Thinking Space

Current State

Procurement is changing. Gone are the days where major projects were automatically delivered by having one party hold all the risk, either the buyer with a Cost Plus Contract or the supplier with a Fix Priced Contract.  Relationship Contracting such as Partnering, Public Private Partnerships (PPP), Early Contractor Involvement (ECI) and Alliancing Contracting is becoming increasingly common. Over time it has evolved and been refined to the point where it is now widely used in both the public and private sector. Focusing specifically on Alliance Contracting, this article provides an overview of the fundamentals.

What is Alliance Contracting

Alliance Contracting is a methodology where the owners and contractors workers together in a cooperative manner so that all members collectively make ‘best for project’ decisions. There is a strong emphasis on relationship building and aligning interests to achieve common objectives. Generally, all key project decisions are made unanimously [1].

According to the Federal Government’s Department of Infrastructure and Development common features of an Alliance Contract include [2]:

  • Risk and opportunity sharing
  • Commitment to ‘no disputes’
  • Best for project decision making
  • ‘No fault – no blame’ culture
  • Good faith
  • Open book documentation and reporting
  • Joint management structure

A typical Alliance Project will also include a ‘pain share/ gain share’ payment structure, which incorporates performance incentives based on predetermined target costs agreed by the members of the alliance. The presence of a ‘pain share/ gain share’ arrangement does not in itself constitute an Alliance Contract where the obligations of the owners remain distinct from the contractors [3].

What’s its history

Contemporary Alliance Contracting has its origins in the UK, where it was first used in the North Sea Oilfields in the early nineties [4]. Shortly afterwards Australia first used the methodology in 1994, where the Wandoo Alliance undertook construction work for an oil platform off the coast of West Australia.  In a media statement released towards the end of the project’s completion, the Western Australian Premier commended the Alliance for its smooth and efficient progress and its innovation approach [5] In The years that followed the Alliance Model was further refined and began to enter the public sector domain, with the Northside Storage Tunnel the first major government construction project undertaken using an Alliance Contracting Model [6].

Since the nineties Alliance Contracting has evolved from a novelty to a genuine mainstream alternative. Between 2004 and 2009, thirty-two billion dollars of road, rail and water projects in New South Wales, Victoria, Queensland and Western Australia were delivered via an Alliance. This represented 29% of the total value of projects delivered across Australia in these industries [7]. Interestingly, most of these projects were in the public sector. This trend has continued with Alliance Contracting more widely used in the public sector than private sectors within Australia.

When to us it

Despite the success of the Alliance Contracting Model it is not always appropriate. For starters it’s expensive to set up and maintain. Many organisations won’t even consider it unless the estimated project value is over a certain threshold. For example, as a general rule the Department of Defence won’t use an Alliance for projects under $80 million [8].

It is also important that all major parties are included to the Alliance Structure if used. The recent acquisition of the Air Warfare Destroyers for the Royal Australian Navy occurred via an Alliance, however the platform system designer elected not to enter the alliance arrangement. The Australian National Audit Office found that this detracted from the Alliance’s ability to collectively and collaboratively manage risk, although acknowledged that all parties still acted in a highly cooperative manner [9].  Even if all parties choose to be involved with the Alliance it is important that they are prepared to commit the appropriate resources, with personnel requirements for Alliances often greater (both with respect to numbers and capability) than traditional contracting.

Yet despite these limitations Alliance Contracting has proved itself to be effective in a number of projects. In particular, those where the premiums for transferring risk to the suppliers are excessive, or where the risks cannot be adequately defined during the procurement planning and the project needs to commence as soon as possible [10]. It is also well suited when the owner has extensive knowledge which could be useful in the project’s development and delivery. Basically Alliancing is generally suitable where the benefits of risk sharing outweighs the additional costs (both financial and non-financial).

One example of an Alliance Project working well was the $155m construction of the National Museum of Australia in Canberra. Faced with an absolute cap in funding, a must meet deadline and a very high expectation of quality, the project hit all three targets without compromise [11]. By using an Alliance Model there was a clear alignment of objectives, the best person for the job was used regardless of who they worked for (owner or contractor) and the sharing of information was embraced, all contributing to the project’s success.

Key Takeaway

Over the past twenty-five years Alliance Contracting has grown from a curiosity to a mainstream contracting option. Whilst not suitable for all procurements (in particular those with low value/ low complexity) it has proven itself to be effective and deserving of its high usage rate. Procurement professionals across all industries should continue to enhance their understanding of Alliance Contracting to ensure best practices continue to be employed.

References

For a list of reference please click Here

Share:

Comments ( 0 )

    Leave A Comment

    Your email address will not be published. Required fields are marked *