Agencies should recognise that risk sharing under an alliance agreement only applies to the extent contemplated by the Risk or Reward regime agreed by the Participants, and that, practically, the Owner Participant will always bear the ultimate risk of the project's success or failure. That is, at some point, the Non-Owner Participant's 'painshare' will reach its limit, and from that point, all further pain is borne by the Owner Participant.
For example, where the alliance Participants fail to keep costs below the target cost and a cost overrun occurs:
• The Owner Participant bears the risk that actual costs will exceed the target cost.
• Some of this risk is shared with the Non-Owner Participants-typically, the Non-Owner Participant's margin is at risk, but in other cases just profit and/or overhead will be at risk.
• Once expended, all direct costs must still be paid to the Non-Owner Participants. At this point, the risk rests entirely with the Owner Participant. Non-Owner Participants are always entitled to be reimbursed for all direct costs, even in the case of delay, negligence, cost overruns or defective design (except where caused by 'wilful default').
Therefore, although there is 'collective' assumption of risk between the alliance Participants from an aspirational standpoint, in practice, an Owner Participant needs to recognise that the degree of risk they may bear if the project is in 'distress' (e.g., if critical timelines are not met or the project exceeds approved funding) is significantly greater than the risk that is borne by the Non-Owner Participants. The Owner will always bear the financial consequences of cost overruns, whereas the Non-Owner Participants will always have their direct costs reimbursed (and will usually have their painshare capped at a certain point). The impact of this can be magnified because of the no fault - no blame principle (see section 4.1 above), which means the Owner Participant also loses its 'insurance of litigation', i.e., the right to begin legal proceedings against the Non-Owner Participants for substandard performance, if that is what caused the increased costs. That said, it is also important to recognise that in most cases, it is the public sector agency that is the most exposed to the risk of litigation.
The implications of the risk sharing under alliance agreements means that the Commercial Framework and Risk or Reward regime need to be carefully structured. There is no one-size-fits-all Risk or Reward regime, and this is the key mechanism which allows Owner Participants to manage the practical impact of the risk sharing approach. For example, depending on the nature of the project, certain risks can be excised from the general pool of shared risks, and allocated to the key Non-Owner Participant(s). These latter could also be required to face financial consequences for particular events that are treated differently from the general Risk or Reward mechanism. Owner Participants can also manage the implications of collective assumption of risk by engaging in detailed risk analysis with the alliance Proponents during the selection process and at the target cost development stage.
Legally, it is also important for alliance Participants to understand that some risks cannot be shared. Even where the alliance agreement regulates liability as being shared between the alliance Participants, third parties will still have the right to bring a claim against one or more of the Participants. This risk needs to be addressed separately from collective risk sharing and no blame regimes commented on above, e.g., through a project-based insurance policy or the inclusion of cross-indemnities and limits on liability. Alternatively, the alliance may also agree that third party claims are recoverable as a direct cost under the Commercial Framework (including for a period of time after the relevant works have achieved final completion). This will obviously impact the Non-Owner Participants' entitlements under the Risk or Reward regime (see section 4.6 below).
Practically, the alliance agreement can also be drafted to reflect the distinction between the relevant agency acting as the 'Owner', rather than as the 'Owner Participant' in the alliance. This approach is designed to ensure that the agency is positioned to exercise greater control over the key project risks. For example, key discretions such as termination for convenience or approval of the target cost can be reserved for the Director or Chief Executive Officer of the agency, with other discretions (such as certification of payment claims and the decision-making performed by the Alliance Leadership Team) reserved for exercise by the agency as the Owner Participant.
Finally, as discussed above, the fact that alliance Participants may act in good faith and in a best-for-project way does not mean that governments do not need to be concerned about the consequences if a project becomes distressed. In order to improve Owner Participants' understanding of potential risks, agencies should analyse risks thoroughly at the pre-award stage, but as a minimum, at the time the target cost is signed-off.