Great article in The Economist (print edition: 20th August 2005), showing how BAA took a new approach to risk management to help keep the Terminal 5 project on schedule and budget. (Something that the UK is not renowned for when it comes to construction projects – think Millennium Dome and railway track upgrades for starters… and then there’s that football stadium in Wembley)

In a nutshell, BAA analysed previous project disasters, and concluded that tying contractors to compensation payments for late delivery and failures might generate money but doesn’t get an airport built. Instead of requiring suppliers to include risk payments in their quotes, the payments are put into a central fund. If the job is done on time, the suppliers get a share of the fund. If there are problems, they are solved using the money from the fund. This also encourages suppliers to work together to fix issues, since all will be affected by reductions to the central fund. BAA says that 80 – 85% of the jobs on site are being completed on time, compared to an industry average of 60%.

There’s more info in the article (including analysis of the potential negatives from this approach), but what a good idea! And what a great way to foster collaboration and cooperation across your supply chain, using a carrot rather than the usual stick.

Article is available online (at time of posting) here:
Blue Skies Thinking

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