Innovation in the Supply Chain

Theory and practice of innovation in construction

September 2016
Acknowledgements
This report has been written by a team from Pinsent Masons, Costain and the University of
Cambridge and is based upon our collective experience of working on, advising on and researching
projects, together with a literature review, case studies and a number of interviews with clients and
noted practitioners.

Adam Golden Tim Embley Shy Jackson Simon Deakin Boya Wang
Costain Limited Costain Limited Pinsent Masons LLP University of Cambridge University of Cambridge

We gratefully acknowledge the help and assistance provided by the participants in this Report, who have generously provided their time
and insightful sector expertise. These included in particular:

Jamie Muir Wood, Hogarth Chambers

Bill Hewlett, Costain Limited
Alex Siljanovski, BaseStone
Paul Morris, Thames Tideway Tunnel
John Pelton, CH2M
Khalid Ramzan, Pinsent Masons LLP
Ayla Skene, Pinsent Masons LLP
Simon Addyman, London Underground Limited
Don Ward, Constructing Excellence
Tim Broyd, University College London

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 Innovation in the Supply Chain

Foreword
We all have a responsibility to encourage and create an environment which nurtures and promotes
innovation. An industry that innovates is respected, profitable, internationally competitive and
undoubtedly delivers better outcomes for the customer.

The infrastructure sector is a key enabler in driving growth and allowing other industries to innovate. It is imperative therefore that the
infrastructure sector succeeds and displays the characteristics necessary for successful innovation. The critical role of infrastructure is
best expressed via its benefit to society, allowing communities to connect and economies to thrive. Without a high performing transport
network that is integrated and connected, a constant supply of dynamic energy that is sustainable and secure and a water network that
is resilient and responsive to environmental pressures, it is clear that the UK will not prosper on the global stage when competing for
investment, business and talent.

It is for this reason that we must transform our infrastructure sector to become world leading in innovation, delivering world class assets
and advancing research and development. This will require changes in contractual practice to drive the right commercial behaviours.

The purpose of this report is to outline what the industry has done to start on this journey and what the immediate priorities are which
the industry must address to become proficient at implementing and accelerating innovation.

Contractual environments and structures can act as both an enabler and a blocker of innovation in all of its forms. Construction
engineering clients and major engineering solutions providers are moving toward a contractual environment that encourages innovation
in recognition that value will be created via the use of talented people and the availability of new ideas rather than the traditional price
driven approach. The report presents useful recommendations that deserve an industry focus, but as separate organisations and indeed
individuals, all can take something away and make a difference.

There has never been a more pressing time to innovate and I would encourage the industry to help alter perceptions through the actions
we take in accelerating our journey.

John Pelton MBE

September 2016
Contents
1 Introduction

2 Executive summary

3 Background to Industry past and present practice

4 Innovation under current forms of contract

12 Defining innovation

13 A conceptual model of supply chain innovation

17 Results and Analysis

24 Case Studies

27 Proposals for reinforcing and promoting innovation

29 Proposals for contracts

32 Conclusions and Recommendations

36 References

37 Contact Details

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 Innovation in the Supply Chain

Introduction
Our research investigation has therefore sought to identify how
innovation is currently dealt with by the industry, especially
within the current legal and contractual frameworks. The aim
was to test how the industry would respond to a move towards
The engineering and construction industry a more collaborative contracting environment to deliver better
in the UK has made significant progress in outcomes and whether, and to what extent, this can be a driver
to innovation. The research was carried out through a mix of
embracing new forms of procurement, focusing workshops, interviews and a questionnaire, involving industry
on collaboration and seeking to create an practitioners throughout the supply chain from clients and their
environment where all parties’ interests are advisers to contractors and small technology businesses involved
aligned. This was the result of an acceptance in the industry as well as academics. We have then built on the
findings of the empirical research to put forward a number of
that the industry had to evolve and develop in proposals and recommendations which in our view would assist
order to deliver the more efficient construction in promoting innovation throughout asset creation, from delivery
that the economy requires, as well as putting in to decommissioning, both by creating an environment that
encourages innovation and through specific contractual provisions.
place the infrastructure that will drive the UK’s
economy. Innovation is central to that but it This report brings together expertise from Costain, Pinsent Masons
seems clear that there is still much more that LLP and the University of Cambridge. We believe that this has
provided us with an opportunity to combine different perspectives
can be done. and prepare a report that will address a variety of audiences, from
academics to industry practitioners. We hope that this approach
There are leading examples of projects that have set the is of benefit and we recognise that while some of the findings will
benchmark for innovation such as Crossrail, but at the same be regarded as self-evident to some readers, others who are less
time it is necessary to address the underwhelming levels of R&D familiar with the construction industry would benefit from such
(Research & Development) and innovation more widely within an approach. Regardless of your starting point we hope you will
the industry. There are a variety of factors which contribute to become a better innovator, to grow and develop a business that
this, including the absence of a reference to innovation within will continue to provide sustainable solutions to your customers.
contractual frameworks. Experience also shows that contract Indeed, it is hoped that this report will prove to be of interest
durations are increasing in length and a number of clients are beyond the construction industry and demonstrate we are an
moving away from some of the more traditional contracting industry that is transforming.
methods, favouring more collaborative methods such as
frameworks and alliances. This is especially the case for the Overall, this report is intended to assist anyone within the industry
mega-projects that are currently providing the continuity to who is looking to unlock the innovation within supply chains. There
sustain the industry. It is also the case that main contractors are are no complete definitive answers, but the research undertaken
evolving their business models where in some situations specialist and the recommendations made should provide a useful starting
sub-contractors and suppliers have a significant role in achieving point for further development of routes to encouraging innovation.
innovations in the final product.
We would like to express our thanks to all those who have taken
It is anticipated that collaborative contract structures will gain time to assist us with this project. They are too many to be named
momentum within the industry as supply chains rationalise to but their contribution was invaluable. This study would not have
increase productivity and many firms, clients and contractors been possible without the investment from Innovate UK and the
alike, will regard innovation as unduly costly and risky. Engineering and Physical Sciences Research Council investment.
Procurement processes and standard form contracts need to The views expressed in the report are however our own views.
address these concerns.

1
Executive Summary
• Social Benefit Recognition, highlighting the social benefit that
the construction industry provides and creating a tool which
provides a social benefit calculation and generates a fixed score.
• Aligning Research with Major Projects, so that major projects
This research project has set out to investigate in the early phases of project development have specific research
the extent to which the need for innovation is programmes to assist the advancement of key challenge areas
recognised and encouraged by the industry in that will advance the industry and deliver an improved solution.
general and in current contractual frameworks. • Strong Leadership, showing a willingness to share cost and risk
in addition to engaging in and encouraging early innovation, so
Based on that research we have set out various that clients can act as the catalyst for bringing the changes which
proposals which we hope will be useful and lead are required to enable not just innovation but open innovation.
to further discussions. A summary of our findings • Innovation Champions, ensuring all innovation is captured,
and proposals is set out below. delivered via the appropriate channels to those with authority for
implementation and also facilitating communication across the
business. Assisting with the development of strong proposals and
To start with, it is clear that the industry recognises the need
connecting people both internal and external of the business, to
for innovation. This is evident from the use of early contractor
accelerate innovation to market.
involvement at the Bank Station Upgrade project and the
Innovation 18 platform created at Crossrail. In addition, there is • Training, every person has the ability to innovate however not all
an increasing use of collaborative contracts which seek to align possess the management and commercial qualities which are
interests by using target cost mechanisms and encouraging required when an innovation begins to grow and succeed. It is
value engineering, so that all parties benefit from innovation and imperative that innovators are given the training and support which
resulting savings. they require to ensure that promising opportunities are not wasted.
• Broadening Job Descriptions, innovation is the responsibility of all.
It is also the case that more can and should be done. The empirical While dedicated innovation managers and innovation champions
research, based on interviews, workshops and questionnaires, has are encouraged it is for all employees to engage in fostering a
shown that the supply chain still sees a value in clear contracts that culture of innovation and bringing that innovation to market.
create certainty and is wary of looser arrangements where there is
less clarity on how the risks and costs of innovation, as well as the In addition to the above, contracts should include additional
gains, are to be shared. At the same time, parties also seek flexibility provisions that will encourage innovation and confirm the client’s
and while that may be seen as going against certainty, that is what commitment to innovation, while delivering the commercial
innovation requires. in addition, there is still a lack of trust and certainty that is needed to create confidence.
a suspicion that collaboration is being used to reduce costs as
opposed to the wider potential benefits collaboration can generate. We propose that such clauses allow for flexibility and that parties
are encouraged to recognise the costs and risks of innovation,
On that basis, we propose that steps be taken at two levels. To which are to be shared, as well as the gains. Alternatively, a non
start with, there can be further recognition and encouragement of binding protocol may also be used to set out the underlying
innovation within the construction industry. This can be done by principles to govern innovation, but it would still be necessary to
implementing the following measures: provide certainty as to how innovation is implemented within the
• Industry Innovation Platform, to allow clients to find ways to contractual structure.
work together and develop innovation programmes that allow
the industry to collaborate and drive long term innovation and
investment that benefits outcomes across the industry.
• Innovation Maturity Framework, creating a performance
assessment framework for innovation to assess capability and
skills within organisations from clients to supply chain partners.
Understanding maturity for innovation implementation would
allow for a large uplift in innovation capability across the industry.
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 Innovation in the Supply Chain

Background to Industry
Among other things, this report aims to challenge this disconnect.
The industry has long recognised the benefit of planning,
Early Contractor Involvement (ECI) and BIM. It is generally

past and present acknowledged that the more work which can be done upfront, the
more successful the project. UK Government, one of the largest
construction clients, has done much to improve visibility of the

practice construction pipeline, the National Infrastructure Plan acting as

the cornerstone of this movement toward transparency and clarity
in infrastructure spending, providing confidence and allowing the
industry to invest.
‘There is nothing more difficult to plan, more doubtful of
success, nor more dangerous to manage than the creation The UK construction industry is of vast economic importance;
of a new order of things... whenever his enemies have the accounting for approximately 6.5% GDP and employing in excess
ability to attack the innovation they do so with the passion of two million people1. It is therefore of paramount importance
of partisans, while the others defend him sluggishly, so that that the industry prospers and remains competitive. Globally and
the innovator and his party alike are vulnerable.’ domestically however, the industry is lagging.
Niccolò Machiavelli, The Prince (1513)
The construction industry has long been plagued by its
The research project grew out of a frustration which surrounds the characteristics. These include high fragmentation, low margins,
difficulty involved in introducing innovation within a construction adversarial relationships and mistrust. As a result of this, the
project, a problem we still experience in practice today. National industry has appeared reluctant to encourage and pursue
infrastructure projects are becoming ever larger and the number of innovation and procurement processes rarely seek to incentivise
mega-projects is undoubtedly increasing, from Heathrow Terminal R&D and innovation. The result of this is that while numerous
5 and the London Olympics, to Crossrail and on to High Speed industries invest 5% and greater of their revenue into R&D, the
Two, Crossrail Two, Thames Tideway Tunnels and Hinkley Point C, figure is a mere 0.5% for the UK construction industry.2
projects are increasing in size, scope and duration.
The issue of fragmentation is far from new and was recognised as
Over the past decade, the UK has transformed the way mega- early as the Banwell Report in 1964 which stated:
projects are delivered, moving away from a world of fixed-price “We consider that the most urgent problem which confronts the
contracts, risk transfer, lowest-cost tendering and adversarial industry is the necessity of thinking and acting as a whole. It has
relationships. While this is encouraging, it is hoped that mega- come to regard itself as a series of different parts, roughly consisting
projects can act as a catalyst for greater change in this regard as of specialist advisers, contractors and suppliers and operatives of
these projects offer huge potential for innovation. various crafts and skills… these attitudes must change” 3
Banwell Report 1964
Much of the ubiquitous infrastructure which surrounds us today
was constructed in the Victorian era. Projects such as Crossrail, It is disappointing that despite pockets of supply chain
Thames Tideway and HS2 will meet the UK national infractructure consolidation and collaboration, this is largely still true today. The
needs, not just for ourselves but future generations too. It makes industry requires radical collaborative change to address this as
sense therefore to integrate research and development with collaborative relationships are key to innovation. As construction
these great mega-projects. As we know well from our Victorian projects become ever larger and ever more complex, supply
infrastructure, it is difficult to retrospectively fit new technologies chains must adapt to become more efficient and overcome new
whereas an environment in which research and development is challenges. For this to occur, supply chains must consolidate. The
aligned with mega-projects in the infrastructure pipeline would see authors envisage that this consolidation and creation of strong
a situation where assets are built to a standard which is at the peak business partnerships will see increased power in the hands of
of technological ability. the sub-contractors and suppliers who are able to consistently
innovate, while delivering safety and high quality.
Undoubtedly there will always be technological evolution and it is
not possible to envisage all future developments. However, much There is a consensus across the industry that early supplier
can be done to improve the current ad-hoc methodology which engagement is advantageous, and that innovation begins with
sees a disconnect between these mega-projects and the research engaging the supply chain. However, client behaviour at the
and development which could benefit these projects. Too often procurement stage needs to encourage and when necessary reward
have we heard the words ‘what a brilliant idea, if only we’d have the early formulation of ideas which are capable of winning bids.
known about it earlier in the process.’

1
House of Lords Library; Construction Industry: statistics and policy; October 06, 2015
2
OECD R&D expenditure in industry database
3
Banwell Report ‘The Placing and Management of Contracts for Building and Civil Engineering Work’ 1964

3
Innovation under
will be less concerned about cost or buildability. Employers are
also usually reluctant to lose control and will often provide very
detailed employer’s requirements or become involved in the design

current forms of development process, which reduces the scope for innovation.

For civil works projects, a common form of procurement has

contract traditionally been the measurement contract. Under measurement

contracts, payment depends on the amount of work actually
carried out based on agreed rates. As with lump sum contracts,
Traditional procurement models the contractor may seek innovation which reduces its costs and
does not affect the agreed rates, but may be reluctant to suggest
Innovation in one form or another has always existed and it is innovation which reduces the work done and therefore the overall
therefore worth considering how it is dealt with under traditional payment. In addition, the nature of such contracts, used for
forms of procurement. In broad terms, contracts were, and still repetitive fixed tasks such as excavation, also means there is less
are, usually procured as a lump sum fixed fee contract with some scope for innovation and no real incentive for the employer to
sectors preferring the use of measurements contracts or cost explore such opportunities.
reimbursable contracts.
The position is similar with cost reimbursable contracts, which are
Under a common fixed price lump sum contract, the contractor used when the scope of work is too uncertain to be defined and
receives in full the benefit of any savings which reduce its cost as there is a need to start with the works. The price will usually be
against the contract price. The contractor is therefore motivated based on rates agreed in advance and while the contractor may
to innovate to the extent that such innovation will reduce its costs, wish to reduce its own costs, it will be less interested in reducing
but there is no reason to explore innovation that may assist the the scope of work. While the unfixed scope of such works may
employer e.g. by providing long term benefits. For the same reason, make such a contract suitable for exploring innovation, in practice
the employer has no interest in innovation by the contractor which the focus tends to be on carrying out the works and employers
simply reduces the construction costs and indeed he may be wary are keen to ensure that contractors do not take advantage of such
of such innovation and may seek to prevent it from happening if contracts by undertaking unnecessary work. There is no common
there is any risk involved. If the contractor wishes to propose an incentive to innovate and such contracts are therefore not
innovation which results in a cost increase or a risk, but provides regarded as promoting innovation.
a long term benefit, that will normally be the subject of separate
negotiations as the contractor will seek an instruction treating it as Overall, under traditional procurement models, it will be unusual
a change and identifying the cost and time consequences. In other for the contractor’s and employer’s interests to be aligned with
words, there is no incentive for the contractor and employer to regard to innovation. The exception is the growing use of target
cooperate in identifying innovation. cost contracts dealt with below.

In addition, fixed price lump sum contracts may be less suitable for Standard forms of contract
the delivery of innovation, if they are based on a well developed
design, which has been completed and forms the basis for the fixed Almost all construction work is carried out under one of the
price. As noted in the IChemE Lump Sum Contract Red Book 2013, standard forms of contract created by the industry, albeit often
5th Edition Guidance, at p 79, this leaves little scope and margin subject to amendments. Innovation is not addressed in such forms,
for innovation as “This is because when the contractor is limited by a but they deal, in varying degrees, with the potential for introducing
lump sum contract he will be reluctant, or may simply not be able, to innovation and the commercial implications of innovation.
explore all the possibilities of optimisation or innovation of design”.
The NEC3 form is the common form used for large infrastructure
Under a design & build contract the contractor usually takes over a works. There is no specific reference to innovation or value
preliminary design prepared for the employer which the contractor engineering within NEC3 standard forms and the contract
is to develop in order to achieve the final design. This therefore provides payment options which largely reflect the models set
allows the contractor to undertake the design and therefore scope out above, e.g. fixed price lump sum. Certain aspects of the NEC
for innovation. In terms of the commercial position however, the form of contract can promote innovation, such as the emphasis
payment basis is normally fixed price lump sum and the same on communications, working together to reduce risks and optional
issues discussed above come up. From an employer’s perspective, clauses such as X6 – Bonus for early Completion, X12 – Partnering
under a design & build contract the contractor will be incentivised and X20 – Key Performance Indicators. In addition, as noted below,
to innovate if at all for largely its own benefit, which may end up in 2015, NEC introduced an additional clause to be used with the
having an impact on the quality of the final build. Indeed, there is NEC3 Engineering and Construction Contract, which allows the
often a tension between the novated designers and the contractor, contractor to be appointed under a two-stage ECC contract, so
since the contractor will often seek ways to reduce the build cost the contractor can help develop the design and share any savings,
while the designers will wish to maintain the original design and creating an incentive for a cost-effective design.
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 Innovation in the Supply Chain

In terms of promoting innovation through the alignment of This provision therefore acts as an incentive on the contractor to
commercial interests, this is best done under the main payment innovate, but it is very much focused on reducing the costs of the
options C and D, which create a target cost mechanism. This is works as the basis for the incentive, albeit the scope for proposals
because the contractor and employer will share the benefits of under this provision is drafted in wider terms.
any savings through innovation. This is however limited to savings
during the life of the project so there is no incentive to innovate The Institution of Chemical Engineers (IChemE) also publishes
when the savings are realised after completion over the life of the a suite of contracts which is used in the UK and internationally,
completed project. The costs of investigating and implementing mainly for process plants. The ICHEME lump sum form enables the
innovation are however shared, because under such contracts the contractor to propose a variation through the Contractor Variation
contractor is paid its defined costs in full but any costs above the procedure. Whilst the contractor can propose a variation under this
target are shared by the parties. Similarly, if the innovation has procedure, the onus is on the contractor to convince the project
been unsuccessful and resulted in the need for remedial works, manager of the viability of the proposed variation and its benefits
this would normally be a shared risk as a result of the cost target to the project, since the project manager’s decision to reject a
mechanism, albeit employers may seek to disallow such costs in variation is not open to review unless it concerns the rectification
certain circumstances. of a defect or a hazard.

For such mechanism to be effective, it is important to set the If the contractor makes an initial proposal, which the project
target at a realistic level so that there is a genuine opportunity to manager is willing for the contractor to develop, the contractor
achieve savings and to ensure that the employer shares any gains is entitled to the cost of developing the proposal. If a variation is
on an equal basis. A target cost contract will not achieve a genuine accepted, it is processed and paid out through the valuation of
alignment of interests if the target has been set at a very low level variations procedure.
as a result of pressure to reduce costs. Similarly, if any gains are not
shared on an equal basis, as sometimes happens, the contractor Under the IChemE Target Cost Contract (Burgundy Book) the
will be less motivated to introduce innovation. process for variations proposed by the contractor is similar to that
under the IChemE Red Book. However, the key difference is that
Internationally, the most common forms of contract used are the Cost incurred in carrying out the variation shall form part of
the suite of contracts published by the International Federation the Actual Cost which in the Target Cost Contract is then subject to
of Consulting Engineers (commonly known as FIDIC, based on the pain-gain share, in a similar manner to the way the NEC target
the acronym for its French name Fédération Internationale Des cost contract operates.
Ingénieurs-Conseils). There are different versions of the FIDIC
form of contract, including a measurement version (the Red Book) The Infrastructure Conditions of Contract (published by the
and a plant design and build version (the Yellow Book). Like other Association for Consultancy and Engineering and the Civil
standard forms, it is common for employers to amend the form Engineering Contractors Association) also include a target
to reflect specific requirements, local law issues and a different cost version that, like the NEC and IChemE versions, creates
allocation of risk. a mechanism where parties share savings and are therefore
incentivised to cooperate in finding innovative solutions. In
Under the FIDIC Red Book form, there is a value engineering addition, the target cost contact (unlike other versions of the
provision which allows the contractor to submit written approvals to Infrastructure Conditions of Contract) includes a value engineering
accelerate completion, reduce the cost to the employer of executing, clause which requires the contractor to liaise with the Engineer to
maintaining or operating the works or improve the efficiency or value identify, explore and propose value engineering initiatives that may
to the employer of the completed works, or otherwise be of benefit provide overall cost savings in carrying out the works. Such cost
to the employer. This is therefore defined in wide terms and includes savings do not result in the target being adjusted, which means the
any benefit for the employer. Where there is such a proposal then parties share the savings.
that is approved through the variation procedure and if the approved
proposal includes a change in the design of the Permanent Works, The guidance notes to the ICC target cost version point out that
then the contractor takes risk of design of that part. this is meant as an incentive to stimulate the tabling of cost saving
opportunities. Helpfully, the notes point out that it is essential
Under the Red Book version, the contractor is incentivised to make that proper processes are established to log and assess proposals
such proposals because a fee is payable where the change results in a in a structured and timely manner, recording the benefits, direct
reduction in the contract value. The fee is fixed in the standard form or indirect costs, impact of design changes on the overall project
at 50% of the difference between the reduction in contract value and the total effect of every opportunity. While the guidance notes
resulting in the change and the reduction in the value to the employer are not part of the contract, they highlight the need to have a full
of the varied works taking account of any reductions in quality, understanding of any proposals in the wider context of the project
anticipated life or operational efficiencies. If the reduction in contract as opposed to focusing on just the immediate cost savings.
value is lower than the reduction in the value to the employer of the
varied works, the contractor is not entitled to the fee.

5
PPC 2000, a standard form of contract for project partnering, The benefits of Early Contractor Involvement were investigated
published by the Association of Consultant Architects, also includes in “Project Procurement and Delivery Guidance Using Two
a target cost mechanism. In addition, it sets out express objectives, Stage Open Book and Supply Chain Collaboration” published
which include under clause 4.1 (iii) “innovation, improved efficiency, by King’s College London, Centre for Construction Law and
cost-effectiveness, lean production and improved Sustainability”. Dispute Resolution in 2014. This was a study of the outcomes
This identifies innovation as an objective but there is no further of UK Government Trial Projects seeking to determine whether
mechanism which deals with how innovation proposals are made the procurement and delivery models known as Two Stage Open
and whether there are specific implications on payment. Book and Supply Chain collaboration generate cost savings and
other improved value. The guidance seeks to assist parties who
Where a standard form of contract does not contain any provisions want to engage in open book two stage procurement based on
relating to value engineering or when parties use bespoke forms collaboration, having concluded that this can have a significant,
of contract, it is common to see bespoke provisions which create positive impact on project costs and other outcomes if led
value engineering proposals. A typical example for an NEC contract by a client committed to creating an integrated team and if
reads as follows: supported by clear contractual processes for the early conditional
appointment of main contractors and their supply chain. The Bank
“The contractor may propose to the project manager that the works station case study is set out below.
information provided by the employer should be changed so as to
result in a reduction to the forecast defined cost and/or result in a In 2015, NEC introduced an additional clause to be used with
saving in the time required to provide the works. the NEC3 Engineering and Construction Contract, which allows
the contractor to be appointed under a two-stage ECC contract
In such an event the contractor submits details of the proposals to before details of what is to be constructed have been fully
the project manager. The project manager shall provide details of any developed and priced. The aim is to allow the contractor to take
employer costs as a result of the proposal. part in the design development and construction planning stage
of a project, to improve team working, innovation and planning.
If the project manager accepts the proposal, he issues an instruction The clause provides a choice between the employer engaging the
changing the works information.” contractor to assist the employer’s consultant in designing the
project or appointing the contractor to carry out the design with
Such clauses can encourage innovation but their aim is to reduce assistance from the employer’s consultant. Using either approach,
costs, as opposed to encouraging innovation in its wider sense. the contractor can also be incentivised to provide a cost-effective
There are also bespoke clauses which seek to recognise the value design by sharing in the resulting savings.
of a contractor’s input into the employer’s design. Such clauses will
require a contractor to provide a design coordinator who will be Alliancing and collaborative contracts
involved in the employer’s development of the design, so that the
contractor can comment on the design using its knowledge and In 1994 Sir Michael Latham called on the industry to improve its
experience with the aim of improving the buildability of the works. conduct and to work more collaboratively (Sir Michael Latham,
“Constructing the Team”, July 1994) and the same points were
Early Contractor Involvement made in subsequent reports such as Rethinking Construction (Sir
John Egan, “Rethinking Construction”, 1998) and Never Waste a
The potential for innovation is of course greater at the early Good Crisis (Andrew Wolstenholme, “Never Waste a Good Crisis”,
stages, before the design and the commercial terms are fixed. It Constructing Excellence 2009) and more efforts have been made
is therefore important to look at opportunities at an early stage by the government in recent years to implement such approaches.
as part of the overall procurement process and, where possible,
involve the supply chain as early as possible too. That is the In addition, the Government’s Procurement/Lean Client Task
background to the use of Early Contractor Involvement as part of Group has set out its preference for collaborative contracts by
the procurement process. identifying NEC, PPC2000 and the JCT’s Constructing Excellence as
the basis for trials seeking to achieve better delivery (“Final Report
Under such a procurement method, the contractor would normally to Government” by the Procurement/Lean Client Task Group, July
be appointed under a contract to produce a design for the works, 2012). This is reflected in the growing focus on and use of alliancing
providing the contractor with the opportunity to use its skill to contracts for major projects.
ensure that the design is buildable and efficient. The contractor will
then be invited to submit a bid for the construction phase of the Network Rail has been a public advocate of alliancing contracts
works, but as he will be familiar with the works, such a bid is more and other major projects such as the Thames Tideway Tunnel
likely to reflect the true cost of the works and have less of a need to are exploring the use of alliancing contracts. The Highways
include allowances for unlikely risks. Alternatively, the employer can Maintenance Efficiency Programme has created The Local Highway
seek proposals from contractors as part of the tender process.
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Barriers to innovation
Authorities Collaborative Alliance Toolkit, a suite of documents
based on collaboration, including an NEC based form of contract.
The Government’s Infrastructure Routemap proposed the use of
alliancing contracts based on NEC (“Infrastructure Procurement
There appears to be a perception that there are certain legal
routemap: a guide to improving delivery capability”, HM Treasury
hurdles that act as barriers to innovation, and the need to
and Infrastructure UK, January 2013).
regulate IP rights or the effect of procurement regulation have
been highlighted as such barriers. A closer examination shows
In 2014, the Infrastructure Client Group, a collaboration between
that such perceived barriers do not in fact prevent innovation.
government, industry and academia produced “Improving
Infrastructure Delivery: Alliancing Best Practice in Infrastructure
Intellectual property
Delivery”, highlighting areas in which alliancing can potentially
add value and identifying what makes a successful alliance,
When innovation is successful, a question may arise as to who
seeking to support any projects which are looking to use alliancing
owns that innovation or the ideas behind it. The need for certainty
models. This was followed in 2015 by the publication of the “The
and to protect intellectual property is sometimes cited as a barrier
Alliancing Code of Practice for Infrastructure Alliancing” providing
to innovation, as parties may be concerned that they will not
further support to alliancing projects, focusing on four key
benefit from the ideas they generate.
themes identified for successful alliancing (Behaviour, Integration,
Leadership, and Commercial) as well as an a excel-based self-
In order to understand whether this is a valid concern, it is
assessment tool, to identify areas that need improvement when
necessary to review the types of intellectual property relevant
conducting an Alliance, either before or during the Alliance.
to construction and how they are protected. This in the context
of innovation occurring on site (or, in the case of software, in
In 2016, the Framework Alliancing Contract (FAC-1) was published
parallel to on site works) rather than considering research and
by the Association of Consulting Architects. It is the first standard
development taking place at head offices, in laboratories or
form of Framework Alliance Contract and it provides a multi-party
through academic links.
over-arching agreement which will cover the relationships between
the parties and set up processes in a way that does not exist under
In that regard, there are several mechanisms for protecting
current construction contracts. It can be used with any form of
intellectual property and the key routes relating to construction
construction contract as the underlying contract and it includes
are patents and registered designs. Copyright may have a role to
provisions for an alliance manager who will integrate the alliance,
play when it comes to software and unregistered designs may
monitor performance and support joint activities and a core group
provide some degree of protection in the event that a registered
to review new proposals and agree on dispute resolution. There are
design has not been obtained. Trade marks and branding may
also provisions for a shared over-arching brief among all alliance
also provide assistance after innovation has taken place, albeit
members, with separate confidential agreements of each alliance
indirectly. In addition, confidentiality regimes and non-disclosure
member’s prices and proposals and it enables additional alliance
agreements may also have a role in enabling protection whilst
members to be brought in under a standard form joining agreement.
encouraging innovation.
More specifically, the form provides for the parties to set out their
• Patents. Patents provide protection over 20 years for inventions
objectives and include success measures and targets, as well as
with industrial application as long as they are both new and
incentives. There are also provisions which deal with supply chain
involve an inventive step. Innovation in the field of construction
collaboration, which is to be used to achieve the agreed objectives
would tend to qualify as industrial application and the degree of
and improved value. Improved Value is defined to include improved
protection will focus on the novelty or inventiveness of the
cost and/or time certainty, cost and/or time savings, improved
invention. Inventions do not, however, include business methods
quality, improved operation, improved staff and other resources,
or computer programs, and it may therefore be harder to protect
improved health and safety and other resources, and improved
a new way of sequencing activities on site as compared with a
sustainability and efficiency.
novel method for laying screed. In general, a patent will be
granted to the inventors albeit ownership can be assigned and
For large projects, therefore, alliancing is an option that is
there can be multiple owners (i.e. both the contractor and the
supported by the government and is already being used, whether
developer could be named owners). It is also important to apply
under bespoke forms of contract or with the new FAC-1. Alliancing
for protection if the parties consider they have come up with a
arrangements represent opportunities for innovation, due to their
new invention.
large scale and the collaboration required of the supply chain at
main contractor level and lower down the chain.

7
• Designs. A design can be registered, to protect the appearance of employer owns the rights in innovative ideas generated by the
the whole or part of a product including its shape and supply chain.
ornamentation, if it is new and has individual character. It is not
possible to register the features required to connect two articles Under the NEC3 form, for example, there is a statement that
to enable them to function and a purely functional design cannot the employer may use and copy the contractor’s design for any
be registered. In order to register a design a series of simple forms purpose connected with construction, use, alteration or demolition
needs to be completed and filed, either at the United Kingdom of the works unless otherwise stated in the Works Information and
Intellectual Property Office or at the European Union Intellectual for other purposes as stated in the Works Information. The parties
Property Office. Even if a design is unregistered, it may still are therefore expected to consider this issue and address it in the
benefit from protection as a United Kingdom unregistered design Works Information.
or an unregistered Community design.
Other forms of contract tend to contain more detailed provisions.
• Copyright. Copyright can also provide protection for plans, Under the FIDIC form of contract (Red Book version) the
drawings and designs for construction projects (as well as works contractor retains the intellectual property and other rights in
of architecture and models prepared for a project), if the work is his contract documents and the designs that he produces, but
original and it is the expression of the idea rather than the is deemed to give a non-terminable, transferable non exclusive
underlying idea itself that is protected. With technology royalty free license to use the Contractor’s Documents. The ICC
becoming a common feature of construction, it is necessary to form of contract has a provision dealing with copyright, which
recognise that while it may be hard to obtain patent protection states that copyright in the employer’s documents remains with
for computer programs, copyright protection can offer an the employer and copyright in the contractor’s documents remains
alternative route to protection, as a literary work. with the contractor, but both parties can make further copies as
needed for the works.
• Trade marks. Another form of protection is the use of trade marks.
If an innovative party can develop a brand and intrinsically In projects which seek to promote and generate innovation,
intermesh that brand with an innovation, it may be able to prevent especially where an employer wishes to use innovative ideas across
others from using the innovation. This is not, however, a direct the project with different suppliers, it will be necessary to ensure
mechanism for protecting innovation, since a third party may be that the contracts used make it clear who owns such rights and
able to imitate the innovation under a different brand and avoid enable the employer to use innovative ideas generated by one
infringing the trade mark. Once registered, trade mark protection is supplier in works carried out by other suppliers.
indefinite, as long as the trade mark is used and the relevant
renewal fees are paid. Registering a trade mark requires a simple Procurement Legislation
online form to be completed.
Increasingly the public sector has played an important role in
• Confidential information/trade secrets. A party can also driving innovation. Yet public procurement is seen by many
protect its ideas by imposing a duty of confidentiality. By suppliers as a blocker, rather than a facilitator, of innovation. We
requiring those involved in an innovative project to keep the have identified below how procurement can be used as a means
details of the innovation secret, a party can obtain protection for of promoting and maximising innovation, before, during and after
the innovation even where it is not possible to obtain a patent, conducting a competitive process, identifying practical measures
register a design or make use of copyright protection. Contractual to encourage innovation in the supply chain and removing any
obligations to maintain confidence can therefore be used to allow perceived barriers to innovate.
an innovative party to protect its ideas even if they cannot be
protected under the usual routes described above. Public Procurement in the UK: the Regulatory Background

Protecting intellectual property rights All contracting authorities in England, Wales and Northern Ireland
are subject to the requirements of the Public Contracts Regulations
As demonstrated above, there are various ways in which parties 2015 (‘PCR’) when procuring works, services and supplies above
can protect their innovative ideas and the value they generate. the relevant thresholds set by the EU.4
Parties should however consider these issues in advance, in order
to identify whether a specific agreement needs to be put in place, In Scotland, contracting authorities are subject to the Public
for example during a tender period, or whether the standard Contracts (Scotland) Regulations 2015 (‘PCSR’) when procuring
clauses used in the standard forms actually reflect the parties’ above the relevant thresholds. It should be noted that, in Scotland,
intention. In particular, an issue may arise as to whether the while the PCSR apply to contracts above the thresholds set by the

4
For a central government bodies this is currently £164,176 for services and £4,104,394 for works. For other authorities, this is £164,176 for services and £4,104,394 for works.
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8
 Innovation in the Supply Chain

EU, the Procurement Reform (Scotland) Act 2014 (‘PRSA’) apply Early market engagement creates the potential risk of suppliers
to: (i) public services and supply contracts with a value of £50,000 who engage with the authority having a competitive advantage
or above or (ii) public works contracts with a value of £2 million or by giving them access to information which others may not get.
above. The PRSA introduces additional obligations for all regulated The contracting authority should therefore seek to manage this
procurements. For example, it is worth noting in the context of risk by keeping a record of all documents shared throughout the
this note that the PRSA imposes a duty on contracting authorities, engagement process and by putting steps in place to ensure that
before carrying out a regulated procurement, to consider how in the specification is not biased towards a particular bidder and
conducting the process it can promote innovation.5 by ensuring that timescales in relation to the subsequent tender
process allow adequate time for those bidders who have not been
Although there are some minor variations between the regimes in involved in the engagement process to consider all information
Scotland and the rest of the UK (such as those noted at section 2.2 provided and formulate a bid.
above), the rules in both jurisdictions are largely the same.
A conflict of interest issue could therefore arise if a supplier
Pre-procurement: Encouraging Innovation through Early has participated in both the early market engagement and the
Market Engagement actual tender process. Although case law has concluded that
the company involved in the preparatory design could not be
A key requirement for a public procurement process geared automatically excluded from submitting a bid,8 there are measures
towards innovation is sound market intelligence and preliminary a supplier should implement to ensure they are in the best position
market consultations are consistent with an authority’s duties to to both demonstrate that no conflict exists and to defend its
ensure adequate competition and value for money, and enables position if other bidders suggest otherwise.
dialogue with the market before the restrictions of a formal
tendering procedure are in place. These measures include separation measures to ensure those
involved in the early market engagement are removed from those
The PCR make specific provision for pre-market engagement who will be bidding downstream. These measures should then be
in regulation 40-41 and early market engagement is actively clearly demonstrated to the contracting authority and assurances
encouraged by the UK Government.6 For example, Crown sought that the authority does not feel there are any conflict of
Commercial Service guidance states that central government interest issues. A record should then be kept of any correspondence
is encouraged to make greater use of Prior Information Notices between the supplier and contracting authority on the issue of
or speculative notices if they relate to a specific procurement or conflict of interest.
industry sector-specific market engagement activity, to promote
early market engagement. When sharing innovative ideas, potential bidders also need to be
aware of the local authority’s obligations under the Freedom of
Information Act 2000. If a third party makes an information request
Innovation through early market engagement can be encouraged
to the local authority, a bidder may find its novel and commercially
practically by a contracting authority through the use of a
sensitive information disclosed to a wider audience. While this may
“competition of ideas” (disseminating problems or issues to the
put some bidders off from sharing such information, the risk of
market and seeking proposals), Prior Information Notices (putting
disclosure can be mitigated somewhat by encouraging authorities
the market on alert to the authority’s requirements) and holding
to enter into a form of a Non-Disclosure Agreement.
“potential bidder conference”, an open invitation to potential
bidders to attend a day where they can present views on the
Outcome based specifications
commercial and technical aspects and risks of the procurement.
Following pre-tender engagement, authorities will issue a
Pre-market Engagement: the Risks and How to Mitigate Them
specification as part of its call for tenders. Authorities should
be encouraged to frame these in such a way so as to encourage
Both contracting authorities and potential bidders must also,
innovation from bidders. Best practice is for specifications to
however, be aware of the potential risks associated with pre-
contain a clear articulated requirement, taking into account criteria
tender engagement. Authorities must be fully aware that in relation to the capabilities of providers, informed through
they are bound at all times of the process, including any pre- early market engagement. Authorities should use outcome or
tender engagement, by the principles of equal treatment, non performance based specifications as much as possible. Innovations
discrimination, transparency and proportionality.7 Therefore, the may be less likely where specifications are too narrow or rigid. An
contracting authority must engage with the market generally (not outcome based specification should focus on the desired outputs
just a particular supplier or group of suppliers) to guarantee a level of a service in business terms, rather than a detailed technical
playing field for all potential bidders and ensure the process is fair, specification of how the service is to be provided, unless this is
open and transparent. necessary. This allows providers scope to propose innovative

5
Section 9, Procurement Reform (Scotland) Act 2014
6
See Crown Commercial Service guidance, “Public procurement policy” First published 1 October 2015, updated 8 June 2016
7
Directive 2004/18/EC, recital 2.
8
Case C-21/03, Fabricom SA v Belgian State [2005] ECR I-1559 9
solutions.9 As noted in CCS Guidance, by specifying outcomes rather The PCR define “innovation” as “the implementation of new or
than a solution, contracting authorities allow room for innovation significantly improved” products, services or processes, which
to create new and better options. Authorities should be encouraged would include (but is not limited to):
to strike a balance between a specification which sets out clear • production
guidance to bidders and leaves enough scope for the proposal
• building and construction
of alternative solutions. Innovation may further be encouraged,
depending on the nature of the contract, by dividing complex • a new marketing method
projects into smaller parts, to allow bidders the opportunity to • a new organisational method in business practices, workplace
devise novel solutions in relation to specific components. organisation or external relations.

Securing Innovation During Selection This broad definition however will cover a wide range of
procurements, from development of a single specialist product
The PCR provide for the following procurement procedures: to, potentially, major outsourcing arrangements. The new or
• The open procedure. significantly improved products, services or processes should
be implemented with the purpose of helping to “solve societal
• The restricted procedure. challenges” or support the Europe 2020 strategy. From a practical
• The competitive dialogue procedure. perspective, the contracting authority will need to have a clear
• The competitive procedure with negotiation. audit trail demonstrating how the proposed arrangements achieve
this objective and fall within the definition of “innovation”.
• An innovation partnership.
The Innovation Partnership procedure permits the contracting
For major projects, the competitive dialogue or competitive
authority to appoint one or more ‘innovation partners’ who work
procedure with negotiation are ordinarily used. These procedures
in parallel to undertake innovative development work. The number
allow for some flexibility in relation to innovation, for example
of partners can be reduced over time. At the end of the research
by providing for discussions with shortlisted bidders to allow
phase, the contracting authority will have the option to purchase
for further development of ideas. When using these procedures,
the innovative supply, service or works developed as a result of the
the contracting authority can plan the dialogue phase carefully
Innovation Partnership.
to provide for innovative solutions as far as possible. The
contracting authority can do this by establishing a clear code of
practice for conduct of the dialogue phase, the evaluation criteria Competitions under the innovation partnership procedure will
(Regulation 67 of the PCR now provides some examples of award be governed by effectively the same rules that apply to the
criteria contracting authorities may apply, including “innovative Competitive Procedure with Negotiation, including an OJEU
characteristics”;10) and the Methodology for ensuring tenderers notice. The documents must identify the need for the ‘innovative’
need to have access to the information and explanations necessary product, service or works and the process of selecting the
to allow them to submit substantially unconditional tenders. parties who will enter into the Innovation Partnership is very
similar to the Competitive Procedure with Negotiation. The key
differences include that during pre-qualification/selection stage,
Innovation Partnerships
the contracting authority must apply criteria which addresses the
tenderer’s capacity in the field of research and development and of
The PCR set out a new procurement procedure known as
developing and implementing innovative solutions. Namely, this
Innovation Partnerships. The purpose of this procedure is to
stage is designed to assess capacity rather than experience, so as
establish long term partnerships which allow for both the
not to rule out the involvement of start-ups.
development and subsequent purchase of new and innovative
products, services or works.
Once identified, those tenderers will then submit research and
development projects which will be evaluated in accordance with
Under this route, high level project proposals are submitted during
the award criteria communicated to tenderers and the procurement
the tender process and the solutions are subsequently developed
documents must set out the arrangements envisaged in relation to
post-entering into the contract(s) with the successful tenderer(s).
ownership and licensing of intellectual property rights.
This is in contrast to the Competitive Dialogue procedure where
dialogue is required to continue until the contracting authority
identifies the solution that best meets its needs. Those selected to enter into the Innovation Partnership shall
develop the innovative product, service or works and the
contracting authority will purchase the results, always adhering
The process can only be used in limited circumstances, where
to the performance levels and maximum costs agreed between
the goods, works and services that are sought are “innovative”and
the contracting authority and the appointed partners. The
there is an intention to include both the development and estimated value of the supplies, works or services must not be
purchase elements in the procedure, provided they correspond to disproportionate in relation to the value of the investment required
agreed performance levels and maximum costs.

9
See Crown Commercial Service guidance, “Public Procurement Policy” First published 1 October 2015, updated 8 June 2016
10
Regulation 67(3)(a) Public Contracts Regulations 2015
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 Innovation in the Supply Chain

for their development. This requirement seeks to avoid the abuse Even if the UK exited the Single Market completely, the UK
of the procedure and limit the quantum of the award to an amount would still need to ensure a fair and transparent cross-border
that is essential to incentivise the development. procurement system if it wanted (as it almost certainly would
do) to maintain its membership of the WTO’s Government
Finally, the reference to the term ‘partnerships’ in this procedure Procurement Agreement (GPA) and thereby access for its national
does not mean a legal partnership. The term is used to indicate the suppliers to other governments’ procurement markets (e.g. the
partnering type approach to working together. USA, Canada, China and Japan). Given that the UK regulations
which implement the EU procurement rules comply with the GPA
The Innovation Partnership procedure became available on 26 requirements, it would seem unlikely and arguably unnecessary for
February 2015 and there has been an uptake by public bodies in the UK to alter its domestic procurement regime.
relation to its use. For example, the procedure has been used in
relation to procurement of data collection and collation services In the short term, organisations bidding for competitions which
and road construction works. Contracting authorities should be are in the very late stages should consider whether any changes to
encouraged to use the procedure where appropriate. Although their submitted financial or commercial proposals are required in
the Innovation Partnership arguably offers very similar flexibilities light of changes to the economy and recent slide in the property
to the competitive dialogue and competitive procedure with market. With the current uncertainty impacting business priorities,
negotiation in relation to the procurement process, the use of a contracting authorities and utilities may need to review current
procedure with innovation as its key incentive sends a message to live projects which may in turn lead to a need to reshape projects,
the market in relation to the authority’s objectives in this regard. such as scaling back scope or duration. Those bodies need to
ensure such modifications are handled in line with the current
Encouraging Innovation after Contract Award UK procurement regime. Authorities and Utilities should also be
prepared to handle changes in the bidding pack as businesses
Post – contract award is generally the most difficult point in a weigh up their response to an exit of the EU, which might include
procurement to encourage innovation. Nevertheless, it can be companies dropping out of bidding for contracts or changes in
possible to “future-proof” contracts to encourage innovation, for
consortium membership.
example by way of a clear, unequivocal review clause which sets
out the circumstances in which the contract can be varied.11
Conclusion
Brexit
As explained above, procurement legislation should not be seen
The position following Brexit has resulted in some uncertainty. as a barrier to innovation. There are a number of high level steps
The Public Contracts Regulations 2015, the Utilities Contracts which a contracting public body could take to capture innovation
Regulations 2016, and the Concessions Contracts Regulations 2016 through procurement. Such public bodies need to balance the
(and their Scottish equivalent) recently implemented the new EU requirements set out in the PCR with the need to provide for
Procurement regime. Until repealed or reformed, this legislation will flexibility in the procurement process to facilitate innovation.
continue to regulate procurement in the UK. If the UK negotiates a Any arrangements put in place should be coupled with an extra-
free trade deal with the EU with access to the Single Market, it would contractual culture that encourages and supports innovation, for
need to adopt the EU procurement rules. That being the case, there example through the use of procurement strategies and policies
would be no impact on the current UK procurement regime which which actively encourage this, with an appropriate risk appetite.
already implements those EU rules. The introduction of innovation partnerships is to be welcomed
and provides further support for the growing recognition of the
importance of innovation.

11
Regulation 72 of the PCR provides that contracts and framework agreements may be modified without a new procurement procedure where the modifications, irrespective of their monetary
value, have been provided for in the initial procurement documents in clear, precise and unequivocal review clauses.

11
Defining innovation
Sloane suggested that for open innovation to succeed, support
is required from the top level of organisations as responsibility
cannot simply be allocated to R&D. OI is difficult to implement
for two key reasons, the first of all being that it is not enough for
Fairclough12 stated that a narrow definition of construction
one company to adopt the mindset, the alteration must occur
research does not serve the industry. A broad definition however is
likely to be complex due to the plethora of stakeholders within the throughout a supply chain if the principles are to be implemented
industry and variety of views, a single encompassing definition may successfully; thus preventing a give and take scenario. The second
be difficult in regard to achieving agreement. issue is the tradition within the industry of fiercely shielding
intellectual property and disregarding unconventional external
As far back as 1934, Schumpter13 recognised that innovation ideas. OI is a collaborative production and exchange of knowledge
could consist of transforming an already invented process into a across organisational boundaries.
commercially viable tool. This highlights that an innovation is not
necessarily a new process or product. Lee14 argued that there is
no single definition of innovation due to its complex and dynamic
Organisation Organisation
nature however he attempted to in general terms, describing
innovation as the creation and adoption of new knowledge for the
purposes of improvement. DTI (2007)15 described innovation as the
successful exploitation of new ideas and a key process to compete in
an increasingly competitive global market. Also, the OECD (2005)16
Innovation Innovation
differentiate technological and non-technological innovation. Source Source
It can be said that an innovation definition varies upon context. DTI
for example indicate that the process of innovation within services
differs from that of manufacturing and so it can be sensibly
concluded that the construction industry has a unique innovation (Sachidanandam, K.(2013), Is managed innovation an oxymoron?
process. In 2008 the UK Government released a paper titled Management Exchange)
‘Innovation Nation’17 in which the changing face of innovation is
referred to, suggesting that innovation itself is not static but a Sloane states that once you have identified partners to work within
dynamic process which alters and evolves with time. an innovation project you need to consider these steps:

Open Innovation Area Step

Clarity Each party should define what it wants to get out
Chesbrough18 suggests that open innovation (OI) is a paradigm shift of the relationship.
that assumes organisations can and should use external ideas in
Who owns the intellectual property in the
addition to internal ideas, utilising both internal and external routes
to market to advance their technology. Sloane19 emphasised the partnership must be clear.
benefits of OI, stating that engaging with external companies and Each side should allocate a senior person with
organisations can reduce time to market, decrease costs, introduce overall responsibility for success of the partnership.
new ideas and speed up processes. Collaboration does not occur in Key expectations, obligations and milestones
isolation and knowledge flows with the market thus there is strong should be established early.
argument to suggest that external organisations are acknowledged.
Culture Honesty and trust is built on clear communication –
Sloane stated there are four distinct classifications of OI [Table 1]. especially when objectives look likely to be missed.
Contract A good legal contract should be in place.
Table 1: Open Innovation Typology

Type Description 12
Fairclough, J. (2002), Rethinking Construction Innovation and Research, Department of Trade
and Industry, London
Suggestive/ A company encourages anyone to submit an
participative idea and to review and rank ideas from others.
13
Schumpter, J.A. (1934), The Theory of Economic Development, Harvard University Press,
Cambridge
Suggestive/ Anyone can submit suggestions for very specific 14
Lee, A; Wu, S; Cooper, R; Aouad, G. (2000), The Process Protocol, A Solution for the Problems
participative challenges. of Construction, In: Proceedings of the international conference of business ethics, New York
Suggestive/ The sponsor company invites specific 15
DTI (2007), Innovation in Services, Department of Trade and Industry, London
invitational individuals, teams or companies to contribute 16
OECD; 2005; Oslo Manual
ideas on very broad topic areas. 17
Department for Innovation, Universities and Skills, Innovation Nation, 2008

Directed/ The company invites specific individuals or

18
Chesbrough, H. (2003), Open Innovation: The New Imperative for Creating and Profiting
from Technology, Harvard Business School Press
invitational partners to respond to specific challenges or
requests.
19
Sloane, P. (2011), The Brave New World of Open Innovation, Strategic Direction, Vol.27,
No.5, pp3-4
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 Innovation in the Supply Chain

A conceptual model of
One way of conceptualising tacit knowledge is to see it as a
common-pool resource, that is, an economic resource, access to
which is shared among a group of actors. The sustainability of the

supply chain innovation resource is threatened by the tragedy of the commons (Hardin,
1968), that is, the tendency for each individual party to look only
to their own interest when taking from the resource. If each party
looks only to themselves there will be an incentive to withhold
The aim of this section is to develop a model information which could lead to an innovative outcome. This is a
of supply chain innovation using concepts version of the collective action problem (Ostrom, 1990).
drawn from the economics of collective action
The collective action problem
(Ostrom, 1990) and contracting (Williamson,
1985, 1996). This exercise can be useful in The collective action problem can be characterised as a social
clarifying the issues at stake in the design of dilemma (Poteete et al., 2010). In a social dilemma, the parties know
that they can realise a common goal by cooperating. However, they
contracts and procurement processes. cannot be sure in advance of each other’s willingness to cooperate.
In the prisoner’s dilemma game (a type of social dilemma), it is
The basic problem individually rational for each party to ‘defect’ (withhold cooperation)
even though collectively they are then worse off. The point is that it
The problem is that innovation, by its nature, involves a departure is always rational to defect if each party expects the other to do so;
from existing uses of materials and technology, and hence a high
and vice versa. Mutual defection is then assured.
element of uncertainty, and an additional risk of things going
wrong. High risk and uncertainty make it impossible to write a
contract that will specify exactly what will be done to generate In the context of supply chain innovation, it may well be individually
innovation, or to stipulate what the outcomes from innovation will rational for each party to withhold from the other knowledge needed
be. Thus the contract will be necessarily incomplete. for innovation, for fear of the other capturing a disproportionate
part of the gains from that innovation. The result is that neither side
This does not mean that the contract cannot be designed in a way shares their knowledge and so the chance of innovation is lost.
which will promote innovation. The contract can allocate risks
and determine rewards in ways which will promote cooperation A further relevant concept is that the collective action problem
between the parties. However, while virtually all contracts require gets worse as the scale and complexity of contractual relations
cooperation, not all are aimed at achieving innovation. In order to increase. The logic of collective action suggests that collaboration
promote innovation, the contract needs to go beyond establishing
becomes more difficult as groups increase in number and size. The
a framework for cooperation; it should also create incentives
for learning, since it is only by generating new knowledge that structure of a multi-party civil engineering project, with multiple
innovation will be achieved. parties arranged in vertical tiers of contractual relationships, may
provide a good example of this problem.
Knowledge as a common pool resource
Solutions to the collective action problem
The knowledge on which innovation depends is partly formal and
technical in nature, and partly tacit and process-related. Formal The risk of defection may be reduced if the parties engage in
knowledge can be embodied in intellectual property rights such as repeated trade, as they will then have incentives to maintain
patents and trade secrets. Controlling knowledge of this kind can good relations for the sake of future relationships. However, the
be critical to the ability to generate new innovations, as well as prospect of continued trading is not enough, in itself, to guarantee
capturing supra-competitive profits (‘rents) from existing ones. In cooperation. Contracts with a finite end point are particularly
principle, where IP rights are clearly specified, the parties can contract vulnerable as the parties reach the ‘end game’ towards the life of
to share the use of them in ways which will generate a return.
the relationship. Since civil engineering contracts tend to be for a
limited period and are mostly project-specific, the risk of non-
However, tacit knowledge bound up with processes and
relationship may in practice be just as important in triggering cooperation is particularly high in this sector.
new innovations. This knowledge may exist at the level of
understandings, or common knowledge among a group of A fully specified contract might, in principle, solve certain social
managers or engineers on a site, and may be difficult to access. It is dilemmas. If a third party, in the form of a court, can impose an
likely that the kind of knowledge needed to generate innovation in appropriate sanction against a party who commits a breach of
supply chains will be at least partly tacit in this sense. contract, both parties’ incentives may be altered in such a way as
to make a ‘win-win’ outcome more likely. One problem with this
By its nature, tacit knowledge cannot be reduced to IP rights which approach is that the parties involved in an innovative project may
are fully specified. Those with tacit knowledge may be reluctant not be able to write the perfect contract in advance; they simply
to share it if they cannot be sure that they will also share in the won’t have the information they need to describe the expected
incomes generated from doing so, but writing a contract to ensure outcomes. A further problem is that even if the contract could
this will be difficult.
specify every eventuality, and the sanction needed to rectify
13
defection in each case, it would still have to be interpreted and remain private, but which, once disclosed, increase the scope for
enforced by a court or other third party. Where the performance of mutual gains. This then provides the framework for the informal
the contract depends on tacit information, there is a risk that the contractual collaboration which is the immediate source of
court will interpret events differently from the parties’ expectations. innovative product and process outcomes. The underlying idea is
that the formal and informal aspects of contract can complement
Reputation may provide an alternative sanction to court each other in providing a framework for the establishment of ‘trust’.
enforcement but in a situation where knowledge is specific to a
particular contractual setting or relationship, it may not be obvious Various formal elements can be used to foster information
to the court which party is to blame for a contract going wrong. exchange. These include express contract terms providing
Nor do all disputes get to see the light of day. for liability-sharing and risk-pooling, benchmarking, and
error correction (Helper, MacDuffie and Sabel, 2000). Formal
Litigation may trigger the availability of a sanction and may also mechanisms for dispute resolution, involving an appeal to a higher
help spread reputational effects, but is expensive and uncertain, so body such as an industry body or a forum or panel drawn from
creating an additional risk for the parties. firms involved in a particular collaborative venture, are also widely
observed in this type of arrangement.
Types of contract
The informal elements of the collaboration may take the form of the
Despite these difficulties, contracts are very widely used to adjustments which the parties make in the lights of the problem and
mitigate the risks of non-cooperation. The literature on the issues they encounter over time. Collaboration can be generated in
economics of contract suggests that different types of contract will the presence of reputational costs of non-cooperation, and by the
work best in particular commercial settings. private sanctions which can be deployed against any party which
chooses to withdraw its goodwill from the collaboration.
Where the parties have complete information and a high level
of confidence that their agreement will be enforced, a classical However, ‘braided’ contracts are not entirely informal: the formal
contract may be agreed. This is one which specifies in detail what elements of the contract help sustain a ‘niche’ or environment
each party must do at every stage of their relationship. It will also within which mutual cooperation comes to be seen as each party’s
specify sanctions for breach of contract, for example in the form of best response to the likely actions of the other (Gilson et al.,
liquidated damages clauses. 2009). The function of the contract is to institutionalize a learning
process through which trust is built and the risks of opportunism
At the other extreme is a relational contract in which the formal minimized (Jennejohn, 2008).
agreement is deliberately left open-ended and incomplete. This is
to allow the parties to adjust the contract over time, in the light of There is evidence to suggest that the contracts governing
changing circumstances (Campbell and Harris, 2005). It is also to innovative collaborations increasingly display the properties of
encourage them to resolve disputes between themselves, or with ‘braiding’. In the US context, Gilson et al. (2009a, 2009b) and
the help of mediation and/or arbitration, in preference to having Jennejohn (2008 2010), refer to contracts of this type involving
to resort to litigation. A relational contract is sometimes said to be pharmaceutical collaboration and licensing agreements,
the most appropriate model for mega-projects involving multiple the supply of precision engineering components for use in
parties (Ballard and Howell, 2005). agricultural machinery, and the supply of parts used in computer
manufacturing and aeronautical engineering. In the UK context,
However, relational contracts are not completely self-enforcing. contracts governing large-scale construction and engineering
They do not work in the absence of trust between the parties. projects exhibit similar features (Caldwell, Roehrich and Davies,
Trust can be understood as a propensity of contracting parties to 2009; Deakin and Koukiadaki, 2009). The NEC standard form
engage in cooperation for mutual gains beyond the explicit terms contract could be said to have ‘relational’ or ‘braided’ features, and
of their agreement. Trust may be generated by successful dealings the concept can also be applied to contract forms which support
in the past. However, it cannot be assumed to exist in the context project partnering such as PPC2000 (Trowers and Hamlins, 2005).
of complex projects in which many things can go wrong and where
the past will not be an infallible guide to future conduct. Governance structures

One possibility is that the formal elements of a contract can be The literature on relational contracts suggests that for them to work
used to generate trust between the parties, and thereby induce the they may need to be embedded in a wider governance structure
elements of relational contracting, including knowledge-sharing, which seeks to create the conditions for information and risk sharing
on which innovation depends. This intertwining of the formal and (Colledge, 2005). Examples could include the series of framework
informal elements of contracting is sometimes called braiding. agreements which underpinned the construction of Heathrow
Terminal 5 (the ‘T5 Agreement’) and the ‘alliancing’ arrangements
‘Braiding’ involves the use of a formal agreement to establish a recently agreed for the Thames Tideway project (82O).
procedure or framework for collaboration, within which parties
have incentives to exchange information that would otherwise
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 Pinsent Masons | Innovation in the Supply Chain

Procurement

The way in which contracts are procured may influence the

nature of the environment for innovation. As we have seen, early
contractor involvement (ECI) is one of the practices which may
allow for information sharing in advance of the final contract being
agreed, and may help generate trust.

Conclusions

The preliminary conclusions to be drawn from this review of the

conceptual and theoretical literature on contracts are:
(i) Innovation in complex projects depends on the sharing of
knowledge between the contracting parties.
(ii) The knowledge base of a complex project is akin to a common
pool resource which gives rise to the danger of free riding.
(iii) The logic of collective action suggests that the risks of free
riding increase as projects involve more parties and additional
layers of contracting.
(iv) Contracts are only a partial solution to the collective action
problem.
(v) Relational contracting may be preferable to more traditional
‘classical’ contracting but the ‘braiding’ of formal and informal
elements of contract seems more likely to work than a
completely informal contracting framework.
(vi) Standards forms such as NEC do not correspond exactly to the
concept or ideal type of a ‘relational’ contract.
(vii)Bespoke governance structures such as T5 and 82O, and
flexible procurement practices such as ECI, may have a role to
play in promoting knowledge sharing in innovative projects.

15
A conceptual model for innovation in the construction The relationship between contract formality and uncertainty can
supply chain be represented as in Figure 1. There is not necessarily a trade-
off between them. The Terminal 5 agreement represents an
In the context of complex projects characterized by a high level arrangement under which a non-binding framework agreement
of uncertainty and the presence of multiple parties operating at is used to provide an overall structure for a complex, multi-tiered
different tiers of the contracting process, contracts can help ensure project, within which many of the agreements made between
effective project outcomes in various ways. Contract terms, when different firms would have been legally binding. The T5 agreement
coupled with a particular approach to procurement, can be used has elements of the non-binding ‘relational’ contract which is
to encourage risk identification and transfer, information sharing, consistent with the idea of ‘braiding’ (Gilson et al., 2011).
gain/pain sharing, and partnering. The benefits for the parties
include greater transparency on pricing at the tendering stage and At the other extreme are more traditional standard forms such
collaborative behaviour (or the absence of adversarialism during as the JCT and ICE, which attempt to spell out the terms of the
performance. These benefits do not guarantee successful project agreement in full on the basis that the parties have complete
outcomes but there is evidence that their presence may make it knowledge of the contract at the time of contracting. These forms
more likely that complex projects will be completed on time and may well be an appropriate model for contracts characterized by
on budget (see Table 2). a low level of uncertainty and will more generally be useful to
parties who are familiar with them. They are still widely used in the
Table 2. Key variables in complex projects industry which suggests that they have a continuing value. How
far they can be used to support risk-sharing in complex projects,
Sources of Contractual Behavioural
particularly those involving innovation, can be studied empirically.
complexity devices outcomes
Uncertainty Risk identification Transparent pricing If the idea of a trade-off makes sense when considering the
and transfer contrast between T5 and ICE/JCT, it has less resonance when
Multiple parties Collaboration in
Information sharing performance contract forms such as PCP2000 and NEC are considered. Both are
examples of contracts which are relatively formal and which are
Gain/pain sharing intended to give rise to legal effects, but in each case the formal
Partnering contract is used to generate outcomes which are consistent with
a high level of trust between the parties, including risk transfer,
Figure 1. Standard contract forms characterized by uncertainty information exchange, gain/loss sharing, and partnering. The idea
and formality that contract formality may be consistent with trust-building
needs to be studied in more detail through new empirical analysis.
T5 Agreement
Framework Agreement
Information sharing in the context of innovation gives rise to a
‘social dilemma’ in which the individual interests of the parties
FAC-1 are at odds with their joint or collective interests (Ostrom,
Alliance Agreement
1990; Poteete et al., 2011). Thus individual firms will not have
PPC2000 incentives to seek out innovative solutions to technical problems
Partnering Agreement if they think that their investments will be appropriated by other
Uncertainty parties ‘free riding’ on their work. This problem can be alleviated
NEC C by the possibility of repeat trading between the parties and by
2-phase ECI gain/pain share
reputational effects, but it may be that contracts have a role
ICE
Design and build
in altering incentive structures, for example via ‘gain sharing’
mechanisms which allow both parties to benefit from an
JCT innovative solution.
Fixed price

Formality
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 Innovation in the Supply Chain

Results and Analysis

eventualities’: almost 75% of respondents said that they ‘strongly
agreed’ or ‘agreed’ with this statement. Nearly 70% strongly
agreed or agreed with the statement that the contract should
set out penalties for late performance. Over 50% were in strong
Empirical analysis
agreement or agreement with the statement that contracts should
be strictly enforced according to their terms, and over 90% agreed
In this part we set out the results of our empirical analysis. This
or strongly agreed with the suggestion that having a clear contract
consisted of three parts:
would help to resolve a dispute if things went wrong.
(i) A survey of around 120 industry practitioners conducted
between March and June 2016. By contrast, there was little agreement (less than 20% agreeing
(ii) Interviews with practitioners. Ten in-depth interviews were or strongly agreeing) with the statement that ‘it is better to have
conducted. Interviewees were selected through industry a framework agreement than a legally binding contract’, and
contacts. with the statement that ‘the contract is not important once work
(iii) Four focus groups with 20 or more participants in each case begins’ (less than 10% agreeing or strongly agreeing).
were held periodically during the year-long life of the project.
The participants in the focus groups were practitioners from a These answers suggest that industry practitioners placed a high
range of backgrounds in the civil engineering and construction value on contracts which were detailed, clear and enforceable. They
industry, including engineers, lawyers and other consultants, do not appear to have regarded contracts as loose frameworks.
officials of trade associations and industry bodies, and They expected contracts to be referred to during the life of projects
government officials. The focus groups lasted in each case for and in particular for the resolution of disputes. Thus contracts were
two hours and provided an opportunity for open-ended not seen as formalities, to be filed away once work begun.
discussion of themes emerging from the research.
At the same time, there was strong support for the idea that
We report two types of results: contracts should be renegotiable if circumstances changed (nearly
50% agreeing or strongly agreeing) and with the suggestion that
(i) Quantitative results based on the survey
the contract should be one with which the parties were familiar
(ii) Qualitative results based on the interviews, survey responses, with from previous dealings (just over 50% agreeing or strongly
and focus groups. agreeing). These answers suggest that practitioners thought that
contracts should be flexible enough to allow for renegotiation.
Quantitative results They also suggest that support for the idea of contracts as
mechanisms of planning and dispute resolution was tempered by
The survey was designed to obtain information on the perceptions a realisation that contracts needed to allow for flexibility and that
of industry participants of current and evolving contractual experience of using a contract mattered as well as its formal terms.
practice, and of the role played by contracts in promoting trust and
innovation. We wanted to test a number of hypotheses suggested The evolution of contractual practice over time: are contracts
by the conceptual model, existing case studies of industry practice, becoming more collaborative?
and the wider literature on contracting.
As we have seen, the standard form contracts used in the construction
Respondents were invited to consider a number of statements industry have undergone a major change in recent years, with the
and to express their agreement with them using a five-point scale supposedly more collaborative and clearly drafted NEC model
according to which they could answer either ‘strongly agree’, displacing, to a large extent, the supposedly more adversarial and
‘agree, ‘not sure’, ‘disagree’ or ‘strongly disagree’ in some cases, or traditionally drafted JCT agreement. NEC replaces the ICE conditions
‘very important’, ‘important’, neither important nor unimportant’, of contract, which were previously used for civil works . JCT is not used
‘not very important’ or ‘not at all important’ in others. for civil works but has always been used and is still the most used
contract for buildings including residential accommodation, offices,
Expectations of contracts: formality versus flexibility hotels, and hospitals. With this in mind, our second set of questions
was designed to find out how far industry practitioners perceived a
The first set of hypotheses we explored related to practitioners’ shift towards more collaborative contracting.
expectations of contracts. Did they see contracts as devices
for planning the performance of the work in detail and being Figure 2 shows that there was a high level of agreement to the
strictly enforced, as would be suggested by a ‘classical’ approach effect that contracts had become collaborative over time, with
to contracting, or did they, alternatively, see them as looser, over 60% agreeing or strongly agreeing). If this is evidence of a
‘relational’ arrangements which should be flexibly interpreted and shift towards a more collaborative and clearer type of contract
enforced? of the kind represented by the NEC, other responses suggest that
this move has not been without costs as well as benefits. Thus the
Figure 1 reports results from the questions we designed to statement that ‘contracts are more clearly drafted than they used
throw light on these issues. It shows that there was a high level to be’ elicited more agreement than disagreement overall (46%
of agreement with the idea that ‘the contract should cover all
17
agreeing or strongly agreeing versus just under 20% disagreeing There was a positive overall association, but a weaker one, between
or strongly disagreeing) but over a third of respondents stated trust and ‘being prepared to give and take’, ‘being willing to exchange
that they neither agreed nor disagreed with this suggestion. business information’ and ‘being willing to share business risk’. In
A similar pattern is found in responses to the statements that each of these cases, only around 50% of respondents regarded the
contracts are more flexible than they used to be and that they are practice in question as important or very important to trust.
more important to the success of projects. Thus the evidence for
contracts becoming more flexible and useful to the life of projects These responses imply that practitioners place great emphasis on
as they also become more collaborative is, at best, equivocal. informality and flexibility in promoting trust, but they value strict
performance of contracts as a mechanism for establishing trust.
Then there was a set of statements with which respondents on This suggests that contract and trust may be complementary to
the whole registered disagreement. Over 40% of respondents each other.
disagreed or strongly disagreed with the suggestion that less
time was spent reading contracts in the past, compared to 25% The responses also indicate that sharing risk and information has
agreeing; nearly 40% disagreed or strongly disagreed with the a positive association with trust, but a weaker one than either the
claim that there were fewer contractual disputes than there used strict performance of contracts or informality and flexibility in
to be, in comparison to under 20% agreeing; and 50% disagreed contractual dealing. This can be read as suggesting that the sharing
or strongly disagreed that parties were now more aware of their of information and risk is not a straightforward route to building
contractual rights and obligations, with just over 30% agreeing or trust in general, or at least not in all contractual settings.
strongly agreeing.
The relationship between contracts and innovation
These answers imply that the move to a more collaborative
The final part of the questionnaire was concerned with finding out
contractual model has not been without its difficulties. A significant
how far respondents associated particular contractual practices
proportion of respondents, while recognising that a shift in
with innovation. Figure 4 shows that there are very high levels of
contractual practice had occurred to a more collaborative and more
association of innovation with having a flexible contract, sharing
clearly drafted contractual model, were equivocal on whether this
the costs of innovation, sharing gains from innovation, sharing
had resulted in contracts becoming more flexible or more important
information on risks, and discussing problems as soon as they arise:
to the way projects were completed. A majority of respondents
in each of these cases, over 80% of respondents reported that
did not associate the move to greater collaboration with contracts they saw the practice in question as important or very important
becoming less detailed or with them becoming easier to read and to innovation, with particularly strong associations reported for
understand. Nor did most respondents think that there were fewer sharing information and discussing problems promptly. In addition,
contractual disputes than there had been in the past. over 70% thought that sharing information on products was either
very important or important to innovation.
The relationship between contracts and trust
At the same time, there was a positive association between
We next asked a series of questions about the association innovation and ‘having a clearly written contract with specific
between particular aspects of contractual practice, on the one rights and obligations’: over 50% saw this as either important or
hand, and trust in the performance of contracts, on the other. very important, compared to less than 20% which viewed it as not
In particular, we wanted to see how far practitioners associated very or not at all important. The association between contract and
trust with strictness of contract performance, on the one hand, innovation was about the same as that between innovation and
versus flexibility and give and take, on the other. We also wanted past experience of successful dealing.
to see how far they viewed trust as enhanced by the sharing of
information and risk within a contractual setting. These results suggest, firstly, that flexibility in contracting is more
strongly associated with innovation than it is with trust in general,
Figure 3 shows that there was a high level of association between and that the same is true for the sharing of information, costs
trust and honouring strictly the terms of contracts (important or and risks. They support the suggestion, therefore, that innovative
very important in over 60% of responses), performing on time projects require a particular contractual approach which places
(important or very important in over 80% of responses) and emphasis on flexibility and dialogue. At the same time, the positive
maintaining quality (important or very important in nearly 90% of association between innovation and having a clearly written
cases). These answers suggest that adherence to formal contractual contract suggests that the contract can be used as a mechanism
commitments is seen as an important way to build trust. However, for supporting flexibility, dialogue and risk sharing.
there were even higher associations with features of contractual
performance which stress the importance of flexibility and The other responses in this part of the questionnaire indicate that
cooperation: over 90% of respondents rated as either important sharing staff and the presence of a similar business culture across
or very important to trust ‘honouring informal relationships’, firms can both assist innovation (in each case around 50% of
‘engaging in dialogue at an early stage’ and ‘being ready to help respondents saw these factors as important or very important).
in an emergency’, and nearly 90% reported the same association By contrast there was a weak link between innovation and firms’
between trust and ‘being willing to overlook occasional faults’. shared membership of a business association (only just over 30%
saw this as very important or important).
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 Innovation in the Supply Chain

Conclusions from the quantitative analysis contracts easier to read or understand. Nor has it resulted in
fewer contractual disputes than in the past.
(i) A first conclusion is that industry practitioners value formal (iii) There is a strong association in the construction industry
contracts as devices for shaping their relationships during the between trust, on the one hand, and flexibility in performance,
performance of projects. They understand contracts to be legally as indicated by the practices of honouring informal
binding agreements which should be strictly enforced and do not, understandings and engaging in dialogue, on the other.
on the whole, view them as loose, non-binding arrangements. In Respondents also associated strict performance of contracts
particular they see a role for formal contracts in dispute with trust, although to a lesser degree. This suggests that in
resolution should problems arise in the course of a project. certain contexts, contract and trust can be complements.
(ii) Secondly, the survey suggests that civil engineering and (i) There is a stronger association between flexibility, dialogue and
construction contracts have been changing: they are seen as the sharing of information, risks and costs, on the one hand, and
more collaborative than they were. However, this does not innovation, on the other, than there is between these features
mean that they have necessarily become more clearly drafted, of contractual practice and trust in general. This suggests that
more flexible, or more important to the performance of innovative projects more than others require a contractual
projects: responses on these points were mixed or equivocal. It framework capable of engendering close cooperation, based on
does not appear that the shift which has taken place has made dialogue and risk-sharing, between the parties.

100% 2.80%
3.52%
2.80%
90% 18.88% 15.38% 5.59% 18.18%
15.49%
27.27%
32.17% 34.27%
80%
18.18%
29.37% 55.94%
70% 22.54%
33.57%
38.46%
60% S.agree
31.47%
24.48% Agree
50% 32.17%
43.36% Not sure

40% 35.21% Disagree

29.37% S.disagree
30% 23.78% 23.78% 59.44% 24.48%
34.97%
19.58%
20%
12.59%
9.09% 23.24% 16.08%
10% 16.08% 6.99% 18.18%
10.49% 2.80%
6.99% 8.39% 5.59%
0% 1.40% 2.10% 2.80% 0.70%
a b c d e f g h i

Figure 1: Expectations of contractual practice

Key: (a) the contract should cover all likely eventualities; (b) the contract should be familiar to the parties from previous dealings; (c)
the contract should indicate penalties for late performance; (d) the contract should be renegotiable if circumstances change; (e) it is
better to have a framework agreement than a legally binding contract; (f) the contract is less important than personal relationships; (g)
the contract is not important once the work begins; (h) contracts should be strictly enforced according to their terms; (h) having a clear
contract helps to resolve disputes if things go wrong.

19
 100% 1.41% 2.82%
9.86% 7.75% 8.00%
14.08% 11.27%
14.69%
90%
20.42% 16.20%

80%
29.58% 25.00%
23.94%
70% 35.92%
39.44%
60% 48.25% 32.39% S.agree
43.66% 17.00%
Agree
50%
37.32% Not sure
9.00%
40% 41.55% Disagree
35.92% S.disagree
30% 32.39% 30.99%
23.78% 26.76%
20% 41.00%
22.54%
16.20%
10% 15.49%
10.49% 13.38% 14.00%
10.56%
2.80% 2.82% 0.70% 4.93% 4.93%
0%
a b c d e f g h

Figure 2: Changes in contractual practice over time

Key: (a) contracts have become more collaborative over time; (b) contracts are more clearly drafted than they used to be; (c) contracts
are more detailed than they used to be; (d) contracts are more flexible than they used to be; (e) contracts are more important to
the success of projects than they used to be; (f) less time is spent reading the terms of contracts than in the past; (g) there are fewer
contractual disputes than there used to be; ((h) parties are more aware of their contractual rights and obligations.

100%
9.86% 12.68%
15.49% 15.49%
90% 21.83%
24.65% 24.82%
29.58%
80%
47.18% 47.89%
54.23% 54.61% 35.21%
70%
36.62%
73.35% 42.96% 47.18%
60% 38.03%
36.17%
32.39% 40.85%
50%

40%
40.14% 38.73% 40.85%
30% 33.80%
18.31% 35.92% 24.65%
36.17% 28.17% 23.40% 26.06%
19.01%
20%
13.38% 21.83%
10.56%
10% 11.97% 8.45% 11.27% 10.56% 10.56% 14.18% 10.56%
7.75% 4.96% 10.56%
6.34% 3.52% 2.11% 2.84% 2.82% 2.82% 6.34%
3.52% 2.82% 3.52% 1.41% 1.42% 3.52%
0% 0.70% 0.00% 1.42% 0.00% 0.00%
a b c d e f g h i j k l m
Not at all important Not very important Neither important nor unimportant Important Very important

Figure 3. Associations between contractual practice and trust

Key: (a) honouring strictly the terms of the contract; (b) performing on time; (c) maintaining quality; (d) honouring informal
understandings; (e) engaging in dialogue from an early stage; (f) being ready to help in an emergency; (g) being prepared to give and take;
(h) being willing to overlook occasional faults; (i) being willing to exchange business information; (j) being willing to share business risk;
(k) being ready to renegotiate the contract when circumstances change.
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20
 Innovation in the Supply Chain

100% 0.00%
4.00% 8.00% 8.00% 8.00%
12.00% 12.50%
90%
28.00%
36.00%
80% 40.00% 44.00% 20.83%
40.00% 40.00%
70% 52.00%
62.50% 48.00%
64.00%
76.00%
60%
60.00%
40.00%
50%
44.00%
40% 12.00% 44.00%
40.00% 58.33%
40.00% 24.00%
30% 48.00%
16.00% 28.00% 29.17% 20.00%
20% 20.00%
12.00%
8.00% 24.00%
10% 16.00% 16.00%
20.00% 4.00%
4.00% 4.00% 4.17% 12.00%
8.00% 4.00% 0.00% 0.00% 8.00% 8.33% 8.00%
4.00% 4.17% 4.00%
0% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
a b c d e f g h i j k l m
Not at all important Not very important Neither important nor unimportant Important Very important

Figure 4: Associations between contractual practice and innovation

Key: (a) having a clearly written contract with specific rights and obligations; (b) having a flexible contract; (c) sharing costs of innovation;
(d) sharing gains from innovation; (e) sharing information on risks; (f) discussing problems as soon as they arise; (g) joint ownership of
intellectual property; (h) long-term relationships; (i) sharing staff; (j) sharing product information; (k) successful dealing in the past; (l)
membership of the same business association; (m) similar corporate culture.

Qualitative analysis “Contracts don’t always matter and collaboration is not the blanket
answer. You match markets to collaboration. Bank Station, that
In this part we report findings from our interviews, which provided was complex, it required collaboration. But you can end up with ‘we
us with an opportunity to discuss issues with practitioners in greater must collaborate’ and then ‘partner’ becomes a dirty word. It costs to
depth. We also make use of the feedback provided by respondents collaborate.”
to an invitation in the survey instrument to provide open-ended
comments on the issues it raised. 10 interviews were conducted and The role of the contract in promoting collaboration was not seen
14 detailed survey responses received. The interviewees and survey as straightforward. Sometimes contracts could engender a false
respondents came from a range of backgrounds in the industry and feeling of security:
we analyse their responses by reference to their respective roles, “Contracts give people the feeling of being secure. We sell this dream
with the focus on clients and contractors. to the client: here is the contract and you’re safe. There are people
who think fixed price is low risk. It isn’t. We have to educate people
Clients on this.” (Client)
“NEC3 may be the preferred form but people use it blindly. And then
Clients stressed the importance of collaboration in complex and
things go wrong…That’s why there are all those Z clauses in NEC3.
innovative projects but also stressed the costs and risks associated
They are all about apportioning risk from the client back to the supply
with it. Collaboration was seen as expensive and resource
chain.” (Client)
intensive. In part this was because close cooperation presupposed
an investment of time and resources in understanding the needs “Sometimes contracts stop active risk management because people
of the other side. In complex projects, close collaboration would think, it can’t go wrong. But it’s often what the contract doesn’t say
only work if clients accepted that they held a significant degree of that matters.” (Client)
residual risk; this also raised the set-up costs for clients.
There was also a perception that innovation was often an
It further followed that collaboration was not appropriate for unnecessary risk for clients:
all projects. Where projects could be procured on a standardised “From a client’s point of view, innovation on a project is an additional
basis, there was no need for a collaborative approach. Practices risk – so why take it! Innovative ideas should be properly tested &
such as integrated team-sharing and pain/gain share had a role in evaluated before introduced into any project. A project is not a test
innovative projects but were not appropriate in every case: bed, it is the sharp end of business delivery… Learn, digest, synthesis
and apply i.e. no need to start from ground zero.” (Client)

21
Contractors Sub-contractors were also critical of open tendering procurement
and similar practices which, some claimed, tended to degenerate
Contractors echoed the view that collaboration is not an easy ride into price wars:
and generally involved high set-up costs. There was support for “There are many examples of tendering processes where money is
the move to NEC away from more traditional contracts such as wasted on failed bids. You do all this work and then you might as well
JCT and ICE, which some saw as having become too adversarial. throw it out of the window. The client strikes a deal with the main
There was recognition of the value of early contractor involvement contractor but then tries to drive the price down further when the
and pain-gain sharing, but also a perception that the displacement supply chain gets involved.” (Sub-contractor)
of risk from clients on to main contractors, and then on to sub-
“The tendering process does not help innovation. We don’t get
contractors, was still common in the industry, and a feeling from
involved in open tenders. Too many tenderers, driving down the
some respondents that ‘nothing has changed.’
price. A closed tender built around relationships, we know who we
are competing against, we know the competitors and we know there
Main contractors commented that risk-shifting by clients was
won’t be a race to the bottom, that works better.” (Sub-contractor)
common and also took the view that clients often regarded
innovation as too much of a risk:
Contractors with experience of more innovative projects
“The majority of clients when an innovation is proposed will question emphasised the importance of cascading pain-gain sharing
where this has been used previously thus stifling innovation as mechanisms down the supply chain:
someone will always have to be the first to employ the innovation.
“at the moment we are delivering a project… which involves a new
This is why the majority of the innovations come from the continent
procurement strategy, we have been invited to bid, we get paid a
where presumably their clients enable the ability to trial and deploy
fee we are given a rate for various things, if we come in under budget
these innovations and enable them to mature.”
we share the gain but the interesting thing is that this is not just with
“ECI has lost its intended use over the last decade, almost becoming the main contractor, it is being cascaded down, this does help, we
a way to solve some procurement burdens and secondly provide get a safety blanket, risk is shared across four parties, but we are
an opportunity to place greater risk on the contractor: ‘why can’t incentivised even so because we gain on the upside if we do well. We
you own the risk, you’ve been there all along’ is often heard.” (Main could hit our budget but if one of the others failed to hit theirs, there
contractor) is pain share. But the pain share is capped, e.g. 5%. So we know where
we stand.” (Sub-contractor)
Some contractors thought that innovation was best organised
outside the framework of a formal contract: There was concern, conversely, that pain-gain sharing would not work
“The most successful value engineering on a project which I have issued if main contractors tried to squeeze profits from the supply chain:
post-contract is where there was a non-contractual agreement where “Does [pain-gain share] lead to innovation? I’m not entirely
if a sub-contractor could ‘engineer out’ elements of its scope of works, convinced. It’s the first time I’ve seen this. Typically even if the main
then this would be accepted and the sub-contractor would be paid half contractor has this mechanism they put the sub-contractors on a
of the value of the omitted scope item. This gave an incentive for the fixed price. The main contractor will want to enhance its profitability
sub-contractor to reduce the amount of work to be done, meaning that by squeezing the supply chain. They will think, I’ve got a 2% margin
we (the main contractor) end up paying out less. However, if a sub- and could get 5% but to do that I’ve got to squeeze the sub-
contractor is aware of this type of arrangement it could put them off contractors. Could it work with sharing innovation? Yes but it must
value engineering pre-contract if it thinks that it could gain half of the flow down to the sub-contractors and it is about the ultimate client
value of an item which it could omit.” (Main Contractor) being prepared to go along with this approach. The ultimate client
must recognise that the supply chain is where the value is. The danger
Sub-contractors, in turn, were critical of what they saw as the is, it’s a façade if the main contractor has its foot on the supply chain’s
tendency of main contractors to shift risk on to the supply chain: throat.”
“The contract affects behaviour at the outset. If it is open tender
under NEC3 Option A we own it, all the responsibilities and the risks, Overseas experience
and we value all of that, we may have an escape strategy to deal
with risk, but if the main contractor is risk averse they will put all the Some respondents were able to speak to the experience of
risk on us. Some of these risks are horrendous. Generally speaking contracting in overseas jurisdictions and to compare it to practice
the quality of the main contractor is poor. We have to manage our in the UK. One point of difference is that construction contracts in
relationships with the main contractor.” continental Europe tend to be shorter than their UK counterparts.
“For most main contractors it is all about price and risk and putting There is still a reliance on traditional contract forms which have
the risk on the sub-contractor. Sometimes we will ask for information not been displaced by NEC-equivalents.
from the main contractor on how to price something and they will
say, well, you work it out. Then it all becomes very brittle. They want Respondents commented that contracts in France and Germany
fixed-price, lump sum, and they will devolve the risk on to us.” tend to be more rigid than their English-law counterparts, but that
their role was different, in that there was less use of the contract
once the project began, and a tendency to regard the signing of the
contract as the start of the negotiation, rather than the end of it.
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 Pinsent Masons | Innovation in the Supply Chain

This suggests that continental practice is to see the contract as a

framework, rather than as a road-map for the project, in part precisely
because of its rigidity and relative brevity. One respondent commented
that continental practitioners were surprised by how much stress is
placed on the contract in Britain once the project is underway.

Respondents also commented on the importance of wider factors in

driving continental contracting practice. These included the prominent
role of the state in procurement in France, the persistence of the
Mittelstand model of industrial structure in Germany in a way which
has not direct counterpart in Britain, and the different corporate
governance environment on the continent, with stock market pressure
generally operating less directly on firms, and codetermination
playing a more salient role.

Conclusions from the qualitative analysis

(i) The qualitative evidence suggests that barriers to innovation in

the construction industry exist, including a continuing emphasis
on adversarialism in contractual relations. This is exacerbated by
price-driven procurement processes.
(ii) There is scepticism towards innovation on the part of clients who
see it as expensive and risky.
(iii) Main contractors, conversely, regarded many clients as unwilling
to share risks and willing to use formal contract terms to displace
costs on to contractors.
(iv) Pain-gain sharing arrangements are helpful for fostering innovation
but they may not work if gain-sharing is not cascaded down the
supply chain as opposed to being confined to first-tier contractors.

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Case Studies
were invited to contribute £25,000 each into a matched-funding
innovation fund to support the operation of the platform.

The result was that all major contractors joined Innovate 18,
In this part we present evidence in the form of creating a pool of £750,000. By requiring skin in the game,
case studies which are based on a combination Crossrail ensured mutual interest in engaging with innovation.
of interview evidence and use of documentary
The Innovate 18 platform was overseen by the CIF and managed
sources. on a day to day basis by the Crossrail Innovation Working Group
(CIWG). By these means, Crossrail created a bespoke governance
Crossrail structure which allowed for the pooling of knowledge and
expertise across the group, taking advantage of the diverse range
Crossrail is the largest construction project in Europe and at £14.8 of skills and experience across the project as a whole which was
billion is one of the single largest infrastructure investments previously confined to individual companies.
undertaken in the UK. It will increase central London’s rail capacity
by 10 per cent. At peak construction, more than 10,000 people Between 2013 and 2015 five waves of investment were organised
were working at over 40 construction sites across the capital with under the auspices of Innovate 18, with the CIF and CIWG overseeing
tens of thousands more jobs supported by the project throughout the selection of projects for funding. The results of innovative
the supply chain. projects were disseminated through academic publications and
events organised with the help of the Digital Catapult.
Crossrail is a temporary project in the sense that the Crossrail
organisation will not be responsible for running the rail Innovate 18 sent a message to the supply chain that it was not
infrastructure that it is tasked with creating. This can be viewed as only acceptable to generate new ideas but actively encouraged.
limiting the possible returns to innovation. By these means, Crossrail’s supply chain was encouraged to share
intellectual property and release ideas. After it was launched in
Moreover, a possible barrier to innovation is that Crossrail is the summer of 2013, Innovate 18 received an immediate boost
publicly funded. This can be seen as limiting incentives to innovate. from new university graduates joining Crossrail, and within weeks
ideas began to flow into the Innovate 18 portal. Much of the early
A further possible fetter on innovation is that the structure of innovation focused on safety. Over time, significant innovations
Crossrail is highly complex. The project involved 16 tier one soon began to be submitted in a wide variety of other areas. At its
contractors and approaching 100 tier 2 firms. peak, more than 1,000 people from every corner of Crossrail were
utilising Innovate 18 and sharing ideas.
However, Crossrail’s managers have consistently held the view
that the financing and structure of the project offer an opportunity In 2016, as the project neared completion, steps were taken
to deliver innovations which have the potential to benefit to migrate the innovation programme into an industry-wide
the eventual users of the infrastructure as well as firms in the approach. A close-out paper is due to be published later this
construction industry and the wider public. As the Crossrail CEO year and a Learning Legacy framework established so that the
Andrew Wolstenholme has said: experience of the innovation programme can be captured for the
“In delivering London’s new east to west railway, we hope to raise benefit of future projects.
the bar in the construction industry, now and for future projects. To
achieve that we need to think differently about how we share ideas Contracts played a role in creating the conditions for Crossrail’s
and implement them.” innovation programme to succeed. Contracts were procured on
the basis of the NEC3 agreement with provision for a 50% gain/
Crossrail’s strategy for delivering innovation turned what could have pain share arrangement. In the words of one of Crossrail’s senior
been a weakness – the decentralised and multi-tiered structure managers, Innovate 18 platform was in effect organised under the
of the project – into a strength, as the diversity of organisations ‘umbrella’ of NEC3.
involved was used to generate knowledge around innovation.
In interviews and meetings with us, Crossrail’s senior managers
Crossrail’s innovation programme began in 2012 when a strategic have pointed to features of the innovation programme which help
projects team was given responsibility for innovation, universities to account for its success. It is important, they have suggested,
were involved in advising the organisation (Imperial College and to find ways to commit partners to innovation. This means taking
University College, London), and an innovation strategy published. specific steps to support information and risk sharing. Undue focus
A Crossrail Innovation Forum (CIF) was established and a pilot on IP rights can deter the knowledge sharing needed to make
programme begun. After the conclusion of the pilot programme in innovation work:
2013, an online platform, Innovate 18, was launched with the aim “The problem is protectionism. An idea is shared which could
of collecting information on new ideas and innovations across the have been subject to IP through normal patenting but that can be
organisation. At the same time the key supply chain companies innovation-destroying. If you share an idea it can be used more
flexibly.” (Crossrail executive)
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 Innovation in the Supply Chain

At the same time, managers with responsibility for innovation features. Evolving software is crucial to SaaS and the delivery of
must be constantly aware of the pressures on parties to behave in world class services. Anything that a company like BaseStone
a narrowly commercial or self-interested way: have created to benefit construction companies would then be in
“Collective behaviours are all about sharing and collaboration and the hands of an organisation that cannot possibly continue that
it becomes too slow if you move towards competition.” (Crossrail process, killing the concept of innovation. Traditional software
executive) vendors charge for any new feature and/or update (customers
are made to purchase the software again). SaaS is about selling
Contract form is important: a service and access to software, not the software itself. If that
software does not meet client needs, it can evolve very quickly
“Cost-plus contracts with lump sum payments don’t work. They can
or the client can stop paying for it, which is great for innovation.
generate innovation within the company but there is no sharing.”
When BaseStone builds a feature after a contract has been signed,
(Crossrail executive)
it has the freedom to deploy this feature across its user base, in
different companies and their supply chains. Innovation is defined
At the same time, the contract is ‘an enabler not a driver’, and ‘the
by this agility and creativity, which ceases if IP is owned.
contract and behaviours must work together’.
This becomes particularly problematic when SaaS SMEs are
Crossrail’s experience suggests clients need to be proactive in
trying to collaborate with large industries like construction which
developing business and commercial models that encourage
operate on outdated contractual models. These contracts give
supply chain participation. Contracts which share the benefits
the impression that sharing information is bad, when in reality
of innovation among the parties are one aspect of this. Bespoke
information flows are crucial to true digitisation. Fortunately, some
governance structures can play an important role in creating the
of the biggest players in the industry are BaseStone’s clients, and
equivalent of ‘common pool resources’ for sharing knowledge and
they understand their need for agile technology. BaseStone have
information. Crossrail’s innovation programme also illustrates
been able to work with enlightened individuals and organisations,
the benefits of taking steps to ensure that innovation does not
making it possible for them to work around these constraints
conclude when projects come to an end.
via the standard contract formats and have developed strong
relationships as a result. People are seeing the importance of SaaS
BaseStone and the benefits that BaseStone’s technology is bringing to the
industry. Part of the problem with technology adoption certainly
BaseStone is an example of a company that has experienced and
resides with the contract.
overcome contractual barriers to innovation.
Transport for London – Bank Station
BaseStone operates as a Software as a Service (SaaS) platform.
SaaS is now a well-known contractual standard in industries such With the objective of procuring better value whilst delivering
as entertainment and finance but is less known in construction. projects, Innovative Contractor Engagement (ICE) was conceived
SaaS is a software delivery model that gives on-demand access by Transport for London (TfL) to ensure that the good ideas the
to licensed software on a subscription basis. Everyday and market had in response to project requirements could be brought
professional examples include Google Docs, Office 365, and forward and developed with the client as soon as possible for
SalesForce, where a service is delivered, and the software is maximum benefit.
centrally hosted – not sold to or owned by any client.
ICE was pioneered on a major upgrade project at Bank Station. In
BaseStone is a collaboration tool for construction professionals the case of London Underground (LU), a key lesson learnt from
that offers a central platform for the digital delivery of the project, the award of design and build contracts for Bond Street (2010)
offering multiple use cases across the construction site, including and Victoria (2010) was that supply chain innovation had to be
design review and digital redlining. BaseStone’s technology identified early on in the procurement process in order to maximise
encountered a problem however at a contractual level when the benefits that the innovation could bring to the project in
they were presented with a contract designed for a traditional addition to Innovative Contractor Engagement which was borne
technology software provider. BaseStone’s SaaS solution did not fit from the same procurement learning.
into the construction industry’s categories for adopting technology
and SaaS never appeared in any of the contracts that BaseStone
ICE was designed to incentivise early innovation from the supply
were offered.
chain. It consists of two strands; first, commercial protection of
competitive advantage from bidder’s innovation; and second,
BaseStone were initially offered a contract which contained a competing performance delivery against outputs (not pricing of a
propagation clause that can cause confusion in service providers, common outline design).
specifically with regards to IP and foreground/background rights.
These contracts state that the company who is procuring their
system would own the foreground rights of their software. These
foreground rights involve IP that is created by the SaaS company
after the signing of the contract, including any updates or new

25
 The original core principles of ICE are as follows:
• Pre-qualification based on contractors’ ability to deliver and
specifically their ability to innovate;
• A post qualification period of ‘Ideas Development’ against a
Requirements Schedule;
• The protection of contractors’ intellectual capital for innovation;
• Establishment of a non-disclosure agreement between
the parties;
• Establishment of fees to be paid to the contractor for this
development;
• Redrafting of the Requirements Statement to allow for constraint
removal where conflicts are established;
• Issue of the ITT against this modified Requirements Statement;
• Commercial evaluation against Requirements Statement; and
• Contract against Requirements Statement NEC Option C
(essentially therefore culminating in an orthodox contractual
arrangement).

The team also recognised that developing an untried procurement

approach would require the development of new management
processes and procedures not in the corporate management
system. Doing this on a major project such as Bank presented a
significant delivery risk to the project and brought considerable
reputational risk to LU. Thus it would have to develop specific
processes and procedures for managing these risks. The
management of reputational risk can have a significant influence
on the pioneering of an innovative approach which by its very
nature has no precedence.

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 Innovation in the Supply Chain

Proposals for reinforcing

Behavioural assessments have been a good start however offer
only a snapshot of behaviour at any given time. Without the
correct business models and structure in place, poor behaviours

and promoting can be inadvertently promoted. An example of a structure

unintentionally promoting negative behaviour could be a client
requirement to competitively tender packages of work, overlooking

innovation the opportunity for a contractor to bring forward innovation from

its well-developed supply chain at the bid stage, a process which
requires trust and commitment.

The following proposals are built on a foundation Innovation managers and innovation champions
of cultural change, behavioural adjustment and
an alteration in mindset. Innovation champions and innovation managers play a crucial role
in ensuring that innovation is channelled to the correct places within
an organisation, in addition to ensuring relationships are maintained
Professional image & innovation campaign
with the appropriate external partners and that ideas are gathered
from across the organisation and appropriately managed.
The industry must become more professional and the engineering
profession heightened in its relative standing. Engineers have a
desire to push science and engineering and aspire to advance the Innovation
profession. We must equip our professionals with the resources Team
Innovation
and tools required to reach their full potential and illustrate the Team
knowledge and excellence within the industry. Mega-projects such
as the Olympics and Crossrail have contributed to making the
industry more attractive and this momentum needs to be built Innovation
upon by accelerating innovation to market, utilising the latest Innovation
Champions
tools, products and processes in addition to improving the link Champions
between the industry and research. An industry supported and
connected campaign led by the professional institutions to raise
awareness around innovation would be beneficial and could be Innovators
used to attract new entrants.
Innovators
Client leadership
In terms of roles within the industry, the position of innovation
In showing a willingness to share cost and risk in addition to manager is relatively new and indeed the introduction of
engaging in and encouraging early innovation, clients can act as innovation teams are newer still and almost exclusively exist
the catalyst for bringing the changes which are required to enable within mega-projects. The introduction of an innovation manager
not just innovation but open innovation. Clients, particularly large on each project above a certain size, the appropriate level to be
infrastructure clients, are in a strong position to change behaviour determined by the organisation, would surely be a move in the
and must aid in driving the required changes as highlighted within right direction at a time when business models are evolving to
this report. If you are seeking to encourage innovation on major reward the benefits this role can bring.
projects, experience has identified that it is important to integrate
any programme and investment into the core delivery programme On major projects the leadership of the client’s innovation team
to ensure it is embed as part of the approach and not seen as a side and project managers can either hinder or inspire the wider
function. Innovation should be part of any programme and should delivery team. These managers should have the facilities and
be considered in the overall mix of key mechanisms to deliver the correct processes to encourage and support innovation adoption.
programme. A measure that captures contribution by different Once a suitable innovation has been identified as an innovation
teams should be identified that allows experts in their field to that can be standardised and scaled across a number of contracts
evaluate and drive innovation into the day-to-day operation and and seen as a best practice that will deliver benefit to the contract,
report benefits. the powers of instruction to accelerate innovation into a live
operation should benefit the end outcome.

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Harvard Business Review; Don’t offer employees big rewards for innovation; Oliver Baumann & Nils Stieglitz; 2014

27
When considering this type of approach it is important to allow the Highlighting whole life benefit against short term cost
correct resource and budget. Without the people with the correct
skills to facilitate the process the desired intent might not be Major projects are often created with the investment from a
achieved and the return on innovation not maintained. The budget capital budget. Within this capital budget an allowance should be
is also important and has two parts, the first is the investment made for innovation that will assist innovation that will benefit the
required to procure and trial the innovation and the second for life of the asset. Making this provision will assist the relationship
the client project manager to allow additional costs to assist with the maintainer to find innovations that will improve the
the facilitation of the innovation in the live environment. When operational performance of the asset.
implementing innovation you need to consider access equipment
and the addition resource required for the trials should be factored Supply chain management
into the budget.
Supply chain management is absolutely essential to developing
Regarding incentivisation, it should be recognised that while large and implementing innovation within the industry. From large
incentives may bring a deluge of ideas, that is not necessarily suppliers to SMEs, these businesses are well placed to develop
a good thing as this can become too difficult to manage, with innovation. Contractors currently offer little incentive for sub-
organisations lacking the resource to respond to each employee or contractors and suppliers to bring forward innovation. Indeed, sub-
act on each idea. This risks a situation where employees become contractors and suppliers assisting a contractor at work winning
disengaged as they do not receive an adequate response to their stage generally have no guarantee of being awarded a contract
idea. Smaller incentives are cheaper and offer a more manageable as the contractor may go on to select another party to carry out
flow of ideas. While employees respond positively to incentives, the works. As a consequence, there is no incentive to provide
they become discouraged by low odds of securing a reward or by innovation at the crucial early involvement stage.
being overlooked.
Human resource and the culture of your team is critical to
Ideas managed & people engaged innovation delivery. You will have selected the best team to work
and deliver the project and they will expect the best working
environment and conditions. The human resource business
processes, training and incentive mechanisms should be adapted to
ensure that innovation is recognised by formal review processes.

Ideas lost &

people disengaged
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 Innovation in the Supply Chain

Proposals for contracts

provide for all possible eventualities within the contract or whether
it is possible to rely on collaboration and future agreement. It is
also necessary to recognise that innovation entails some risk and
The previous section has described the extra contractual steps that that investigating the potential for innovation may impact the
can be taken in order to create an environment that encourages works and result in additional costs and delay. Such clauses can be
innovation and creates opportunities for innovation to be proposed used as part of any agreements for early contractor involvement
and implemented. That can take place as part of a non-binding and as part of the construction contracts.
framework, especially on mega-projects such as Crossrail. The
empirical research has however shown that people still consider The research has shown that while people have a preference for
it important to have a formal contract in place rather than a loose a formal contact that provides for all eventualities, there is also a
non-binding agreement and that compliance with such a contract desire for flexibility and this is especially the case for innovation,
plays an important role in creating trust. At the same time, it was where people recognise that the contract should allow for
recognised that it is beneficial for contracts to have some flexibility communications, sharing of risks and benefits and flexibility.
and that this is particularly important for innovation, where people
recognise the sharing of information, as well as sharing the costs At one extreme, it may be possible to have a brief provision that
and benefits, plays an important role. simply states that a party that wishes to propose an innovation
shall provide details to the other party and they shall meet to
This suggests that there will be a benefit in having an express agree whether and how such a proposal will be adopted. This is
contractual provision dealing with innovation. That will be coupled sufficient to identify innovation and provide a trigger for proposals,
with an extra-contractual culture that encourages and supports but it then relies on the parties engaging in a genuine attempt to
innovation. In such an environment, the contract can encourage agree issue such as payment, risk allocation and ownership of any
and enable innovation by creating a mechanism that identifies IP rights. This provides a great degree of flexibility but gives rise to
the opportunity for innovation, clarifies its position within the the risk that parties may be distracted or discouraged by having to
contractual framework and helps address any barriers. negotiate the terms. A sample of such clause can be found below.

There is a range of views as to how such contractual mechanisms Either party may put forward an innovation proposal which
should work, and whether they should be the subject of may reduce the costs or duration of the works and/or have
comprehensive detailed drafting or whether a minimal approach is benefits with regard to the performance of the works and/or the
better, relying on the parties reaching agreement. As noted above, operational life of the Project. Such proposal shall be submitted
some existing contractual structures, such as target cost contracts in writing with full particulars and the parties shall meet to discuss
and value engineering clauses, help to align parties’ interest and whether and on what basis such a proposal may be implemented.
can be said to be effective ways of encouraging innovation.
An alternative is a detailed provision, which sets out in advance
In our view, there is a benefit in addressing innovation in the a process for proposing innovation and identifies how such
contract, even where the contractual framework already a proposal will be dealt with in terms of sharing the costs of
encourages parties to collaborate and improve their performance. innovation and the impact on the works. The benefit of such an
This is because of the importance of identifying innovation as a approach is that it resolves in advance incidental issues and allows
separate objective and raising awareness and the recognition in the parties to focus on the innovation itself as opposed to the
the research that innovation is different from other contractual commercial implications. By way of example, parties can agree
obligations. This also ensures that the employer sends a clear that the costs of any innovation will be shared equally as will be
message by elevating innovation under the contract, showing that any savings, but that the party proposing the innovation will take
it is a joint objective and allowing the contractor the confidence the risk of delay caused by implementing the innovation. A sample
and incentive to put forward proposals. It is therefore necessary to of such clause can be found below.
consider how such provisions should be drafted.
1. “Innovation Proposal” shall mean a proposal that identifies a
The approach to innovation clauses
change to the Works or a method that is likely to result in a
reduction to the cost or duration of the works or an improvement
The clear message from the research has been that people are
in the quality of the works, manifesting itself for example in an
more familiar with contract provisions than they used to be and are
improvement to the performance of the works, including a long
more likely to read the contract. Much of that appears to be driven
term improvement or cost reduction and/or an improvement in
by the use of contract forms such as NEC3, which put the emphasis
the maintenance regime for the works and/or following
on clear drafting in plain English as opposed to the lengthy formal
completion in the long-term operation of the works. The party
drafting that is found in more traditional contracts (and tends to
making the Innovation Proposal shall investigate and prepare the
discourage familiarity with the contract).
Innovation Proposal at its own expense and risk and without
disrupting its performance of its obligations under the contract
This confirms that any clauses drafted should aim to be clear and
and/or the progress of the works.
concise. The issue however is the extent to which it is possible to

29
2. The Contractor shall notify the Employer of an Innovation Proposal In practice, it is likely that discussions about innovation will take
by submitting full particulars of such proposal in writing, including: place between the employer, main contractor and specialist
sub-contractor or consultant. It also follows that any agreements
2.1 t he direct and incidental, costs of implementing the about implementing an innovation and any sharing of costs and
Innovation Proposal benefits will have to take place under both the main contract
2.2 t he impact of the Innovation Proposal on the duration of and the sub contract. We do not anticipate that this will create
the works a problem and while it is possible to add a contractual provision
dealing with such tri-partite discussions and agreement, on balance
2.3 any related risks of implementing the Innovation Proposal
that seems unnecessary.
2.4 d etails of any independent or external assessment of the
Innovation Proposal The use of incentives
2.5 t he potential benefits of the Innovation Proposal to the value
of the works to the Employer. As noted above, the main direct incentive for proposing innovation
is the opportunity to share the financial benefits of any savings. It
3. The Parties shall meet within 14 days of the Innovation Proposal is however possible that innovation will have benefits which are
being submitted to agree whether the Innovation Proposal should not reflected in direct savings, for example whole life maintenance
be implemented and/or any changes that may be required to the cost is reduced but not the construction costs. In such a case, a
Innovation Proposal before implementation. The Innovation contractor is likely to expect to receive a share of such benefits, as
Proposal shall be implemented in an instruction on the following well as being paid the costs of implementing the innovation. This is
basis, unless otherwise agreed by the Parties: something that employer will need to recognise and allow for.
3.1 T he Parties shall share the costs of implementing the In addition, there are indirect benefits in proposing innovation,
Innovation Proposal on an equal basis by developing a reputation for innovation, which will assist with
3.2 T he Contractor shall be entitled to an extension of time to the winning further work opportunities, and improving the working
extent that implementing the Innovation Proposal delays relationship with an employer, which will increase the trust
completion/taking-over between the parties. This is part of the wider picture and some
3.3 T he Contractor shall own the Intellectual Property, if any, suppliers may well feel that it is in their benefit to develop a
reputation for innovation even without a direct financial incentive.
related to any Innovation Proposal and shall grant the
employer an irrevocable free perpetual license to use the
Employers who wish to promote innovation and to recognise the
Innovation Proposal, notwithstanding any other provisions of
value in proposals being made, even if they are not implemented,
the Contract.
could consider other forms of financial incentives. The NEC3
form, for example, provides at Option X20 for key performance
Using a pre-determined approach however prevents flexibility and indicators which are used to create targets for a schedule of
goes against the inherent unforeseeability of innovation. In other incentives, so that the contractor is paid when a target is achieved.
words, it is very difficult to predict what innovative proposals will be It is possible to use such a mechanism to create incentives which
made and trying to predetermine a uniform approach may well be are based on KPIs such as the cumulative amount of savings due
too rigid. If the contract identifies that costs and gains are shared to innovation proposals or the number of innovation proposals
equally, that will prevent a party who may be willing to pay a bigger submitted by a contractor, coupled with the percentage of
share or take a greater risk, since they have a better understanding implemented proposals.
of the potential value. The empirical research also suggests that, for
innovation, a flexible contractual provision would be preferable. Innovation in the context of mega-projects and alliancing

It is of course possible to strike a balance between the two approaches Another theme that has come up from the research is that complex
and try to agree some matters in advance while preserving flexibility mega-projects, especially where alliancing is used, need to be
and the potential for negotiation. Indeed, we expect that parties considered separately from smaller single projects. This is not
will consider what is most suitable for the particular project and the surprising and it is of course the case that in a mega project the
type of innovation that they wish to encourage. We suggest that in potential for innovation and resulting benefits is much greater and
any event such a provision should refer expressly to innovation and the employer has a much better ability to encourage innovation. The
provide a process which allows a party to present a detailed proposal Innovate 18 project at Crossrail discussed above is a clear example.
to be discussed with the other party.
In contrast, a local authority procuring a road may be less keen
Engaging the second tier supply chain and consultants to explore innovation and would prefer to benefit from relying on
established methods and avoid uncertainty. This simply reflects
Innovation will often occur at the second tier level, where specialist the fact that innovation needs to be considered in context and that
suppliers or consultants will have the expertise to suggest while in general innovation is to be encouraged, the extent to which
innovation in their areas. This means that second tier contracts innovation is promoted will depend on the nature of the project.
should have similar contractual provisions and these should be
on the same basis as any clauses in the main contract, in order to
ensure that the interests of all parties are aligned.
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 Innovation in the Supply Chain

It does also mean that mega-projects represent the best • The parties will discuss the approach to each innovation on an
opportunity for promoting innovation and that this should be individual basis but in general will seek to share the benefits of
recognised as one of their benefits. The same is true for projects any implemented innovation as well as related costs and risks.
procured through alliancing, where a large number of contractors
are involved and there is an opportunity for different parties • The parties recognise that the potential benefits of any
to collaborate. proposed innovation will not materialise and that innovation
involves risk. The parties will share such risks equally and will
The use of an innovation protocol or statement not seek to blame each other.
• Unless otherwise agreed, all parties will be able to use the
Some parties will wish to encourage innovation but will be innovation on other projects and works.
reluctant to include a specific contractual clause. Indeed, some • The parties acknowledge and agree that the statements above
parties may believe that innovation should be promoted but are not intended to be legally binding and that any innovation
should not be regarded as a contractual activity and that people will be implemented in accordance with the terms of the
may be discouraged if it is seen as yet another contractual process. contract and/or other terms to be agreed by the parties.

In such cases, parties may use an Innovation Protocol/Statement, As noted above, using such non-binding principles may be seen
which can be included in the contract or exist outside the as more acceptable to some parties. They will help to encourage
contract. The Protocol can serve to promote innovation and an innovation mindset and provide a structure for proposing
provides guidance to the parties on how best to deal with innovation. If the parties then wish to implement any innovation,
innovative proposals. We assume that in such a case parties will
they will however still need to agree the contractual basis and
want to ensure that such a protocol does not create any binding
confirm how the costs and benefits are shared. This may not be
legal obligations, but that needs to be made clear to avoid any
an issue when using a target cost contract, for example, but if the
uncertainty. If the parties agree to implement an innovation, that
parties agree that they will share any design related risks, this is
will be pursuant to any existing contractual provisions and any
likely to require a separate express agreement.
amendments that may be needed.
Summary
This has the advantage of complete flexibility and it does not of course
prevent the parties from agreeing at a later stage how any proposals
At present, contracts do not encourage innovation directly
are incorporated into the contract. We would anticipate such a
or identify it as an objective of its own, but the two common
protocol to include statements similar to the ones set out below:
mechanisms that will in practice encourage innovation are target
• The parties acknowledge the benefits that innovation can bring cost contracts and value engineering clauses, which allow both
to the project and will work together collaboratively in order to parties to share the benefits of savings.
identify and develop opportunities for innovation.
Such mechanisms are likely to be sufficient on projects where
• The parties recognise that innovation can assist to reduce the
innovation is less important, possibly because it is not a large scale
costs and time take to complete the works, but that innovation
project or the scope is based on standard designs which require no
can have wider benefits over the whole life of the project. Such
development. Innovation however will be more important on large
benefits include better and more sustainable performance, as
complex projects, especially where the supply chain enters into an
well as other benefits such as improving health and safety
alliancing arrangement. In such circumstances, we believe that it
during construction.
is of benefit to identify innovation as a contractual objective and
• When either party identifies an opportunity for innovation, the provide a procedure for proposing innovation. This is in addition to
parties shall meet to discuss the potential benefits of such the non-contractual measures identified above.
innovation, as well as the costs of implementing innovation
and any risks that may arise. The party proposing the The form of such contractual procedure will be up to the parties
innovation shall provide: and will be based on the underlying construction contract. In
--Details of the proposed innovation general, while it is possible to create a detailed prescriptive
--The potential benefits in terms of costs and time, as well as provision, it is our view that a general and relatively brief provision
any wider benefits has the benefit of being more flexible and accessible and is less
--Any risks in implementing the innovation likely to be seen as a barrier.
--Any relevant industry experience or knowledge
We have also considered the use of an innovation protocol or
--Whether the innovation will result in any intellectual statement which some parties may prefer to a binding contractual
property rights that will need protection. process. There are clear benefits to having such a document and
it will help reinforce the importance of innovation, but where
innovation is proposed and implemented, it will still be necessary to
address with clarity how the parties will share any benefits or risks.

31
Conclusions and
different by its nature. It will often require investment and some
risk, in order to provide potential savings. Having said that, it is
also necessary to recognise that in engineering and construction,

Recommendations in contrast to other industries such as advanced manufacturing, a

much smaller part of the project will lend itself to innovation.

We therefore suggest that promoting innovation has to take place

The industry has been recognising the value of innovation for a
at two levels. First, the industry has to champion innovation by
number of years, as part of the drive to respond to customer needs
public campaigns as well as more direct and specific recognition
by forming collaborative delivery models to achieve better value.
and promotion of innovation within businesses. This has to be led
This is self evident from the case studies we have set out above
by clients and based on joint investment when possible. Second, it
and there is a clear intention to continue such efforts justified by
is necessary to recognise the desire for contractual certainty as to
the benefits of the approach. This enlightened approach is being
how the costs and risks of innovation will be addressed, as well as
led by mega-projects that benefit from attracting the best talent,
the sharing of the benefits. Having such a contractual mechanism
resource and skills. The challenge will be to see how innovation can
in place will send a clear message from the top of the supply chain
be used to the same effect on smaller projects such as schools and
that innovation is valued as a shared investment and for businesses
hospitals. What is clear is that innovation must be led by clients
that decide that this approach fits with their business model,
and the client must cascade the intent down into the supply chain.
they will be able to decide how they can invest to deliver better
Innovation will not happen without the right leadership at all levels
outcomes to the customer.
in the supply chain and the innovation intent can easily be broken
by the wrong behaviours. Choosing the right businesses that have
a history of long term collaborative relationships and innovative As the industry matures it is achieving a greater understanding
delivery will be key to the next stage of the industry’s evolution. of the importance of innovation and clients of the industry are
recognising how to encourage innovation in the supply chain to
achieve better solutions. We expect to see greater alignment in
Similarly, there are contractual mechanisms that are designed to
supply chains which will move from mega project to the next
align interests and encourage innovation, by allowing parties to
mega project seamlessly, taking innovation and research between
share savings and assist in creating a collaborative environment.
projects. The continuity of continued investment in the sector and
The research however has shown that parts of the industry are yet
the complementary commercial legal environment will provide
to fully convert to collaborative contracting and that there is still
a justification for business to invest in research and innovation
a perception that collaboration is promoted as a way to drive cost
to maintain competitive advantage. Through this market
down rather than embracing genuine cooperation as a means to
transformation innovation might bring new ways that could
enhancing value.
change the way the industry operates in the future. This change
could bring productivity benefits and through that legacy we
In that regard, the research has shown that people still value
would see innovation transfer to small projects.
certainty of contractual frameworks. At the same time, perhaps
not surprisingly, people desire flexibility to address unexpected
These conclusions have led to the specific proposals set out
events. This represents a contradiction for traditional construction
below. The table outlines learning we have discovered in the
which places a high value on certainty. Innovation, however, is very
research and from this learning we have identified in each case a
recommendation with an appropriate change agent who has the
remit to implement the recommendation.
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 Innovation in the Supply Chain

Learning Recommendation Identified Change Agent

Apprentice Mechanism PhD Mechanism Government Minister
Apprenticeships are an appropriate mechanism to We should encourage investment in skills and/or
assist and train people into skilled roles addressing development at PhD level, to enable us to address Infrastructure Client
skills shortages. Many clients insist on a ratio some the pressing challenges faced by the Group
mechanism (spend to number of apprentices) infrastructure sector. These would be formal PhD
to determine the number of apprentices to be mechanisms that allow industry and academia
employed on the contract. to train high calibre future industry leaders. As
an industry we should be using our contracts and
spend to drive a behaviour of business investing
in PhD training and development programmes to
develop a pipeline of innovation and talent that will
advance the performance of the industry in a similar
approach to apprenticeships.

Crossrail Early Research Engagement Research in the early stage of infrastructure Research Councils
Crossrail and the Cambridge University Centre for development and/or
Smart Infrastructure and Construction worked Major projects in the early phases of project HM Treasury
together in the early outline design stages as development should have specific research
part of a research programme to embed fibre programmes to assist the advancement of key
optic into the drawings of major infrastructure challenge areas that will develop the industry and
assets across the Crossrail programme to form deliver an improved solution. Research Councils
a monitoring mechanism that will now allow a and major infrastructure programmes should look
greater understanding of how the civil assets are at how combining investment will deliver better
performing by taking measurement from the fibre results during the operational delivery of the
optics integrated into the structure. At Paddington contract.
Station, fibre optic was integrated into the design of
the station box wall, allowing the Costain Skanska
JV to price and deliver the innovation as part of the
construction programme. This is a good example
of how future research and teams can be paid to
deliver innovation in a live environment.

Crossrail Innovation 18 Programme Industry Innovation Investment Platform (I3P) Knowledge Transfer
Crossrail’s innovation programme has changed Clients must find ways to work together and Networks
the industry perception of innovation and shown develop innovation programmes across their Institution CEOs
how client leadership can engage a supply chain to operation that allows the industry to collaborate
innovate and share learning across companies. and drive innovation that benefits customer’s’ Innovate UK
outcomes. A structured collaborative innovation
programme would provide a link between large and
small companies to work with industry clients and
accelerate innovation to market.

Thames Tideway Tunnel project has adapted

Crossrail’s Innovate 18 model and the database and
software is evolving and being shared with other
national infrastructure clients. The result of this is
I3P, a platform which will bring the supply chain
together to tackle the industries most pressing
challenges. Completing capital programmes more
efficiently across the entire life cycle not only adds
value but also builds public confidence. Clients
should be incentivised to work together and
support their supply chains to innovate. I3P and the
long term collaborative ethos it embodies is fully
supported by the report’s authors.

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Learning Recommendation Identified Change Agent
Contract Conditions Contractual Clause Clients and publishers
Current contract forms do not expressly encourage Clear contractual provisions will help underline the of standard contract
or deal with innovation. In addition, there is a importance of innovation while giving contractors forms
reluctance to innovate when there is no certainty on and their supply chain the confidence that there will
which party bears the costs and risks of innovation. be a genuine sharing of risks and costs, as well as
benefits.

Lack of Structure & Capability Innovation Audit Constructing Excellence

The industry suffers from a large variation in Driving forward a performance assessment
capability which is accentuated in the context of framework for innovation to assess capability
innovation management and where competence is and skills within organisations from clients to
patchy. supply chain partners, to understand maturity for
innovation implementation would allow for a large
uplift in innovation capability across the industry.

Divide between Research & Mega-projects Review & Call for Evidence House of Lords
Mega-projects can act as a catalyst for best practice A review on ‘Future Integrated Industrial Research’ Committee
but are neglected from a research and development requirements for major infrastructure projects and
perspective, resulting in infrastructure which could an industry call for evidence to understand how
be greater developed in terms of social benefit and public research investment can enable innovation
technological advancement. that will deliver better infrastructure. Explore future
delivery models and structures of governance that
would best enable integration of invest activity.

Disconnect between Infrastructure & Social Social Benefit Measurement Tool Independent research
Benefit Industry practitioners should unite to develop a project funded by the
The lack of knowledge around the social benefit that tool which provides a social benefit calculation and Research Council or
the engineering and construction industry provides generates a fixed score. A wide range of variables Innovate UK
results in a lack of appreciation for what we believe would be assessed and the final score would have
to be an industry with a broad social reach. a weighting within a client’s bid assessment.
Variables would include, for example, the number
of apprentices and PhD students, local economic
benefit and employment in addition to contribution
to research funding and engagement of universities.

This would be of benefit to all infrastructure

customers and particularly government
departments which suffer from additional pressures
to demonstrate value for money.
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 Innovation in the Supply Chain

Learning Recommendation Identified Change Agent

Lack of clients introducing innovative business R&D Contractual Model Clients and the supply
and procurement models Target cost contracts could be used so that both chain, supported by
Examples such as Crossrail and TfL where the parties agree that a percentage of any gain achieved industry bodies
fundamentals of project delivery are updated and is set aside as an innovation fund to be administered
improved are extremely rare in practice. in consensus by the parties.

The authors make no recommendations of how the

fund should be spent. It could be fed into a long-
standing R&D relationship, be used to undertake
some research or product development of particular
interest, be spent quite quickly as a contribution to
a ‘good cause’, feed into the aforementioned ISP
platform or perhaps be donated to the ICE R&D
fund.

Further research should also be conducted,

developing new procurement models which
enhance the opportunity for innovation, in addition
to investigating the merits of such new business
models.

35
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 Pinsent Masons | Innovation in the Supply Chain

Contact Details
For further information relating to this report
please contact:

Adam Golden
Legal Executive
Costain Limited
T: +44 (0)16 2884 2471
M: +44 (0)7783 400190
E: [email protected]

Tim Embley
Innovation Director, Costain Limited
T: +44(0)78 2553 3825
E: [email protected]

Shy Jackson
Partner, Pinsent Masons
T: +44 (0)20 7418 7312
M: +44 (0)7917 627344
E: [email protected]

Simon Deakin
Professor of Law, University of Cambridge
T: +44 (0)122 376 5339
M: +44 (0)7795 580222
E: [email protected]

Boya Wang
Research Fellow
University of Cambridge
E: [email protected]

37
Notes

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Notes
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