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TRANSCRIPT
Alliance Contracts
in Australia
Brain Noble
Director Operational Asset Management
Main Roads Western Australia
4th November 2010
Alliance Contracts in Australia
• Australia’s first Alliance was in the oil industry in mid
1990’s.
• First used in the water industry during late 1990’s.
• First road construction alliance is 2000.
• Main Roads Western Australia first Alliance in 2003.
• Main Roads has awarded 8 Construction Alliances
and varied two maintenance contracts into Alliances.
• Our future road maintenance/management strategy
is based upon this type of contracting.
Project Alliance Definition
A Project Alliance is where an owner and one or
more service providers (designer, constructor,
supplier) work as an integrated team to deliver a
specific project under a contractual framework
where their commercial interests are aligned to the
actual project outcomes.
In an Alliance, the Parties:
─ Assume collective responsibility.
─ Take collective ownership of all risks.
─ Share in the “pain” or “gain”.
Alliance Contracting is Not Partnering
Partnering can be considered a “Band-aid” solution -
it does not address the contract issues:
• Partnering partners tell each other that they will
act reasonably and fairly.
• But when things go wrong, they often regress to
traditional litigious ways.
• Project Alliance partners work together because
compensation (financial success) is tied to overall
success of project outcomes.
• While Partnering can be effective in getting
people to work together in difficult situations, it
does not address the actual issues (i.e.
uncertainty, complexity of the work) that are
making the situation difficult in the first place.
Alliance Contract Principles
• All parties either win or all parties lose.
• Equitable sharing of risk and reward.
• All parties have an equal say.
• All decisions must be “best-for-project”.
• No-blame culture.
• No recourse to litigation.
• All commercial transactions are fully open-
book.
• Encouragement of innovative thinking with a
commitment to achieve outstanding outcomes.
• Open and honest communication (no hidden
agendas).
• Visible and unconditional support from top
management levels of each party.
• Governed by joint body (Alliance Leadership
Team) where decisions must be unanimous.
• Day-to-day management by seamless
integrated project team (“Best for Project”).
• Resolve issues within the Alliance with no
recourse to litigation.
Payment
Uses 3 part approach.
Part 1: Actual project costs.
Part 2: Margin (profit + corporate overhead).
Part 3: Margin Incentivisation (Gain/pain sharing).
What are the Benefits?
• Creates an environment that drives high
performance.
• Achieves commercial objectives of all parties.
• Joint responsibility for managing risk.
• Realistic target price.
• Synergy driven outcomes.
• High performance and innovation.
• Helps build capability of all parties.
Risk Sharing vs Risk Transfer
• Traditional approach to contracting.
─ Transfer as much risk as possible.
─ Can be successful for non complex, certain,
well defined projects.
• When a traditional approach may not be most
suitable option.
─ Complex, unpredictable risks.
─ Tight timeframes.
─ Not well defined details.
─ High likelihood of scope changes.
─ Complex interfaces.
─ Difficult stakeholder issues.
─ Complex external threats.
• When faced with these factors, project
outcomes are more likely to be achieved with
collective responsibility.
Typical Alliance Structure
Alliance Leadership Team
Alliance Management Team
– Headed by Alliance Manager
Project Team
Alliance Leadership Team Responsibilities
Alliance Leadership Team
• Create an inspiring vision
• Establish principles & set challenging objectives
• Approve performance targets
• Set policy & delegations
• Approve Alliance Management Plan
• Appoint the Alliance Management Team members
• Champion the vision, principles & objectives
• High level support / stakeholder interface
• Harness best resources
• Monitor team performance
• Resolve conflict within the Alliance Leadership Team
Alliance Management Team
Responsibilities
Alliance Management Team
•Deliver outcomes to meet / exceed objectives
•Appoint / empower wider team
•Day to day management of the project
•Provide effective leadership to the wider team
•Measure / forecast / report performance to AB
•Take appropriate corrective action
Procurement stages for an Alliance
Contract
3 phase process
1. Selection of Partners.
2. Interim Alliance.
3. Full Alliance.
Selectionof PreferredProponent
CommercialDiscussions
Are Key
Issues
Agreed?
Interim Alliance Period
IsThe Target Outturn
CostAgreed?
Walk Away
Alliance Agreement
Yes
No
Yes
No
Selection Interim Full Alliance
All parties have the right towalk away up to this point
Only owner has the right to terminateFor convenience from this point
1ST Phase
Selection of partner(s)
The most important step for the owner to
achieve a successful Alliance is to choose the
right partner.
Selection Criteria
Non Cost
• Technical, financial, and management capacity.
• Understanding of and commitment to the Alliance
way of doing business.
• Preliminary ideas on innovations and execution
strategies plus the potential to deliver outstanding
design and construction outcomes.
• Willingness to commit to the project objectives and
pursue “breakthrough” outcomes.
• Ability to work with the owner’s personnel in a high-
performance team.
Selection
Commercial (Cost) Considerations
• Agree on the primary commercial
arrangements.
• Ensure that no fundamental “roadblocks” are
left to emerge during Interim Alliance phase.
• Audit the financial records and costing
structures of the prospective non-owner
participants to assist in agreeing the “Margin”
(corporate overhead & profit).
Selection
• Corporate overhead can usually be easily
established based on the audit.
• Profit can be harder to determine. It should take
into account:
─ Actual past profit.
─ Current corporate expectations and actual trend.
─ Difference between the audited project figures
and the prospective Alliance project – such as
risk profiles, nature of work, etc.
Selection
2ND Phase
Interim Alliance Agreement
• Develop Target Outturn Cost (TOC) and Time
Schedule.
• Value management / value engineering.
• Risk & opportunity workshops.
• Planning & design.
• Systems and procedures development.
• Alliance team development.
Interim ISA Payment
• Non Owner Participant’s (NOP)
reimbursement is usually limited to actual
costs.
• If the parties enter into Alliance Agreement,
the NOPs receive a margin on Interim Alliance
Phase work.
• If the parties don’t enter a Alliance Agreement,
then payment of the margin to NOPs is based
on reasons they didn’t enter into the
Agreement.
Interim
Target Outturn Cost (TOC)
• Jointly developed during the Interim Alliance by the
parties.
• First real test of the new Alliance.
• TOC is the key to the payment model:
─ Used to determine the gain/pain portion payable to
each non-owner participant.
─ Used as the target against which the actual cost
will be compared to determine the extent of under /
overrun that is to be shared amongst the Alliance
parties.
Interim
─ TOC is not an estimate of the full cost of the
project to the owner.
─ The TOC does not include any pain/gain
payments.
Interim
Apparent conflict between owner pushing for a
low TOC while the non-owner parties pushing
for a high TOC.
Several factors counteract this conflict:
• Transparency: TOC is developed jointly on a
full open book collaborative basis. Nothing
can be hidden.
• If TOC is too high, the project may not proceed
(not in the best interest of any party).
Interim
• If TOC can not be agreed, non-owner parties
may not receive any margin for Interim work
accomplished.
• Potential for damage to reputation and future
business relationships if owner feels non-
owner parties conspired to inflate the TOC.
Interim
Payment Structure
Full Alliance
Direct P
roject C
osts
Pro
ject-specific
overh
eads
Co
rp.
o’head
sP
rofit Part 2
(Margin)
Part 1(Costs)
Part 2 is at risk
under the Part 3
risk/reward
arrangements
Part 1 costs are guaranteed
irrespective of the
outcome of the Part 3
risk/reward arrangements
• Part 1: (Reimbursement of project costs)
Guiding principles:
• Each party is paid actual costs incurred on the
project, including costs associated with rework.
• Payment under part 1 must not include any
hidden corporate overheads or profit.
• All project transactions and costs are open book
and subject to audit.
NOP’s are guaranteed part 1 costs.
Full Alliance
• Part 2: (Margin = corporate overhead + agreed
profit).
─ Margin is set before entering into the Interim
Alliance Phase.
─ Generally a fixed lump sum as a % of TOC.
─ Margin is not subject to adjustment regardless of
the actual costs expended.
─ Margin is only adjusted in case of a Scope
Variation (usually very few under an Alliance).
Selection Interim Full Alliance
• Part 3: (Sharing of pain and gain)
─ Intended to ensure that the NOP’s assume an
equitable share of the gain / pain along with
the owner where the actual performance is
better / worse than agreed targets.
─ Guiding principles:
• gain / pain should be linked to outcomes that
add to (or detract from) the value to the owner.
Full Alliance
• All possible project outcomes must result in
win / win or lose / lose (i.e. everyone wins or
everyone loses together).
• Performance that is better than the agreed
targets lead to superior returns for NOP’s and
performance that is less than the agreed
targets leads to lower returns for NOPs.
Full Alliance
• Part 3: (Sharing of pain and gain)
Full Alliance
Ta
rget O
uttu
rn C
ost
Overrun
Underrun
50% 50%
Owner NOP’s50% 50%
Owner NOP’s
Managing “Change”
As a general principle, the parties collectively
assume all risks associated with the delivery of
the project, regardless of:
• Whether or not those risks are within the
control of the parties.
Full Alliance
• Whether or not they have considered them in
advance.
• Whether they could reasonably have been
foreseen or not.
Therefore, situations that would be treated as
“variations” under a traditional contract are not
variations under the Alliance – rather they are
just part of the delivery of the project.
Full Alliance
Issues / Downsides?
Potential Downsides:
• Perception of lack of certainty in cost outcome
for the owner.
• Requires significant involvement and
commitment of owner personnel and senior
management to support process.
• Requires significant cultural shift – away from
traditional adversarial approach to one of
integration, collaboration and high
performance teamwork.
• Substantial costs to establish the alliance and
develop and maintain the alliance culture.
• For government projects it raises probity
issues that need to be managed carefully.
• Parties need to waive legal rights that they
would normally pursue in the event that things
go wrong.
Reasons for Poor Outcomes
• Expecting benefits without investing effort.
• Selection of an inappropriate team.
• Not addressing value for money concerns.
• Under estimating the commitment required by
the parties’ senior representatives and
experienced staff.
• Parties may be tempted to make unilateral
decisions.
• Attempting to transfer risks to other parties.
• Relying upon legal recourse.
Characteristics of high performing alliances
• A single cohesive team without any “us and them”
attitudes.
• High performance culture amongst the team
characterized by:
─ Clear understanding of purpose/mission of Alliance.
─ Unequivocal commitment to meet or exceed
demanding objectives.
─ Willingness to commit to targets without knowing
how they can be achieved.
─ People who mean what they say, and do what they
say they will do.
─ Individuals who are willing to accept
responsibility for their actions.
─ Open and effective communication.
─ Successes are acknowledged and celebrated.
─ Very close collaboration between designers and
constructors – collaboration that never stops,
right up to final completion.
─ All energy focused on optimizing project
outcomes – no time at all wasted on position
protecting or case building.
─ Very fast “integrated” decision-making.
Benefits for Non-owner Parties
• Potential for good returns within acceptable
limits of risk.
• Enhancement of reputation leading to
increased prospects of repeat and referred
work.
• Strengthening of relationship with owner and
the other parties (forming the basis for
possible future Alliances).
• Greater insights into project delivery from an
owner perspective, enabling constructors and
designers to better understand and service
their clients.
• Increased job satisfaction for staff with
associated benefits to overall organizational
culture.
• Significant increase in communication and
general project management skills.
Key steps to insure success
• Owner must have a good understanding of the
principles underlying Alliancing and why it has
succeeded on other projects.
• Select the “right” partners using appropriate
criteria.
• Ensure that all key stakeholders are committed
to achieving or exceeding the project
objectives.
Outcomes of Alliance Contracts in
Australia
• RMIT University have studied 217 Australian
Alliance Contracts from 1996 to 2006.
Industry Number of Alliances
water 81
road 62
rail 27
oil, gas & energy 25
Defence, mining & ports 6 in each area
building 4
The number of Alliances in Australia
Time Number
1996 / 1997 5
1998 / 1999 11
2000/ 2001 14
2002 / 2003 28
2004 / 2005 35
2006 / 2007 87
20008/2009 37
Value and Number of Australian Alliances
(1996 – 2008)
Value $A millions Number
0 to 50 58
51 to 100 40
101 to 250 58
251 to 500 30
501 to 750 12
751 to 1000 7
1001 to 1500 2
1501 to 2000 7
2001 to 3000 + 3
30 Government Alliance Contracts
Final Costs Vs Target Outturn Costs;
─ 83% less than TOC,
─ range 1%-29% variance from TOC.
─ 17%greater than TOC,
─ range 3%-6% of TOC.
─ 37% under planned duration,
─ range 0.5 to 18 months.
─ 20% exceeded planned duration,
─ range 0.5 to 6 months.
i. Project Alliancing Practiticoner’s Guide
Victorian Department of Treasury and Finance
www.dtf.vic.gov.au/projectalliancing
ii. Project Alliancing Activities in Australasia 2008
Alliance Association of Australiasia
www.alliancingassociation.org
iii. Introduction to Project Alliancing
Presentation to Institution of Engineers, Australia
August 2000, Brisbane Australia
by Jim Ross.