Supplier performance to be rewarded by BAA

9 March 2010

9 March 2010 | Helen Gilbert

BAA is offering financial incentives for suppliers to encourage improved performance and reward outstanding behaviour and results.

The construction of Heathrow Terminal 2 will be purchased using an award fee approach. The airport operator will pay suppliers a margin of between 2 and 4 per cent if they suggest successful ideas on cutting costs.

Vendors could also win an extra fee if they exceed a set of pre-established criteria including scheduling, safety, quality, responsiveness, cooperativeness, innovation and success at mitigating problems. Performance on these requirements will be assessed every six months.

Steven Morgan, capital projects director at BAA, told SM the approach had been used in a number of deals in the US, including government defence and IT contracts, with positive results.

“The improved performance of contractors more than pays for the additional fee. It creates an atmosphere of trying to please the client rather than avoid their wrath,” he said.

“While an attractive opportunity, [an] award fee is not paid for showing up but is instead an offer to reward outstanding behaviour and results. Contractors would need to exceed the requirements to earn any award fee – and to earn it all would require absolutely extraordinary performance.”

The scheme is similar to one proposed by General Motors last year. The company planned to share half of its savings with vendors who submit successful ideas on cutting the cost of car parts.

During the construction of Heathrow’s Terminal 5, BAA was acknowledged for its innovative approach to risk management. The operator took responsibility for risk instead of passing it on to the supply chain, as well as helping to expose waste and manage supplier performance more efficiently.

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