earning trades report

Alliance contracting

Integrated procurement method removes barriers for construction delivery
Friday, March 1, 2013
By Christopher Hirst

Traditional construction contracts place significant emphasis on the consequences of failure and tend to focus primarily on how risks are allocated between the contracting parties. The natural reaction to this type of contract is the reinforcement of self-protective behaviour because of the perception (of contracting parties) that the contract is a “zero sum” game wherein project participants only gain or profit at the expense of the other party. This traditional model has been criticized as inefficient, costly and counter-productive.

Alliance contracts have been touted as an answer to these issues. Alliance contracts are incentive-based relationship contracts in which the parties agree to work together as one integrated team. Defining characteristics of an alliance project are a culture of cooperative decision-making, risk sharing, no blame and no dispute, and financial transparency. Ideally, an alliance contract will see an alignment of the business goals of the primary parties.

Alliance contracting is gaining in popularity in Canada, although it has still not reached the level of acceptance it has achieved in countries such as Australia, where it is reported that nearly 50 per cent of publicly procured government projects now use an alliance project model.

Cooperative decision-making
In an alliance contract, the owner, contractor and designer are all parties to one project agreement. Project development is driven by a co-operative (but all powerful) board of management made up of representatives of the parties, with a mandate to deliver the project in accordance with agreed goals and alliance principles. Generally, all decisions of the project board must be unanimous. The alliance should result in an integrated “virtual organization” comprising the primary parties for the duration of the project.

Risk sharing
Risk is spoken of as shared in the alliance model; however, in reality, most project risks remain with the owner. The contractor is entitled to be reimbursed for all direct costs, even in the case of delay, negligence, cost overruns or defective design.

Most projects will have a target contract cost and a target completion date. The purpose of these targets is to drive pain-share or, more hopefully, gain-share in decision-making. The contractor is incentivized by earning a greater or lesser profit margin depending on performance and having a share in the overall cost performance of the development as it relates to the agreed upon budget.

Transparency is the hallmark of an alliance project. The concept of transparency in an alliance contract extends beyond subcontracting and requires an open book between the owner and the contractor. It is not unusual for owners to require the contractor to open the books on earlier projects so that the owner can fully understand the contractor’s overheads, margins and costs.

Procurement and subcontracting is done on a construction management style basis (and may involve somewhat counter-intuitively more conventional risk allocation to the subcontractor for the benefit of all alliance parties).

No blame and no dispute
The owner and the contractor (and any other alliance parties) release each other from all liability except in the case of “wilful default.” Disputes must be amicably resolved, although sometimes there will be an ultimate deadlock breaker (though not in a ‘pure’ alliance contract).

Time-consuming and expensive claims processes do not exist in an alliance contract and there is no incentive to resort to litigation in the event of disagreement. The philosophy is rather than spending time and energy on apportioning blame and developing costly claims, a more efficient approach is for the parties to work co-operatively to overcome problems and risks that have manifested themselves during the life of a project.

One of the most significant and difficult to quantify is alliance projects rely to an even higher degree on the competency and quality of participants than other projects. Moreover, without genuine commitments from all participants to principles of transparency, open communication and “no blame,” the project will likely not get off the ground.

Another risk is the lack of certainty in price and completion dates. Accordingly, an alliance contract may not be appropriate for smaller projects where early price and time certainty are a key consideration.

Questions have also been raised about the enforceability of the alliance contract model given aspects of the contract have the appearance of “agreements to agree,” which courts have traditionally been unwilling to enforce.

Further, given the unfamiliarity of the market to alliance contracting, it can be difficult to find appropriate insurance coverage for otherwise insurable risks that may occur over the course of a project, whether it relates to alliance aspects or otherwise.

Christopher Hirst is a partner and practice group leader of Alexander Holburn Beaudin & Lang LLP’s construction and engineering team.

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