Steve McDowell at EIX.

© 2017 - 2020 by COMIT Projects Ltd.

 

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