THE T5 PROJECT AGREEMENT

INTRODUCTION
Heathrows airport was the largest airport in the world, with demand far exceeding
capacity in 2001 (Nuno, 2008). With the vision of becoming the most successful airport
company in the world, its operator, BAA, decided to develop Terminal 5 (T5) in 1996. This
project would increase the companys capability to offer higher quality services and,
consequently, rise its revenue provided by airport charges.

To overcome the complex challenges posed by the T5s programme, BAA created The
T5 Agreement, which neglected the traditional approach for construction projects. Its
application had led the programme to successful progress until 2004, when 50% of the work
was completed on time and budget. At this point, BAA needed to decide whether to extend this
approach for the fit-out phase of the project, which would have different conditions. The aim
of this essay is to explore the possible implications of this choice, discussing different
alternatives and proposing the most suitable solution according to the context of the T5
development.

PROBLEM ARTICULATION
After a public enquiry period which lasted 5 years longer than expected, the T5
programme was finally approved in 2001. Funded by BAA itself, T5 represented a massive
economic risk for the company, with investment embodying almost 70% of its capital in 2002
(Nuno, 2008). Furthermore, to compensate for the delay in getting the permission required, the
programme duration was reduced to 5 years, without a buffer period for risk (Nuno, 2008).
These challenges, and the additional complexity of its 16 major projects, placed a highly

uncertain environment in terms of design requirements for T5s development, which called for
cooperation and flexibility within the project supply chain (Nuno, 2009).

In order to ensure the right disposition among its suppliers, BAA based its project
management approach in a relational contract, known as the T5 Agreement (Nuno, 2008). This
strategy aimed to encourage exceptional performance in all its first tier suppliers, by means
of large asset-specific investments (Nuno, 2009). It could be argued that such innovative
approach for construction projects had been successful in T5, leading to completion on time
and on budget of 50% of the programme in December 2004 (Nuno, 2008). However, up to that
point, the project had only involved relatively large but few suppliers, tackling substantial
packages of work; while the upcoming fit-out phase would involve a large number of firms
working on smaller work packages (Nuno, 2008). Close to its start, the T5 leaders needed to
define if this contracting strategy should be extended to the fit-out stage.

DISCUSSION
Different alternatives can be considered to face the problem articulated above. Firstly,
the T5 leaders could extend the T5 agreement to the fit-out phase, using the same first tier
suppliers, which would reduce operational risks for BAA. Since these suppliers already know
the T5s culture and processes, the company would not need to devote more time and money to
knowledge transfer (Nuno, 2009). It also meant that BAAs project management staff would
continue with the same demands and rapidly allocate the work between the existing suppliers
(Nuno, 2008). Nonetheless, this could bring a loss of cost-effectiveness, due to the
accumulation of mark ups from the lower tiers (Nuno, 2008).

Secondly, the T5 leaders could extend the T5 agreement to the fit-out phase, using
new suppliers from the international market. This would drive cost efficiencies on the bids

and BAA could pay all the job at market prices (Nuno, 2008). New suppliers could also bring
better or more innovative practices to the project. However, this possible savings would be
largely outweighed by the cost and time required to align their systems and cultures with the
T5 model (Nuno, 2009). BAA would need to consider carefully is every supplier has the
capabilities required in process flexibility and people, in addition to interest in the project, to
ensure the effectiveness of the relational contract (Nuno, 2009). As a result, BAA would get a
longer time on the procurement process and more interfaces for its staff to manage (Nuno,
2008). Such investments would rarely be profitable, considering that these suppliers would only
be part of the project during the short period required for their work.

Lastly, the T5 leaders could not extend the T5 agreement to the fit-out phase, using
new suppliers from the international market. This would avoid the high asset specific
investment for suppliers that might not be there for a long time. On the other hand, this could
send a contradictory message to the workforce, with some teams working collaboratively while
others focusing on their individual goals (Nuno, 2008). Such confusion would undermine the
effectiveness of the T5 agreement in the whole programme, increasing the risk of inter-firm
conflict and the commercial management complexity (Nuno, 2009).

Considering the advantages and disadvantages of each possible solution, the author
suggests that the first alternative is the most suitable option for the fit-out stage. BAA has
already done high asset specific investments in the relationship with its first tier suppliers, such
as consultants, logistics centres, production-planning tools, kanban systems, among others
(Nuno, 2009). Such infrastructure should be exploited as long as possible, to achieve good value
for money. Furthermore, a good implementation of the T5 Agreement should be the priority to
keep obtaining exceptional results with a relational approach (Nuno, 2009), and such efforts
would be more effective with the players and conditions already in place.

CONCLUSION
The relative efficiency in transaction costs, which are the result of its asset specificity,
frequency and uncertainty, drives the choice between contracting through markets, hierarchies
or hybrids, such as relational governance structures (Williamson, 1985). In order to make this
decision for T5s fit-out stage, BAA senior managers would mainly need to consider the high
specificity of the investments required for implementing the T5 Agreement and the quality of
the relationship that it has with its current first tier suppliers vs. the possible candidates in the
market (Nuno, 2009). It could be argued that going to the market and contracting new suppliers
would involve higher transaction costs and, consequently, higher risks for BAA. Therefore, the
best alternative would be to further exploit its current relationships.

However, the author recommends BAA to keep signalling its expectation by closely
monitoring the suppliers performance for the fit-out work packages, demanding continuous
improvement. This would avoid the emergence of opportunistic behaviour and a spending
culture (Nuno, 2009). BAA should also negotiate reasonable targets for the suppliers overhead
and profit recovery levels required in this stage. Ultimately, as Nuno (2009) suggests, the
commercial terms of the any agreement should be adjusted as the project unfolds: how they
are managed throughout the project, also drive behaviours.

REFERENCES
Gil, N. (2008) BAA: The T5 Project Agreement. Manchester, UK: Manchester Business School.
Gil, N (2009) Developing Cooperative Project Client-Supplier Relationships: How much to
Expect from Relational Contracts?. California Management Review, 51(2), pp. 144-169.
Williamson, O. (1985) The Economic Institutions of Capitalism. New York: Free Press.