Measuring Value for Money in Relationship Contracting
Relationship contracting is a term applied to a project delivery strategy which strives to achieve a better outcome through the closer alignment of client and contractor. This alignment includes not only project goals, but also the treatment of risk and incentivisation.
Although such collaborative environments have a strong track record of achieving project goals in a non-adversarial environment, the jury is still out when it comes to cost effectiveness when compared with more traditional forms of contract.
These concerns about “Value for Money” (VFM) are one of the major obstacles to a more widespread adoption of relationship contracting.
This article explores some of the keys to establishing robust metrics around the measurement of value in a relationship based contract.
One of the biggest problems is the inconsistent and sometimes subjective interpretation of the word “value”. The Merriam Webster dictionary definition describes value as
“A fair return or equivalent in goods, services, or money for something exchanged”
This can be represented by the formula:
VALUE = BENEFITS – PRICE
So when a customer achieves the defined benefits for a price that can be demonstrated to be fair, value for money has been achieved.
The process of defining benefits is where the VFM equation can start to become subjective.
In most commercial transactions individuals rarely establish these definitions or metrics so much of our impressions of value become subjective. For example if you change a $10 dollar note you know that receiving 2 x $5 notes in return represents fair value or your “Minimum Conditions of Satisfaction” (MCOS).
If you get less than you were expecting you would consider the transaction as “Poor Value” if you got more than you were expecting you may consider the transaction as “Good Value”.
If you buy a meal for $10 your definition of value will almost certainly lack a pre-determined metric on which to base you final opinion of value. Ensuring a subjective rather than an objective rating.
So, it is incumbent upon both customers and contractors to establish objective indicators of value prior to entering commercial negotiations.
The first stage in the process involves the customer’s drivers for initiating the project. Most projects result from the desire to achieve a Government or Corporate strategy.
For example, a Government strategic target could be:
“Increase public transport to x% of metropolitan weekday passenger vehicle kilometres travelled by 2020”
Project objectives need to directly support these strategic targets, an example being:
“Expand rail network in outer suburban areas to improve public access to metropolitan public transport hubs”
Once the Project Objectives are established the customer or owner needs to define the Key Result Areas (KRAs). These are the areas in which the customer must get measurable results in the delivery of the Project Objectives.
Examples of typical KRAs include – Cost, Quality, Schedule, Safety, Environment, Community etc.
Within each KRA a number of clear Project Objectives need to be agreed with the contractor. For example within the KRA of schedule, an objective may be:
“Finish the expansion of the rail network by December 2015”
These Project Objectives reflect what the owner is attempting to achieve in each of the Key Result Areas.
The final step is to identify exactly what measures or Key Performance Indicators (KPI’s) will be used to track achievement or progress against the Project Objectives.
With the schedule example above, the scale is easy to establish. Project completion by 31st December 2015 becomes MCOS, any date beyond this could be considered “Poor Value” and assuming early completion provides a benefit to the owner, any date before this would be considered “Good Value”.
When all the KRAs, Project Objectives and KPIs have been agreed, it is possible to build a balanced scorecard where MCOS is used to produce a weighted score that dictates the overall Value for Money achieved at the conclusion of the Project.
Although such collaborative environments have a strong track record of achieving project goals in a non-adversarial environment, the jury is still out when it comes to cost effectiveness when compared with more traditional forms of contract.
These concerns about “Value for Money” (VFM) are one of the major obstacles to a more widespread adoption of relationship contracting.
This article explores some of the keys to establishing robust metrics around the measurement of value in a relationship based contract.
One of the biggest problems is the inconsistent and sometimes subjective interpretation of the word “value”. The Merriam Webster dictionary definition describes value as
“A fair return or equivalent in goods, services, or money for something exchanged”
This can be represented by the formula:
VALUE = BENEFITS – PRICE
So when a customer achieves the defined benefits for a price that can be demonstrated to be fair, value for money has been achieved.
The process of defining benefits is where the VFM equation can start to become subjective.
In most commercial transactions individuals rarely establish these definitions or metrics so much of our impressions of value become subjective. For example if you change a $10 dollar note you know that receiving 2 x $5 notes in return represents fair value or your “Minimum Conditions of Satisfaction” (MCOS).
If you get less than you were expecting you would consider the transaction as “Poor Value” if you got more than you were expecting you may consider the transaction as “Good Value”.
If you buy a meal for $10 your definition of value will almost certainly lack a pre-determined metric on which to base you final opinion of value. Ensuring a subjective rather than an objective rating.
So, it is incumbent upon both customers and contractors to establish objective indicators of value prior to entering commercial negotiations.
The first stage in the process involves the customer’s drivers for initiating the project. Most projects result from the desire to achieve a Government or Corporate strategy.
For example, a Government strategic target could be:
“Increase public transport to x% of metropolitan weekday passenger vehicle kilometres travelled by 2020”
Project objectives need to directly support these strategic targets, an example being:
“Expand rail network in outer suburban areas to improve public access to metropolitan public transport hubs”
Once the Project Objectives are established the customer or owner needs to define the Key Result Areas (KRAs). These are the areas in which the customer must get measurable results in the delivery of the Project Objectives.
Examples of typical KRAs include – Cost, Quality, Schedule, Safety, Environment, Community etc.
Within each KRA a number of clear Project Objectives need to be agreed with the contractor. For example within the KRA of schedule, an objective may be:
“Finish the expansion of the rail network by December 2015”
These Project Objectives reflect what the owner is attempting to achieve in each of the Key Result Areas.
The final step is to identify exactly what measures or Key Performance Indicators (KPI’s) will be used to track achievement or progress against the Project Objectives.
With the schedule example above, the scale is easy to establish. Project completion by 31st December 2015 becomes MCOS, any date beyond this could be considered “Poor Value” and assuming early completion provides a benefit to the owner, any date before this would be considered “Good Value”.
When all the KRAs, Project Objectives and KPIs have been agreed, it is possible to build a balanced scorecard where MCOS is used to produce a weighted score that dictates the overall Value for Money achieved at the conclusion of the Project.