Insights

Alliancing Contracts: an innovative approach or another false start?

Market Insight 07 September 2022 07 September 2022
UK & Europe
Infrastructure

Any construction professional has their own war stories of traditional contracting models. These stories are often based on the lowest price and highest transfer of risk and often result in projects being delivered late and over budget.

Alliancing offers the industry an alternative: an effective form of collaboration to deliver complex projects, whilst focusing on maintaining genuine value for money and increased productivity. But is this really the case?

Where did alliancing come from?

Since its use on the Wandoo Project in 1994, alliancing has become a mainstream contract model in Australia.

In the UK, alliancing contracts emerged in the early 1990s, following a general dissatisfaction with more traditional types of contracts and procurement methods.

BP, at the forefront of the alliancing movement, sought a way to reduce costs and risk in its North Sea operations. They established a new form of relationship between the client and the contractors, focusing on pooling skills, expertise and resources. BP’s alliancing contract involved complete open book accounting; sharing all uninsurable risks between the parties and developing a target cost which was generated by the whole team.

Since then, the alliancing model has been used on several major infrastructure projects in the UK. In particular, the introduction of “Project 13” (an enterprise model for infrastructure delivery) has been utilised by the likes of Network Rail, the Department for Transport and South West Trains on its £800m investment in Waterloo Station, National Grid on its £750m London Power Tunnels Project, and Anglian Water on its £400m Strategic Pipeline Alliance.

The new NEC4 Alliance Contract is also being used to deliver a £1bn package of electrical, heating, ventilation and air conditioning services at Hinkley Point C nuclear power station.

What is alliancing all about?

Alliancing is a concept under which various levels of collaboration and risk sharing agreements can fall. They can range from heavily amended standard form contracts providing for very limited claims between the parties, to “pure alliancing” contracts, which are based on unified agreement by the alliance to share the success or failure of the project.

Some sectors, such as rail and water, will have experience around what makes a successful alliance. However, for most industries, alliancing is a radical change in contracting behaviour.

So, what makes an alliancing arrangement different?

1.	Business outcome	The alliancing model aligns the commercial interests of the participants and is geared towards the successful business outcome of the project (agreed at the outset of the project).
2.	Open communication	The foundations of alliancing are based on "non-legal" concepts, such as mutual goals, respect, openess and honesty. Open information sharing often includes open booking accounting to allow for accurate figures for forecasts, profits, costs and expenses to be freely available to all parties.
3.	Painshare / gainshare	The most significant difference is that all uninsurable risks under the project are shared collectively by the participants. Participants equally share the financial rewards, which are linked to the overall project performance.
4.	No blame / no claim	Apart from a few exceptions (such as wilful default or insolvency), each party is released from liability under the project and there will be no right to claim for losses arising from certain events such as delay, defective work and design, which are the cause of a significant number of disputes under traditional contracts. An effective dispute escalation or avoidance management regime is key, particularly as alliancing contracts usually do not include traditional dispute resolution provisions.
5.	Innovation and continuous improvement	Alliancing agreements allow for a far greater degree of flexibility compared to more traditional contracts, adopting to any changes or issues which may not have been evident at the outset of the project. Longer term projects (i.e. 25+ years) can benefit from more flexibility to respond to the changing times and market conditions.
6.	Skills and expertise	One of the key steps to success in an alliancing agreement is for all participants to recognise and acknowledge the skills and expertise of the other members of the alliance. For most parties, working so closely with other contractors will represent a fundamental commercial shift from how they operate under traditional contracting methods, where other contractors are kept at arm's length under separate contracts.

Some standard forms to note

There are a small number of different standard form alliancing contracts. Whilst these all broadly adopt the alliancing concepts set out above in this article, they do differ and can be for adapted to suit individual project needs. Selecting the most appropriate form for the project is crucial.

Framework Aliance Contract

("FAC-1")

Term Aliance Contract

("TAC-1")

NEC4 Aliance Contract

FAC-1 works as a framework contract, combining the workflow of a framework, with the relationships, values and processes created by an alliance.

FAC-1 includes the following key provisions:

A multi-party structure of ‘Alliance Members’.
Agreed ‘Objectives, Success Measures, Targets’ and ‘Incentives’.
Structure for the awarding of work, under a ‘Direct Award Procedure’ and/or ‘Competitive Award Procedure’ and under standard form ‘Orders’.
Process for seeking ‘Improved Value’, ‘Supply Chain Collaboration’ and other agreed ‘Alliance Activities’, all set out in an agreed ‘Timetable’.
Management of risks and dispute avoidance with a ‘Risk Register’, joint governance and ADR.

This is a term alliance agreement, based on the principles of FAC-1.

TAC-1 closely follows the previous TPC2005 Term Partnering Contract but introduces more alliancing principles of transparency and collaboration.

It includes many of the provisions found in FAC-1, such as agreed ‘Objectives, Success Measures, Targets’ and ‘Incentives’, as well as order procedures appropriate to the term contract. There is also a Risk Register and early warning process, along with an agreed timetable for seeking improved value.

The NEC’s first Alliancing Contract was designed for use on major projects for longer term collaboration.

All parties in the work package sign up to the same alliance contract, including any key subcontractors (which are then treated equally as members of the alliance).

Adapting the NEC option X12 and bringing it to the heart of the contract, the alliance members agree on the following:

Collaborative objectives, common systems and processes (set out in the Implementation Plan and the Programme).
An Alliance Board, which consists of a representative from each member, tasked with making decisions, agreeing work and resolving disputes.
An Alliance Manager (like a typical NEC Project Manager).

Dispute resolution mechanisms are very restrictive, focusing on internal resolution. There is no process for litigation or arbitration, distinct from other forms of alliance contracts.

Points for organisations to bear in mind when considering an alliancing arrangement

What are the key points to consider when making that all important procurement model decision?

Governance and behaviour

•Clear governance procedure and a suitable alliance board capable of making sensible, pragmatic decisions?

•Commitment from each organisation at the highest levels.

Risk and liability profile

•Agreed proportions of liability and a no claims approach to liabilities?

•Consider appropriateness on higher risk projects, with a greater degree of variables.

•To what degree variations or compensation events (e.g. for change in law or force majeure) are catered for?

•Caps on liability and exclusions of liability?

Dispute resolution

•A "true" alliance anticipates minimal disputes, but projects don't always go to plan.

•How will the escalation process work within each organisation?

•Mechansim for a final binding decision?

Pricing

•Lump sum or cost reimburseable?

•Pre-agreed profit elements or any specific deductions (e.g. for defects)?

•How will the pain/gain share work, tying into the project deliverables?

Supply chain

•How will supply chain contracts be entered into?

•Managed so they sit with the upstream alliancing values and objectives?

Termination

•Termination rights and how will this be managed?

•Compensation payable?

•Alliance preserved for non-defaulting members?

If approached properly, alliance contracting can offer an innovative alternative to parties wanting to establish more long-term, collaborative, and flexible relationships.

If you have any questions or would like to discuss alliancing in more detail, please contact one of the authors.

End

Authors:

Kate Lister

Partner

Popular search terms