Infrastructure Contract Analysis

A Fortune 50 company with a unique multi-billion-dollar project in a remote environment was considering simplifying the compensation terms of a ~$200 million dollar civil and infrastructure subcontract to reduce risk and project costs.

The current contract contained four types of payment terms (unit rate, monthly lease, lump sum, and reimbursable cost) used to manage many different scopes of work including ice roads and maintenance, gravel roads and pads, camp and office construction, marine service pier installation, and more.

The contracting strategy of using a single subcontractor for all these areas was adopted after determining the subcontractor was capable of executing all the disparate aspects. This strategy helped minimize the number of subcontracts used for the project, but the dissimilar scopes required separate methods of monitor and control. It was determined that utilizing the four types of payment terms could help ensure successful completion of the work by promoting objective progress measurement where appropriate while maintaining both flexibility and visibility where necessary.

Early into the project, however, it became apparent that executing this contracting strategy had unanticipated factors, and the company was proposing switching most of the contract to reimbursable cost, believing this change could help manage risk by giving the company more timely and complete access to all information, and save the project money in the end.

Prior to making the decision, however, the company asked for an objective analysis of the contract.

After the company’s issues, concerns, and objectives were understood, an analysis was conducted that included interviews of the relevant stakeholders; evaluations of the contract’s terms and conditions, and its rate tables and other pricing information; historical project costs to date; the subcontractor’s project reporting and schedules; and the company’s own estimates for this work.

The assessment’s findings confirmed that there were opportunities for improvement, but it was recommended that the company consider not changing the contract’s terms – even if it meant providing more resources to increase the management and control of the current contract.

The analysis determined that the project could save somewhere between $10 million and $55 million by leaving the current compensation terms in place vs. changing to the proposed strategy.

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