British Airports Authority (BAA), a major airport operator, constructed Heathrow Terminal 5 (T5), the largest construction project in Europe in the early 2000s. T5 is a complex multi-modal transport interchange designed to handle 30 million passengers per year over a 260 Ha site. The program included two large terminal buildings, an air traffic control tower, a 14,000-space car park, an airport hotel, and road and railway transport links. In 2008 there were approximately 50,000 people involved in the project.
The program was split into 16 projects valued at between GBP10 million (USD13.8 million) and GBP200 million (USD276.9 million) each. These were further split into 147 sub-projects and over 1,000 work packages.
BAA had never undertaken a program of the scale that Heathrow T5 represented and undertook extensive research prior to T5, to understand what factors made major projects successful. A two-year study included every major construction project in the United Kingdom over GBP1 billion (USD1.38 billion) and every international airport that opened in the past 15 years. The study found that no UK project had delivered to budget, time and quality, and that all the studied airports had opened late. BAA concluded that without a radically different approach on T5, there would be negative impacts to safety, cost, and delivery timeframes.
BAA identified two areas that would contribute to poor performance – poor collaboration, and reluctance for project participants to assume responsibility for risk.
To achieve the desired outcomes to budget, time and quality, BAA decided it needed a model to actively manage the risk on the project. It developed a bespoke relational contract (T5 agreement) for use with its T5 tier 1 suppliers, including architects and engineering design consultants, and general and specialised contractors and manufacturers.
A totally integrated project team was created between the client and suppliers. This was designed to mitigate conflicts between parties, which incentivised parties to collaborate and foster positive problem-solving behaviours. Suppliers, including architects, contractors, and consultants were co-located and requested to work together from the start of the project to manage risk, including with contractors who were traditionally competitors.
The T5 agreement was a cost-plus contract with BAA paying the suppliers’ actual cost plus an agreed fixed fee covering their overheads and profit, based on a partnering approach. BAA removed all the contractors’ risk contingency by retaining all major risks by taking out project-wide insurance covering loss or damage to property, injury, death, and professional indemnity.
Risk was pooled into a program-wide ‘risk pot’ for each major component of the project to enable easier allocation based on need and greater financial control. This lowered the contractors’ overall tender costs with the risk managed actively by the entire team. It also underpinned the cultural approach which was one of partnership and transparency.
In its contract with the tier 1 contractors, BAA stipulated its expectations on how tier 2 suppliers were to be engaged to ensure that its approach was carried downstream throughout the project supply chain.
BAA mandated ‘open book’ pricing, which involved looking in detail at suppliers’ internal cost structures. Incentivisation of all subcontractor pricing was necessary to achieve the intended outcomes. By using a target cost approach, contractors were aligned with BAA’s goals to deliver the project successfully. The incentive fund was created from the target cost for the whole project and provided a commercial incentive for suppliers to improve on their agreed plans and increase their profit. Any outperformance against the target budgets for each sub-project was split between the contractor, BAA, and a contingency fund until the entire project was completed.
A long planning and design lead time (15 years) allowed BAA and contractors to refine plans and comply with 700 planning conditions. The planning period allowed for study of every international airport opened in the last 15 years, and all UK construction projects over USD2 billion in the preceding 10 years.
The trial and testing regime involved favouring already-established technologies, to lower R&D costs. Any ‘new’ technology was first tested on BAA’s smaller airports. 70% of mechanical and electrical engineering components were manufactured off site.
British Airways – sole airline user of T5 on opening
Tier 1 suppliers to T5, including architects, contractors, and consultants.
September 2002 – Construction commenced
14 March 2008 – T5 opened.
Results / impact
T5 was delivered on time and within its planned GBP4.3 billion (USD8.5 billion) budget, with the success of the commercial framework leading to its adoption by other projects. The integrated project team BAA developed with its tier 1 contractors enabled a collaborative partnership with the development of innovations, practices, knowledge, and tools.
The project’s success led to multiple awards: StructE Supreme Award (Best of the Best), StructE Best Commercial / Retail Structure, British Construction Industry Awards – Highly Commended, BCSA 40th Structural Steel Design Awards, RIBA National Award, and RIBA London Award.
Key lessons learnt
The success of T5 shows that organisations must be willing to undertake new ways of working and delivering projects, such as greater risk retention by clients, risk pooling and project-wide insurance, and integrating or co-locating project teams. Standardised processes created and implemented in T5 demonstrate the need for successful mega-project delivery models. Organisations that have successfully delivered mega-projects can use the adopted processes and systems, while continuing to refine them to deliver the next project.
The transparency required in a contractual arrangement used on T5, achieved through use of open-book pricing, can be culturally challenging for some suppliers and may need to be gradually developed, with the understanding that this is the trade-off for the client carrying more of the risk. Additionally, success of this contracting approach requires a strong and competent client (BAA).
The strong leadership of BAA’s CEO was key to success, with the ability to create a coherent vision aided by the use of key performance indicators to measure success. Organisational change programs also helped lead this mega-project to accomplishment. In addition, the in-house project management capability of BAA was an important consideration in the success of the delivery model.
Using an aligned commercial approach allows all parties to focus on the technical delivery aspects of the project.