instead of taking an adversarial approach to risk ownership, stakeholders can work together to align incentives so that both parties are mitigating risks that could lead to cost or schedule overruns. For example, project partners could set aside a common incentive pool that grows or shrinks based on overall project performance and negotiate allocation percentages as part of contracting. As suppliers or EPCs take on additional project risk, the project owner’s percentage would decrease to compensate them. In another model, the contractor that carries the risk for materials and labor could receive progressive incentive payments for achieving costs or schedule below a predefined target. In such progressive incentive schemes, the contractor retains a higher percentage of the cost savings as the total cost savings increase (for example, 30 percent of the first $100,000 in cost savings, 35 percent of the next $100,000, and so on). This system can motivate the contractor to exceed targets and capture incremental savings beyond the low-hanging fruit. Embracing collaborative contracting. Collaborative contracting could be a solution to anticipate demand, align on capacity for future projects, and unlock mutual growth. In other capital-intensive industries, collaborative contracting pilots have improved both costs and schedules by 15 to 20 percent versus traditional contracts, according to prior McKinsey research. 6 The right level of collaboration will depend on the nature of the partnership. For example, in aligned-incentives arrangements, cost and schedule overruns and underruns are shared. In integrated project delivery models, partners shape project scope, validate cost and schedule estimates together, and both share risk and profits. Stakeholders might operate under a single contract and a joint management structure that guides the execution of project. 7 Contracting with newer players. Collaborative contracting is also beneficial in a market with newer, less-experienced players attracted by the rapid
growth of renewables. Project owners who make significant bets on emerging EPCs could agree on a more “open book” approach with visibility into the underlying costs of delivering projects. Owners could monitor improvements over time and help structure contracts so that both the EPC and its workforce are rewarded for efficiency gains. Developers who scale their own in-house or joint capabilities, such as building late-stage engineering and design capabilities, can also reshape project delivery. For instance, moving away from a complete reliance on turnkey solutions could give developers flexibility to build projects with new contractors. Workforce development The labor shortage has affected numerous sectors of the US economy, and renewables have not escaped the crunch. More than 92 percent of employers in the electricity generation sector are having difficulty hiring construction workers. 8 The rapid growth of renewables has led to many players competing for the same talent pools, and because solar installation has lower margins, it can be difficult to compete with rising wages in adjacent industries. 9 To increase productivity—which is a main source of competitive differentiation in solar—effective training and talent retention are critical. A renewed approach to workforce development can help secure access to labor, enable high productivity and continuous improvement, and reduce unexpected changes in project schedules and costs. Attracting talent. Talent attraction is the first step in growing the construction and engineering workforce. Solar project design and installation can provide jobs in rural parts of the country, but local people need to know those jobs exist. EPCs can partner with trade schools and local high schools to recruit new entrants to the workforce. In addition, dedicated efforts to attract historically underrepresented demographics would help expand workforce participation and make the growing industry more inclusive. Currently,
6 “Collaborative contracting: Moving from pilot to scale-up,” McKinsey, January 17, 2020. 7 Ibid. 8 United States energy & employment report 2022 , US Department of Energy, June 2022. 9 “Will a labor crunch derail plans to upgrade US infrastructure?,” October 17, 2022.
Accelerating the journey to net zero
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