Incompatible Incentives & Penalties
Sometimes, chasing a bonus too aggressively can cost money.
I recently heard about a large new construction project where the commissioning process hit a snag because of apparently conflicting construction contract clauses. In one part of the contract, the installation contractors were offered a bonus for completing the project by a certain date (earlier than the base scope requirement). In the commissioning specification, the owner made the general contractor responsible for the cost of retesting required due to deficiencies discovered during initial functional performance testing.
The commissioning professional was not aware of the incentive, and the contractors, as it turned out, may not have been aware of or may not have remembered the penalty. As the early completion date approached, the contractors exerted tremendous pressure on the commissioning professional to perform the functional performance testing. The commissioning professional resisted, pointing out that all of the system readiness prerequisites were not yet documented as complete. In particular, the TAB report, even in preliminary draft form, was not available.
The contractors implored the commissioning professional to conduct the testing anyway, assuring the commissioning professional that the systems were, indeed, ready for testing. The contractors specifically stated that their request was due to the bonus available for early completion. This was the first time the commissioning professional was made aware of this incentive.
In the interest of being team players, the commissioning professional agreed to proceed with testing. I am not sure if the commissioning professional pointed out to the contractors that they would be responsible for the cost of retesting if the systems were actually not ready for commissioning.
The testing did not go well. There were more than 10 deficiencies on every major AHU unit (not including terminal units) and scores of failures on the life safety and emergency power systems. Clearly, the systems were not ready for successful testing.
Based on what I understand from the commissioning professional, the general contractor pressured the mechanical and electrical contractors to be ready for testing, and the mechanical and electrical subcontractors told the controls and life safety system contractors to be ready. However, “telling” the controls and life safety contractors to finish their installation, perform point-to-point checkouts, and write code for the custom programs is not the same as coordinating the entire construction team to ensure these “last” contractors have sufficient time to successfully complete their work. The same is true for the TAB contractors who need the air and water systems installation to be complete, the controls to be functional, and a number of general construction elements (such as ceiling installation and cleaning) to be finished.
When it came time for retesting, the contractors pushed back about paying for it. The general contractor wanted the commissioning professional to assign retesting responsibilities/costs to individual subcontractors. The commissioning professional refused to do that because the commissioning specification put the retesting onus on the general contractor and only the general contractor could determine, based on their specific subcontracts, how and if they wanted to back charge their subcontractors. It was important to remember that the commissioning professional was a third party tasked with impartially testing the systems and factually reporting the results. The commissioning professional has no authority to provide design and/or construction direction or to otherwise influence contractual agreements between other parties on the project.
The contractor’s pushback resulted in hours of painstaking discussions, written communications, fingerpointing, and negotiations, all of which did nothing to improve systems performance or bring the project closer to completion.
Was the early completion incentive bonus incompatible with the retesting penalty? I do not think so. However, the contractors needed to take both contract clauses seriously and understand that early completion included early commissioning success. This meant coordinating the entire project team to achieve both goals simultaneously.