Top 5 Commercial PrinciplesApr 27, 2023
To help improve your chances of executing on time, on budget, and on benefit we’ve developed the Top 5 Commercial Principles to get right!
Get these principles right, and your chances of success will increase dramatically.
- Avoid litigious one-sided agreements:
Typically, an owner's standard contract templates are created by an external law firm that doesn't understand our industry and wants to protect their E&O policy.
This results in one-sided, heavy-handed terms that attempt to transfer all risks to the contractor.
I was recently speaking with a VP of a mid-tier gold mining company about putting in place a collaborative win-win contract with select OEM’s.
I recommended the VP review the contract to make sure the terms aligned with the collaborative approach before sending the contract to the OEM’s (which, sadly didn’t happen).
Spoiler alert… the terms and conditions were as described above (e.g., plagued with risk for the OEM’s).
This cost the project months of lengthy negotiations fixing the contract along with a big fat legal bill, and soured relationships with the OEM’s (not a great way to start).
Had the contract been updated before it was sent to the OEM’s, much of this pain (and cost) could have been avoided.
Don’t let this happen to you.
Make sure you read your standard contract templates and ensure that they are aligned with your win-win approach.
- Ensure Executive Management buy-in and support:
Although Executive Management's viewpoints on project execution aren't within your control, they are certainly within your influence.
The key here is to start the conversation early, be transparent with your intentions, and align on key objectives.
Years ago, I was asked to negotiate a prime contract for a midsized project in the arctic.
Here an executive had decided the owner would be completely hands-off and the selected contractor would be responsible for everything.
The problem? The executive hadn’t socialized this hands-off approach with peers.
This really upset the executive responsible for community relations and permitting whom in turn completely torpedoed the project…
Leading to significant delays, cost overruns, and a soured relationship with the contractor – not to mention an internal political battle that went on for months.
Don’t make the same mistake, make sure you have internal alignment before engaging external parties.
- Pick the right contractor (and contract) for the application:
You wouldn’t hire a plumber to do the work of an electrician.
And you wouldn’t execute a multi-million-dollar construction contract on a purchase order designed to buy office supplies.
Make sure you are hiring the right contractor (and using the right contract)!
For instance, the power industry and the mining industry have different practices for project execution.
Most mining projects are executed under cost reimbursable EPCM agreements. Meanwhile industrial power projects are typically executed under lump sum EPC agreements.
Very different models (and industry practices).
As such, when a mining company hired a contractor from the power industry it was no surprise there were challenges right out of the gate.
Expectations were unclear, and the differences in practices caused significant delays in design, procurement, and ultimately construction.
As a project leader in mining & metals its vital to understand contractors’ qualifications, culture, and common industry practices.
- Incentivize behavior:
Or more specifically, incentivize the right behavior.
You’ve likely heard me say this before: People Build Projects.
Understanding what motivates people will help you to incentivize them to demonstrate the desired behavior.
And when you get the right behavior, you’ll get the desired results.
In the words of Dr. Jill Bolte Taylor, neuroanatomist and researcher of the brain:
“We are feeling creatures who think”
Emotional intelligence skills like empathy, interpersonal relationships, and stress tolerance (to name a few) are essential to helping motivate people, connect, and find meaning at work.
While we might not consider feelings as an important factor in executing capital projects, just think about the last time you saw a job with a deflated workforce…
I can all but guarantee that job was not delivered on-time, on-budget, or on-benefit.
We are feeling creatures who think.
- Get the best team:
One could argue I’ve saved the most important principle for last.
Perhaps this principle should have come first.
Or, perhaps we wanted you to wait until the end.
In his book How Big Things Get Done renowned author and Oxford professor Bent Flyvbjerg emphasizes it like this:
“The value of experienced teams cannot be overstated, yet it is routinely disregarded.” …
“So how do you get the team right? The simple solution, whenever possible, is to hire (them) … If they exist, get them.
Even if they are expensive—which they are not if you consider how much they will save you in cost, time, and reputational damage.
And don’t wait until things have gone wrong; hire them up front.”
I couldn’t agree more.
In fact, I feel so strongly about this, when evaluation contractors for a project, we often recommend clients give 50% of their total evaluation weighting to people proposed for the project team!
That’s right, half! The other half is split and shared across everything else (e.g., HSE, Project Execution Plan, Systems and Tools, Cost and Commercial, etc.)
It’s all about people! People Build Projects!
What do you think?
Do you agree, or do you have something else you’d like us to consider as well?
I would love to hear from you!
To your success!
We are passionate about doing things better – no more horrifying industry statistics – there is a better way! Grab a time to meet with me 1:1 to discuss the unique challenges of your project.