Commercial management: enabling innovation

21 April 2017

Shy Jackson underlines the importance of commercial management to enabling innovation

Last year, the government held a consultation seeking ideas for a proposed national innovation plan. Innovation is a key issue for ministers – especially in the construction industry, where new ideas are essential to staying competitive and providing better value. Projects such as Crossrail and the upgrade of Bank station on the London Underground network have demonstrated the benefits of innovation for construction.

However, it also needs to be managed commercially so that there is a clear understanding of how these benefits are shared, as well as of who ends up owning any innovative ideas or bears the risk if the innovation does not turn out as planned.

The commercial treatment of innovation was one of the areas explored in a recent research project supported by Innovate UK and carried out by Costain, the University of Cambridge and Pinsent Masons LLP. The report was published in September 2016.

The current approach

Innovation is not currently addressed in standard form contracts. A simple lump-sum contract does not align interests in such a way that both parties benefit if an innovative proposal is adopted, although the parties can agree to do so under any terms they negotiate. There is also a perception that legal issues such as procurement legislation and protection of intellectual property rights act as a barrier to innovation.

There is also a perception that legal issues such as procurement legislation and protection of intellectual property rights act as a barrier to innovation

The promise to share potential savings is in contrast an incentive, and this is commonly ensured through value engineering clauses and target cost contracts such as NEC3 Option C. Mechanisms of this kind, however, are not always suitable for innovation that offers benefits through the whole life of the project, especially when it means a cost increase in the short term. In addition, proposals are treated under the appropriate contractual change mechanism, which fails to take account of the fact that innovation will often involve additional costs and risks that need to be shared as well as gains.

Evidence

Most of the empirical research for the project drew on analysis of a survey of around 120 industry practitioners, along with interviews and a number of focus groups. The detailed findings are set out in the report, but one in particular was that industry practitioners still value formal contracts and prefer legally binding agreements that can be strictly enforced rather than loose, non-binding arrangements.

The research also identified a strong association between innovation and flexibility and dialogue as well as sharing information, risks and costs. This suggests that innovative projects more than others require a contractual framework capable of fostering close cooperation between the parties, based on dialogue and risk-sharing.

Commercial management of innovation

The report identifies general measures for encouraging innovation, such as the use of innovation champions, but it also highlighted the need for certainty as to how innovation may be treated under construction contracts.

In that regard, it was felt that having a specific innovation clause would allow parties to agree a framework under which it was clear how the benefits of innovation would be shared, but also how any costs and risks would be treated. The clause could also set out the position on related issues such as ownership of any intellectual property rights generated by the innovation.

Innovation allows businesses to develop and remain competitive. This is true for all industries, but in construction there is an increasing drive to offer better value through innovation

Just having such a clause will not guarantee innovative proposals; but it was felt that it will help to reinforce the message that an employer considers innovation as a positive measure, and it will also offer certainty on the way proposals for innovation will be treated. The report includes 2 such sample clauses, 1 drafted as a short flexible option and the other a more detailed provision. Such clauses should not be regarded unusual, and to an extent they are similar to supplemental provision 7 in the Joint Contracts Tribunal’s Design & Build 2016 form, which deals with cost savings and value improvements as well as highlighting the importance of innovation.

The report identified other alternatives, such as incentives to reward innovation as well as the use of a protocol where specific clauses were felt inappropriate. The overall conclusion was that a clear contractual framework, based on collaboration, would help to promote innovation by offering certainty as to the commercial outcome. The report also explains how procurement legislation or intellectual property rights can be managed so they are not a barrier to innovation.

Conclusion

Innovation allows businesses to develop and remain competitive. This is true for all industries, but in construction there is an increasing drive to offer better value through innovation. Innovation and what it means will vary depending on the nature of each project and there are no standard solutions; the research undertaken and the recommendations in the report made should, however, provide a useful starting point for further development of routes to encouraging innovation.

Shy Jackson is a partner at Pinsent Masons

Further information

• Related competencies include: Contract practice
• This feature is taken from the RICS Construction journal (February/March 2017)