The Algerian loss and the turn to cost-plus contracts (1972)

Turning a failure into a method

The heart of this decision was not the roughly ¥5 billion hole in the accounts but the fact that JGC drew out of that wound a repeatable method: a contract form and a spread of risk. Floods and tripled wages cannot be read in advance. So it stopped relying on lump-sum contracts that made it carry every variance alone, mixed in reimbursable work, and avoided concentrating orders in a single country — an attempt to absorb uncontrollable misfortune through the design of contracts and allocation. That it took apart the structure of the failure and wrote the findings into its next order strategy, rather than simply chasing the strong order book, tells you what kind of judgement this was.

Cost-plus-fee work is laborious and thin on margin, and when prices are stable the lump sum has the advantage. Shinoda Haruo himself said that without taking risk there is no profit; the shift was not an attempt to eliminate risk but to identify the risk being carried and price it in. Roughly half a century later JGC would again post enormous losses on large lump-sum projects and face the same question. Algeria in 1972 can be read as the first time the question of which contract form should carry the risk was put to management directly.