Performance-based contracting in construction: innovation for the brave?

The construction sector is innovating to ensure building procurement transactions mirror the simplicity of mass-produced consumer and capital (CaC) goods transactions with their complete contracts. One of the potential construction innovations - the performance-based contract (PBC) - is a hybrid of complete and incomplete contracts focused on building output (performance) rather than input works and materials. A PBC is a complete contract for building price and output (event certainty because, like the CaC goods sectors, design and performance are frozen at contract execution) but an incomplete contract for rewards to be earned during the performance-life of the building. The PBC construction teams (the equivalent of producers in the CaC goods industries) comprise historically successful, trustworthy experts (including manufacturers and suppliers) - not consultants. The greatest risk on current construction projects is client-driven changes which are avoidable if a PBC is used because the PBC is executed on the basis of the client's performance-based design - and therefore no contract renegotiation is necessary. The innovation risks are borne by the constructor-producers who are able to innovate as they see fit. Producer rewards flow once the building "performs" and outputs meet the agreed targets but producers must have control over future building operation in order to be assured of receiving their rewards. The literature search identified PBC characteristics including full information, no renegotiation, fully committed parties, asset specificity with uncertain ownership, and output and innovations unknown at the time of contracting. By using these characteristics as a basis for research it was possible to determine which of the PBC innovation and risk management requirements are present in current non-PBC projects. Two different case studies were conducted and results showed that acceptance of PBC would require a risk-tolerant, open-minded culture; that PBC innovations and incentives would be the same as traditional construction innovations and incentives, and innovation risk management strategies for PBC-type projects would be the same as traditionally contracted risk management strategies. Results also showed that innovation occurs throughout the construction process (not just at design stage) and contracts are regarded as renegotiable. A PBC is a non-renegotiable service contract with on-going performance targets - which undermines the aspiration to make construction transactions as simple as discrete, complete-contracted CaC goods transactions.