Case Study: the Owner and the Contractor

I have never seen a Gantt Chart survive first contact with a project. If Mr. Murphy (if it can go wrong, it will go wrong) is an optimist and Mr. Sod (it always goes wrong) is a realist, contracts that define business relationships between different entities in a project have to address the risks of things going wrong. In some cases, the parties assume the best will happen, and that they will be able to work out who pays for what when it is all over. It is not just new or naive players who fall into the “work it out” trap; experienced companies do too. That is why contracts for complex Material Handling Systems become complex—because the parties involved know the risks from experience, and they attempt to control those risks through the contracts.

It helps to have a case study to illustrate how a project can go wrong, how  contracts are constructed, and how the ethics of the companies involved can set a project up to succeed in incredible conditions or fail with the slightest of problems. The wrong contracting structure can create havoc and increase the risk of failure with even the slightest of changes. If both parties act ethically and fairly, however, a project can succeed even under the worst of conditions.

Boxing-Corner-Man 1.jpgFor this case study we need to employ a gedanken, or thought experiment, to understand how a systems contract should differ from a general contracting contract. I based our example on a combination of actual projects that I have observed. I may have had ringside seats to the action. I may have been part of the corner team of one of the parties battling in the ring. I may have been part of the project, working to keep the wreck from happening, or I may have been brought in to clean up the mess after everyone died from the train wreck of the project.

In this five-part case study, we define the chain of events for our thought experiment.

  1. First, we illustrate from two different viewpoints:  the view of the customer and the view of one of the main integrated systems suppliers.
  2. Then, we look at the next tier of project relationships:  the relationship between the main contractor and the subcontractors.
  3. Next, we examine the possible ways the project might play out, assuming all three tiers of the project share common desired outcomes.
  4. Following that, we examine how things did play out in the example, based on my observations of projects, much like what I describe in this gedanken.
  5. Finally, we wrap this up with a recap of how the complex art of collaborative contracting affects the outcome of complex systems.

The Owner’s Dilemma

Assume you are the key decision maker at a company that invests hundreds of millions of dollars a year in complex material handling systems in multiple locations throughout your network of facilities.

This company is a key component in the supply chains of many other companies. Many retailers, distributors, manufacturers, and banks—heck, a significant chunk of the commerce of the United States—depend on your company to move material like clockwork. Global companies depend on your company to run a tight shipping business. Your company is not the only player in this competitive marketplace. There are other competitors, large and small, all craving parts of your business volume.

Last year, things went wrong at Christmas. For many different reasons, your company could not deliver by Christmas Eve. Your competitors had a hard time too, but your company took the blame. The volume hammered your facilities, and the conveyors could only push so many boxes through.

The company upgrades equipment systems all the time. Each year your company spends hundreds of millions of dollars on material handling equipment across the globe, both for building new facilities and upgrading existing facilities. There is a running upgrade and expansion plan, and the company executes to that plan. However, because of the holiday shellacking, some points in the network are going to get the upgrade faster than planned.

Company engineering teams work a network of suppliers and systems integrators as suppliers; some of these relationships span years, and some are relatively new. These are not small integrators; they do major package handling systems all over the world. No one supplier could handle all of the company’s business, and working with a group keeps all the suppliers competitive in price and services.

Making things more difficult, there is more demand for these complex systems than there is supply. Your competitors all demand new material handling systems, too. Some customers are, in fact, competing for the same systems. Once one of your biggest customers, say, an e-commerce company, is building a complex network sortation and loading facility to support your competition, and to support their own delivery fleets. There is demand for these systems, but the systems integrators just don’t have the capacity to take on more projects.

You must upgrade quickly in multiple locations. Under your old project model, your engineering groups integrated the systems, hiring companies that specialized in equipment platforms and the companies that built, installed, and integrated the conveyors; they also hired all the minor trades that took care of other facility systems. Your company does not use a central Project Management Office for these projects, leaving the planning and execution to localized regional teams. The teams make the selections, build the schedules, and execute the projects.

With the time compression, the regional engineers look for ways to control their workload, pushing work onto the suppliers. Your integration suppliers offer not only the conveyors they build, but the platforms and supports for the system. One supplier is working on three projects for your company: two retrofits and one new facility. With the holiday problems, you have to juggle priorities. The retrofits must happen now, before the next holiday rush hits, not two years out as planned. These are key facilities where your network just fell apart, unable to process the peak volumes. The contracts are in place, and the design work is underway, so why not tell the integrator to shift schedules and move two of the projects around? Yes, it is risky, and it will upset the careful planning, but this change fixes things this year, not next year. Your own engineering teams are not happy about the switch, but still, it has to happen.

The Supplier’s Dilemma

Now let’s look at things from the supplier’s viewpoint. One of the contractor’s major customers just changed scheduling on two contracted projects. They swapped the schedule, postponing a project for a new facility for a retrofit project. While both projects involve sorters, conveyors, platforms, automation controls, and integration, the facilities serve different operations of the customer company, so they are not a one-for-one swap of systems. Every part of the system is custom engineered for that specific project, so while some components are interchangeable, most of the components are not.

Both projects are turnkey projects for the system, so the supplier provides the platforms, conveyors, sorters, chutes, electrical, and controls. However, there is a great deal of other construction going on in each of the projects, where other integration suppliers are providing systems that interface with what the contractor is providing, along with regular building systems like building lighting, electrical, fire protection, and office facilities. The customer is managing all these other parts of the project, providing various levels of integration with the primary sort-system contractor.

The project in the new facility is in a new building, where there is nothing but the four walls, the roof and the floor. The retrofit is in a building that is almost 20 years old, and will be in use up to the moment the project starts. There are sections of existing equipment that remain in the old building, including the offices and some of the older technology sortation systems that the contractor’s system builds over the top of. As with the new building, the customer is project-managing the work performed by other trades and suppliers.

This contractor, while well known and successful in Europe, is fairly new to the US. The company started at the end of the 1940s, when Europe was rebuilding after WWII. After building baggage-handling systems at US airports for more than a decade, the company established sales, engineering, and operations offices in the US about five years ago. Well-known and respected in the EU, the company engineers and manufactures the equipment it makes in its home country, and in other EU-based factories, using a make-to-order principle for the internal components and shipping the components around the world.

Other components used in the systems the company does not make come from a variety of other suppliers; some are local, but many are global or regional. The company sources components like motors, cables, connectors, and other control devices from mostly EU-based global manufacturers. For engineered structural components, like work platforms, the company buys from steel structure suppliers in the home country of the project, so support platforms for the US-based projects come from US-based manufacturers. Every project uses steel shapes, hardware, conduit, and other generic materials, and the company sources those materials from suppliers in the immediate vicinity of the project. Each system can use conveyor and other machines that the company does not make, and the company tends to source these components from steel fabrication and millwright shops local to the project.

These projects involve lots of specialized trade labor—welders, millwrights, electricians, and installation laborers. The company contracts all the labor needed for installation services to companies that provide labor and management of these specialized trades. In some contracts, like electrical installation, the contract will include labor and materials, like conduit and fittings, while other contracts are for labor alone.

Because of their extensive baggage-handling systems background, this contractor is used to working as a mechanical subcontractor to the general contractor that is building the airport terminal buildings. As such, the company works as a subcontractor to the General Contractor, and is used to working under the GC form of contracting. In fact, because of their extensive experience using the GC format, the company now follows this form with all its contracts to its subcontractors.

Since the company follows a make-to-order manufacturing principle, schedule change creates havoc for engineering, internal manufacturing, external supply of bought-out components, and the procurement of installation contractors. The company may have as many as 30 projects operating at the same time in different phases. When a schedule changes, the resulting mayhem is not confined to the internal manufacturing schedule. Changes ripple through the supply chain, affecting the suppliers of components that go into the internally built parts. The changes also ripple through the outsourced supply chain, creating engineering, sourcing, and manufacturing problems for the manufacturers of chutes, welded conveyors, and support platform structures.

Complex Problems Finding Complex Cognitive Talent

One interesting consequence of the economic recovery of the past five years is the difficulty of finding talent with the right cognitive skills to deal with the growing complexity of the world. The equipment systems, the human systems, the legal and ethical issues behind contracting, and the relationships between the parties all become more complex as more people and businesses become involved in a project.

Qualified project managers have always been hard to find, and finding competent ones with domain experience in Material Handling Systems can be even harder. It isn’t just the material handling systems field; construction, software, financial, legal—all these knowledge domains need competent representation.

This extends to finding subcontractors with the right mixture of experience, knowledge, and expertise. The good ones are booked up for the simple reason that they are in high demand, and therefore can name their price. That leaves contractors to search for subcontractors with sufficient skills and abilities to do a good job on the project, as we will learn next.


Note:  Just as a reminder given the nature of this series, I am a logistician and IANAL (I am not a lawyer).

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