Alliance Contracting: Setting Benchmarks for Project Delivery
Alliance contracting is often heralded as an unprecedented way to deliver high performance against key result areas for complex and risky projects. Indeed, despite suffering the deepest recession in 60 years, the construction industry is still surprisingly positive about future prospects for alliance contracting and is consistently entering into new alliance projects.
Recent noise from both project owners and the construction industry would suggest that a new and emergent set of circumstances has arisen and is dictating procurement and the evolution of the procurement landscape for these alliance contracting projects.
Key challenges in delivering alliance projects often gravitate around the following key potential fracture points;
- Alliance partner selection
- Defining and aligning commercial and contractual frameworks
- Establishing the alliance team culture and overall governance structure
- Performing above and beyond ‘business as usual’ and delivering high performing / game-breaking outcomes
- Demonstrating and delivering value for money in the alliance project
It is the latter of these that is currently attracting distinct attention, and is driving plenty of lively ‘noise’ amongst stakeholders actively engaged in alliance contracting projects nationally.
It is worth noting, at this point, that alliancing originally came to Australia in the oil and gas industry as a way to deliver two marginal projects in terms of their business cases. It was only through better management of risks through the risk sharing framework of an alliance that these projects could proceed. This was perhaps the earliest demonstration of value for money that an alliance can deliver. In addition, this project established the foundation for relationship contracting and indeed alliance contracting in Australia as we know it today.
The landscape has shifted significantly since the early days of alliance contracting and no more dramatically than in the last 18 months in the shadow of the GFC. As a result of the GFC the construction industry have experienced a shift in focus for the way alliance (and other collaborative contracts) are delivered. The trend in procurement is towards more competitive pricing, the emergence of more hybrid / collaborative projects and finally a closer scrutiny on aforementioned value for money outcomes.
Owners are currently re-thinking the way that they put projects to market and certainly there is a focus on costs for solutions in light of tighter and capped budgets. Resources that are procured need to demonstrate that they offer effective, efficient and economic solutions through an appropriate methodology. This reality has led to more negotiation on margins and, in particular, has impacted remaining participants in final stage selection processes. In turn, non-owners are placing closer scrutiny (reviewing and checking processes) around client budgets. Finally, commercial negotiation and auditing, as part of the selection process, are becoming more commonplace as a result.
Derek Skinner, GM Major Infrastructure Projects, Department of Transport and Main Roads, commented in a recent webinar hosted by Alliance Contracting IQ that, ‘changes in the procurement landscape have led agencies to look more closely at the value proposition for each project. There is naturally more of an emphasis on pricing. However, we need to keep everything in balance and ensure that the focus on effectiveness and efficiency is not lost along the way.’
Richard Morwood, Director - Alliances and Sustainable Infrastructure, AECOM, another Alliance Contracting IQ webinar participant, concurred and surmised, ‘there has been a lot of change over the last ten years and it is important to ensure that, despite any changes in market appetite or drivers, we continue to see the benefits from this change and support a healthy industry through continued learning and transparency.’
Alliancing has also fundamentally changed the type and scope of insurance that can be procured for major alliance projects. The advent of an "event based" Professional Indemnity policy and the Leg3 extension to contract works insurance and design write back on Public Liability insurance are substantial benefits that the insurance industry has delivered based on the better integrated risk management philosophy in an alliance.
Other more immediate benefits of alliance contracting are transparent to those operating under an alliance structure; better interactivity within owner / non-owner teams, less time and money expended fruitlessly when projects brought to the table, improved innovation, more open industry engagement, significant skills development and a better range of integrated insurance options available.
It is critical that these behaviours, outcomes and insights are not lost in a trend towards more price tension. The loss of these behaviours is a not unrealistic outcome in any trend towards more competitive pricing, as competitive pricing - by its very nature - could be considered the antipathy to any collaborative project environment.
It is also interesting to also note the volume of collaborative hybrid contract strategies that are now evident in the construction landscape; early contractor involvement (ECI), collaborative D&Cs and even PPPs that are injecting alliance principals into their delivery approach.
Not only are lump sum / hard dollar pricing structures are being injected into more innovative collaborative style contracts (with reference the trend towards more competitive pricing) but there are also more instances of alliance style delivery being injected into lump sum / hard dollar contracting environments. This blending and combining of contract styles is becoming more and more common as the ‘best fit for project’ and is currently the mainstay of many discussions across industry.
Emerging hybrid delivery models need to retain the lessons from the past and continue to focus on senior leadership and communication, high performance teams and to stand shoulder to shoulder through the difficult decisions that arise as part of the nature of complex or risky projects.
The increasing focus on designing and delivering to a cost means that what is delivered needs to be considered carefully and functionally. Both Derek and Richard commented that a return to past practices would be both undesirable and damaging to industry. A balance must be found.
Richard also stated that, ‘all sides of industry have learned a lot about each other and about the way that they structure their businesses and think about their projects.’ This is a certainty. Perhaps this bigger picture might be the key to ensuring that, whatever evolutionary changes continue to occur, the nature of procurement remains true to the lessons alliance contracting has brought to the fore in terms of how projects can be delivered.
The knowledge and appreciation that industry now has, on all sides, can enable strong and capable industry and client relationships to continue. To conclude, and to touch on a comment from Derek, ‘all sides of industry should be congratulated on its extraordinary effort to deal with and resource some particularly difficult projects with real success.’
The advent of the alliance concept has enabled a greater volume of more innovative projects to come to market. The leverage that this has provided should give confidence to owners and non-owners alike of the potential going forward for project innovation through the appropriate methodology. If projects are packaged in such a way as to always be the best fit for the circumstances, procuring projects post the GFC should continue to be an exciting and value-adding environment despite any financial legacies that at first seem to overshadow the true value of collaborative delivery methods.