The business issue

The client (a privately held electricity and gas distributor) was locked into a value destroying contractual relationship with its service provider. The contract had a fixed price arrangement for all maintenance or operational expense work but a cost plus arrangement for capital works.

The net result of the service contract was the gradual deterioration of the asset base (there was no incentive for the service provider to perform the fixed price work) and a cost blowout in the capital works forecast estimates (where the service provider was incented to deploy its resources). This lead to frequent disputes with the service provider since the client’s needs were not being met as originally intended.

There were other dimensions to this complex issue which included the regulatory risk created by opacity of costs and the lack of adequate expert capacity within the client to keep the service provider honest.

What d2e did

d2e was initially brought into project manage the resolution of the numerous contract disputes that has originated as a result of the adversarial contractual relationship. After a brief review d2e concluded that the root cause of the problem was the underlying contract and the client’s interest would be best served by amending it.

After gaining agreement from CEO and the Board, d2e helped implement the contract changes.

Benefits delivered

  • Alignment of client and supplier incentives with the implementation of an open-book, cost-reimbursable contract with the inclusion of KPIs on work quality
  • Assurance of client value by including an additional supplier with separate geographical coverage but with enough similarities to provide comparable benchmarks on cost performance
  • Improvement to client expert capacity by moving to a more traditional model of in-house expertise