Contractors and Utilities: What Makes a Relationship Work?

January 2018, Vol. 245, No. 1

By Mona Haggag, Principal, and Gretchen Gagel, President, Continuum Advisory Group, Denver, CO

Fifteen years ago, a gas utility client faced a nearly impossible task – quadrupling pipeline construction with a limited increase in internal resources. The solution – bring in the contractors as trusted partners and build the solution together.

And it worked.

Relationships of any kind take hard work, but the benefits can be tremendous. Our work as strategic advisors to utilities and contractors has helped us gain a deeper understanding of the key ingredients to strong contractor/utility relationships.

Issues such as good governance structures, well-defined “wins” for all involved, and dedicated continuous improvement processes are just a few of the keys to achieving outstanding relationships between utilities and their contractor partners. We’ve asked some industry leaders about their thoughts on this topic.

In the last five years, how have you approached managing your contractor relationships, such as contract structure and data sharing?

Cheryl Campbell, SVP Gas, Xcel Energy: Our communications and data sharing has increased considerably. We have maintained blunt and candid conversations with one another about performance. It is a two-way street, and it is important that our contractors feel just as comfortable giving us feedback. For example, our contractor communicated to us that we were changing their standards manual too frequently. As a result, we started involving them in changes to ensure that we were setting reasonable expectations for the contractor.

Doug Reeves, President, Q3 Contracting: Some of our utility client relationships have begun to employ scorecards to evaluate performance. The scorecards track data relevant to performance and help identify trends both positive and negative. Key players on both sides meet monthly to discuss the results which can shine a light on a good process as well as a poor one. For our team, the scorecard interactions do a great job reinforcing client expectations and also identifying opportunities for improvement.

Jeff Tuttle, CEO, Heath Consultants: Risk management and mitigation is critical to all parties, and has been a driver for our utility customers to outsource more compliance-related work. Technology will play a critical part in tracking work as well as supplying data that will assist in asset management strategies – specifically, transmission and distribution integrity management programs. Technology will also drive down costs and add layers of protection in industry safety programs.

Data-sharing has also become more prevalent with Field Force Automation initiatives with GIS, electronic reporting, and documentation via GPS.

Eric Habecker, Project Director, Piedmont Natural Gas: At Piedmont, over the last five years, our capital program has grown significantly. We depend heavily on our contractors to perform a variety of work, including engineering projects, construction, and third-party inspections. It’s important that we maintain good working relationships, open communications and sustain a manageable number of contractors at any given time.

We recognize that when you provide repeat work (predictability), we get the best out of them. The safety and environmental aspects of our projects are vital as well. We’re working with our contractors to share data back and forth so that we have meaningful lessons-learned and near-misses reported. In the past, contractors were less likely to share near-misses, which are critical to becoming more predictive around safety.

How has this changed or evolved over the last 20 years?

Campbell, Xcel Energy: It is much more of a partnership now. We believe that our contractors deserve a fair profit, and that it is in our best interests for them not to be financially hamstrung. Our contractors have also been more transparent about costs and what’s required to deliver work on time. Historically, contractors would complete the work and move onto the next project without communication on what created challenges and how we can work together more effectively, but that has since changed.

Reeves, Q3 Contracting: Utility clients have experienced greater regulation and compliance pressures. This brought about the data-tracking process that really evolved into a more productive way to communicate. It makes for a better dialogue and a greater opportunity for more mutual input with work planning, schedule commitments, project design, etc. I think contractors even get more input into how contracts are structured and if the scope of work is written in a way that better reflects all types of work being performed.

Tuttle, Heath Consultants: Having spent most of my career on the utility and operations side of the industry, I firmly believe the trend will continue toward developing productive long-term relationships between the customer and the contractor.

It’s about developing trust and confidence which will mean that contractors need to be more open about their project finances. Utilities work in an environment based on a justified rate of return and you can leverage that same approach with service providers. A stable, long-term relationship that fosters continuous improvement will enhance the performance of all parties.

That long-term relationship on our side assists us in developing a more stable workforce and project leadership team that is essential to performance and achieving lower costs over the life of the project. Contractors also now offer bundled services under a single vendor to leverage economies of scale across human resources, vehicles, offices and equipment, and to spread out seasonality so the workforce can be employed year-round.

Habecker, Piedmont Natural Gas: One of the biggest changes concerns safety – we now have much higher thresholds for safety requirements – and we are sharing lessons-learned and near-misses with our contractors in an ongoing effort to discover and implement new best practices.

The quantity of work has also changed and the industry is doing more work around integrity projects resulting from PHMSA regulations. Growth in power generation and natural gas has also increased the size and number of projects.

What characteristics about the contract relationship has impacted positive change?

Campbell, Xcel Energy: Getting involved earlier in the work-planning process has been positive for us and for our contractors. It is moving beyond tossing work over a wall to someone; instead, becoming more engaged across the work and setting reasonable expectations for each side.

We are more thoughtful about how we engage and implement compliance measures. We are also doing contractor work inspections, something utilities have embraced. Through it, we are gaining new knowledge about the work, asking questions about why they are doing certain things so that they can be fixed during the process if necessary.

Reeves, Q3 Contracting: It has highlighted the common goals between us and the utility’s customer. We now have improved balance in the relationship and more collaboration with problem-solving. By shining a light on performance using the hard data, we are better at project management and work execution.

As a result, our safety indicators and damage-prevention performance has improved. With more impactful relationships, our contracts have become longer in nature. This has removed some of the resource volatility in those markets and has established continuity for those working on them so that they get to know the customers better, and consequently, the work improves.

Tuttle, Heath Consultants: We have been fortunate to develop long-term relationships with many customers. I have found that operational and regulatory performance among these customers tends to be better. Switching out contractors every two or three years will prove to be less productive and doesn’t do anything to promote regulatory confidence.

Long-term contracts afford the contractor a more stable workforce, employee growth opportunities along with improved familiarity with our customers’ operations and maintenance procedures and service territory.

Habecker, Piedmont Natural Gas:  We are working to develop contractor alliances. We still bid the job, but for the smaller projects we bundle the work and form alliances. We’ve expanded this beyond just price considerations as well. We evaluate our contractors on a variety of criteria such as safety, project experience, individual qualifications and price.

What has negatively affected the relationship?

Campbell, Xcel Energy: The level of regulation keeps rising so they keep narrowing the box in which the contractor can operate. They don’t have the flexibility that they had in the past, and we keep raising the bar because it’s being raised on us. It’s also challenging on both the utilities and the contractor to keep things positive – it’s easy to end up in a bad place.

Reeves, Q3 Contracting: Increased regulation and the escalation of system-improvement schedules can amp up expectations and create friction when results do not come quickly. The surge in work volumes can squeeze resources, especially with the workforce, material availability and even equipment scarcity. It requires patience, problem-solving and communication from both sides to work through those situations.

Tuttle, Heath Consultants: I found, both on the operator and contractor side, that shorter-term relationships based primarily on price tend to have lower productivity and overall performance. It takes time to stand up a project with many new team members and to start hitting your stride from a performance standpoint. Shorter-term contracts don’t allow a contractor to fully capture all of their initial startup costs.

Employees tend to look for longer-term stability and opportunities for growth that are not always available under shorter contracts. Contractors also tend to lose employees to the utility as they look for more stable employment. This is not always a bad thing as it reflects well on the quality of our employees, but from a project service perspective, we need to ensure that we can hire and train new employees in a timely manner.

Habecker, Piedmont Natural Gas:  Any long-term relationship will encounter bumps in the road, so when a contractor makes a mistake, the relationship is usually only impacted negatively when the issue is not resolved honestly and immediately.

The key is to establish very clear expectations early on, and to communicate often throughout the project. Misunderstandings and mistakes go both ways, but if dealt with openly and honestly, a negative relationship can be avoided.

What advice would you offer to your peers on implementing best-in-class relationships?

Campbell, Xcel Energy: Select contractors who are true partners – those who take ownership over their work and behave like they are working on their own pipeline. Remember, building trust is key and that requires a willingness to share information, even when you are at fault.

We had a contractor who bored under Interstate 25 with low-quality welds. The contractor admitted fault even though the Xcel inspector was also at fault, and they replaced it at their cost. Not only did they replace it, they X-rayed every weld even though it was not required to rebuild trust in their performance, and trust is critical.

Covey’s speed of trust is a great resource for articulating how this trust exists in the relationship and how people do right by one another. We have worked hard on it, and we have made mistakes, but at the end of the day, that’s what it takes to make it a positive situation for everyone involved.

Reeves, Q3 Contracting: Make sure you understand your customer’s expectations, and be prepared to speak up if the expectations are not clear or what they are asking for is not economically feasible. You must have an honest conversation with your customers, and to do that, you need to understand what they expect.

Incremental improvement is important, but you need to establish a certain baseline of performance in order to confirm those improvements. Be honest about your shortcomings and make the effort to erase those shortcomings in order to build trust with your utility partner.

Tuttle, Heath Consultants: Develop openness and transparency for a win-win opportunity between the contractor and the utility. Each needs to understand how the other operates and the related costs with human resources, vehicles and equipment. Work together to keep a high-quality, stable workforce.

Provide year-round contracts verses seasonal opportunities to avoid the “peak and valley” affect with related compliance work and scheduling. Remember, the details matter, and it is important to create the conditions that will enable your workforce to project the best image to your customer and safeguard their reputation with utility customers.

Habecker, Piedmont Natural Gas: Creating more alliance-type relationships with contractors really helps. There are mutual benefits because the contractor has a more predictable workload and we get a dedicated workforce that understands our requirements and expectations.

You are also more likely to get the contractor’s A-team because the workload is known, sustainable and predictable. To establish a best-in-class relationship with contractors, it’s imperative that both sides agree that safety is the highest priority and always comes first.

Summary

The discussion with each participant reflected a diversity of viewpoints – an executive-level utility owner and their contractor, a contractor who is now led by a former utility owner, and a utility project director whose responses reiterated many of the practices that we have also observed to result in better project outcomes.

However, across each of these perspectives, there are distinct, key themes that emerged when describing best-in-class relationships. They included building trust-based relationships, setting reasonable expectations and requirements, transparency, and collaborative problem-solving.

Strong contractor relationships can greatly enhance the ability of a utility to achieve key corporate results such as meeting capital spend forecasts, driving down total cost per new service, or enhancing the reliability and safety of the utility’s installed base.

The key is to understand what you want out of these relationships, then dedicate the time and energy to develop the relationship. It will pay off. In our next article, we will examine how to build these relationships and how you can develop a roadmap that fits your needs.

Editor’s note: This topic will be further explored at the Pipeline Opportunities Conference on April 3 in Houston. Gretchen Gagel will moderate the panel which will include Cheryl Campbell and others.

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