Alliancing Contracts: an innovative approach or another false start?

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?

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.

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.