Case Gil, N. (2008).

BAA: The T5 Project Agreement (A)

Shun Yao 10647912. Zekai Wang 10661235. Zixuan Wu 10696361. Renyuan Zheng 10752500.

Yiting Wang 10620412. Yicong Ye 10633290. Kexin Wang 10668345.

Background:

Project T5 includes 16 major projects with a total cost of about 3.1 billion pounds,

including buildings and baggage handling systems for London Heathrow Airport. It is a

large-scale and extremely challenging project for BAA whose valuation is only 5.5 billion

pounds. BAA decided to implement the T5 agreement, considering that if the project is

carried out as usual, it will delay delivery and exceed the budget.

T5 agreement is a contract signed with the first-tier suppliers. The purpose of

designing the contract by BAA's legal and commercial team is to minimize the conflicts that

usually plague major projects and ensure the successful completion of the project. The T5

agreement aims to encourage suppliers to adopt best practices and excellent performance,

actively seek and provide affordable and excellent solutions, and get rid of the traditional

practice of infrastructure customers choosing the supplier with the lowest bid. Under T5

agreement, BAA reserves the right to carry out audit reviews to all the financial information

of suppliers and encourage them to change their work habits. In addition, the T5 agreement is

associated with a policy document that sets out the commercial terms and conditions

applicable to the relationship between BAA and its primary suppliers. And it turns out that

under the framework of T5 agreement, the project did not exceed the budget or overtime

when the project was halfway through. Therefore, BAA is considering whether to continue to

use T5 for the next stage of renovation work.

Option1: Award the fit-out works to the first tier suppliers

The first option is using the first tier suppliers who have been involved in the previous

project. They will take responsibility for procuring key suppliers from the global market,
training employees and undertaking the project management. Mitigating the risks is the first

advantage of contracting with the incumbent suppliers in the work packages selection. Since

these suppliers had cooperated with BAA in the previous project, they knew exactly the

clauses of the T5 agreement, the possibility of miscommunication which directly impacts the

project deliverables can be avoided. Cost-saving is a crucial advantage as well. The previous

project met both the financial constraints and the project schedule, and there were not any

conflicts during the collaboration process, the BAA do not need to spend money on training

suppliers for adjusting to their styles. Time-saving is the last advantage. To find fit-out

market suppliers, RFI, RFQ, RFP, negotiating contracts……the bidding process is

time-consuming. And BAA suffers the stress unders the project time schedule.

However, some market researches showed that commissioning these first-tier

suppliers to procure suitable key suppliers for the fit-out work packages would not be the

optimal choice, considering the economic benefit. Since the first-tier suppliers helped reduce

the operational risks in the process, BAA would have to pay more for the overheads and

profit recovery of the first-tier suppliers. It would also be easy for them to utilize the

information asymmetry between BAA and the sub-tier suppliers to bargain for more.

Furthermore, once implemented this mode, BAA might not be able to inform the second-tier

suppliers of some necessary changes or monitor their performance directly due to the

existence of hierarchy, instead the information would be passed through the first-tier

suppliers, which, to some extent, might reduce the efficiency of communication.

Option2: Procure new fit-out suppliers using T5 agreement

BBA directly selects fit-out suppliers from the international market by putting out to

tender is an alternative plan for fit-out work, and whether extending the application of T5

agreement to the new fit-out suppliers is the key question.

 The benefits of applying T5 agreement were shown in the early work with the first

tier suppliers, finishing works on time and within budget. In general, T5 agreement is an

enabler for BAA, it makes supplier teams and BAA staffs work as one team, trusting and

relying on each other to achieve the same goal. Because the high level of transparency is

required by T5 agreement, BAA can better control new suppliers in profit margin and risks.

Also, the policies in T5 agreement such as, incentive plan, risk management, and the way of

compensating can engage the suppliers from the international market which are the leader in

their field to join this project.

Option3: Procure new fit-out suppliers using traditional commercial contract (Without

T5 Agreement)

The third choice is that BAA can seek potential suppliers for the fit-out work

packages from the market around the world. By issuing a notice at the OJEC with a call for

pre-qualification documents, BAA is able to have some potential qualified suppliers who will

be invited for presentations. Next, BAA will negotiate the final commercial arrangements for

each work package with the suppliers that are selected according to the bids. Different from

the second choice, these fit-out suppliers will not be considered as the first supplier and use

T5 agreement. BAA should make commercial contracts with these fit-out companies. Then

things will go as the suppliers normally do on major construction projects without the

implementation of the T5 agreement.

The fit-out work of the Terminal 5 is relatively scattered, and many small decoration

companies need to be invited if BAA try to directly procure key suppliers for the fit-out work

packages from the international market. These small decoration companies are not familiar

with the working process and mode of T5 contract. Introducing and explaining T5 contracts

to these small companies will bring a lot of extra expenses. Compared with T5 contracts,

another advantage of traditional business contracts is to reduce the difficulty of management.

Traditional business contracts do not require BAA to review the company's specific

expenditures. If BAA applies the T5 contract, BAA needs to audit the financial information

of the decoration company, which will bring great pressure to the management, while the

traditional commercial contract does not have these problems.

Conclusion and recommendation

Since the T5 agreement proved to be successful in the massive works, BAA definitely

could still trust those first-tier suppliers and let them handle the fit-out phase. Since the

previous data shows that the implementation of T5 agreement will neither delay the

construction period nor overrun the budget, there is reason to believe that the first-tier

contractor can bring this good inertia into the next stage of work. Because the entire project

budget has been locked, and there is no sign of exceeding the budget, there is no need to

change partners for uncertain cost savings.

If BAA insists on procuring the fit-out suppliers from the market, there are still two

ways it could help BAA do better. First, before the end of the first stage, the bidding will be

started in advance, and all subsequent processes will be followed up in turn. In this way, the

time saved compared with the original plan can be used to implement T5 agreement with new

partners. Second, BAA can also invite relevant responsible persons from the original first-tier

suppliers to give guest speeches, to help new partners accelerate their understanding and use

from the perspective and thinking of the people who have benefited. Of course, in reverse, it

is also possible for the new partner to send a representative to the first-tier suppliers to

conduct a study and research on existing project management.