Alliance or relationship contracting is an alternative form of traditional procurement that departs from an adversarial contracting framework by favouring a joint and collaborative approach to project costing, risk sharing and project management. The characteristics of an alliance contract may include some or all of the following:
• A mutually agreed contract price and margin
• Selection of the contractor by pre-qualification - organisational culture and the quality of the project team are important factors
• Risk and rewards are shared - the contractor is assured full payment of the actual cost of construction and project-specific overheads. Cost overruns are shared with the contractor losing all or part of the profit and corporate overhead for the project and sharing cost savings with the principal
• All disputes are resolved by alternative dispute resolution methods
• Shared technology and, design and construction innovation.
Alliance contracts substitute an adversarial contract framework for one based on relationship management and collaboration. It also aligns incentives for the principal, the contractor and its sub-contractors. However, they are a contract for the delivery of assets and unless stapled to a long-term management contract, they do not incorporate lifecycle costing or value for money performance measures.
Evidence suggests that alliance contracts are delivering procurement cost savings in the range 2-4% or, in the case of large complex projects such as the new Terminal 5 complex at London's Heathrow airport, 24%.23
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23 NAO 2005, Vols. 1 and 2.