The team works like a "real" company, controlling its own budget and making profits or losses for the whole virtual company. This is opposed to the usual practice of profit and loss being made by companies within a project. The idea is that everyone works for the virtual company and the project, not the main contractor, subcontractor or architect. In this way, team members can help each other without worrying about the interests of different employers.
For instance, if a subcontractor misses its time slot for a tower crane, the site manager might try hard to create some free time, because the profitability of the whole job could be jeopardised by the missed delivery. Before virtual companies, the site manager might have said to the subcontractor: "Tough, it's your problem. I'm hitting all my targets."
Despite the rhetoric, the virtual company is not a guaranteed win-win arrangement. The added cost of early involvement, the reward formula that locks partners into sharing in the total risk of the project, the personal difficulties of maintaining relationships, and the possibility of teams becoming static and complacent are all provisos on its success. Over-arching all this is the industry's slowness in embracing change.
Removing hierarchy
But after 18 months of pilot schemes and consultation (virtual companies were invented by the Movement for Innovation in 1999) the formula is ready to be tested, underpinned by a new style of contract that is signed by the client and each of the secondees. The contract removes hierarchy and blame – except in cases of bad faith – binding the partners in an agreement to achieve the client's objectives.
Martin Davis, M4I board member and vice-chairman of services contractor Drake & Skull, says: "We need to shift the emphasis away from the contract. It is still there, but it is underpinning and enabling. The contract is not a tool for bashing each other over the head. It's a record of what has been agreed."
The initiative for the virtual company is client-driven. Before team members are convened, the client decides on provisional objectives and places them in order of priority. For example, speed of completion and maintainability of the facility may be foremost, with low capital cost also a consideration.
The client, the facilities management contractor and the architect select partner companies based on reputations and track records, and on value rather than cheapest tenders. Davis says: "Of course market forces still apply, but success in competition is based on the track record."
The partner companies then propose secondees to the virtual company who they believe will be suited to the ethos of teamwork. "When the provisional team is put together it is a question of matching the partners, not competitive tendering," Davis explains. As the partners get to know one another, the traditional animosity between designers and contractors is broken down, say proponents. Trust can be fostered directly between individuals rather than through reams of signed documents. But as in any relationship, Davis warns, "Trust has to be earned, it cannot be injected."
Once the team is in place, the client's objectives can be confirmed. The roles of the partners are discussed and shares in rewards and risk assessed and linked to the achievement of the client's objectives. This "reward formula", according to Davis, works on a "pain share, gain share" basis that motivates partners to work together.
Davis points out an additional benefit of the non-hierarchical structure: "M&E contractors will be peers in a virtual company rather than hidden somewhere down the supply chain."
So far, so friendly. But what about money, the driving force behind any successful change in practices?
The client undertakes to pay the contractor secondment costs, construction and operation costs, and a share of the rewards for satisfactory completion – linking customer satisfaction to profits. If the project fails to meet the client's objectives, the partners share in the risk.
Contractors can make savings in a number of areas of procurement: tenders are replaced by negotiation; lead-in and construction times are reduced; defects are detected before building begins through consultation between designers and contractors; and the need for wasteful paperwork is removed by face-to-face discussions, a single multi-party contract and the use of IT. The "no blame" contract should also do away with the costs of litigation if a project fails.
The potential for repeat business is also high if a team works successfully together, as evidenced by the well-known example of the BAA pavement team, or HBG Construction's work with Argent Estates.
All well and good, but does it actually work? The industry has been slow to embrace the new ideas, and so far no project has demonstrated all the principles of the virtual company. But a number of schemes have displayed different aspects of the theory in practice.
Strategic relationships
M&E contractor NG Bailey has worked with GlaxoSmithKline on its Fusion (Fairness, Unity, Seamless, Initiative, Openness, No blame) programme. The projects at Beckenham in Kent and Ware in Hertfordshire came in on time and with total savings of £4m and £7made on paperwork, claims, manpower and defects, on projects worth £17m and £20m respectively.
Mark Lench, marketing director at NG Bailey, sees close partnering as the future for contractors: "Supply-chain partnerships will become increasingly important and provide M&E contractors with exciting opportunities to form strategic relationships."
But partnering and teamwork is not all fun and easy savings. Lench says: "To gain and maintain key partnerships, M&E contractors will need to prove that they can add value, integrate with other team members and show commitment to productivity improvements."
Jeremy Eavis, construction director at HBG Construction, has been involved in two schemes with developer Argent Estates, using an integrated team for the projects. Eavis says, "We worked with Argent on the Thames Valley Park project, and when we took on the Green Park office scheme about 90% of the team was re-used."
Construction time on the 120,0002ft development was one year, meeting Argent's priority of delivery on time. Defects were reduced by 20%. The integrated team approach to balancing cost and budget was part of a wider initiative incorporating prefabrication and direct procurement as ways to increase value.
Eavis says: "Team working has benefits. It is much easier just to pick someone and negotiate with them [rather than going through the traditional tender and procurement process]."
One client keen to set up a full-blown virtual company is NHS Estates. A spokesperson said NHS Estates "are currently trying to identify a suitable body or trust to run a trial scheme".
The M4I is spreading the word about virtual companies and looking for contractors and clients to test the theory. But the greatest obstacle is the conservative nature of the construction industry. Unwillingness to embrace change, particularly where the protective contract is involved, may yet stymie attempts to improve practice and profits.
"The ideas are radical," admits Davis, "and they must be tested." This is not a prescription to industry; it is a suggestion and it has to be tried out in practice."
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