A key value proposition of alliancing is that government agencies trade-off their traditional contractual rights (under a 'risk transfer' contract) in exchange for NOPs bringing to the project their good faith and acting with the highest level of integrity to achieve collective goals. As discussed in section 2.1, the unique features of alliancing include the collective assumption of risks by the alliance Participants; best-for-project decision-making processes; a no fault - no blame culture; and a joint management structure. The aspiration behind these features of alliance contracting is that they will provide the following benefits:
performance enhancement: The Participants are encouraged to take calculated and agreed risks and opportunities to pursue cost savings and enhance project performance, without fear of legal liability if they fail;
focus on solutions: The alliance team will be able to focus on solutions, rather than blame, when problems arise during the project lifecycle;
reduced disputes: The risk of disputes is reduced, and the threat of litigation between the Participants is removed (except in limited circumstances);
cooperation: The Participants are able to cooperate in an honest and transparent manner to achieve the project objectives;
collective decisions: The alliance's decision-making processes are directed towards the shared, collective vision and objectives of the alliance, rather than serving the self interest of each alliance Participant;
risk management: The project's risks can be better managed through a collaborative effort, where each party's knowledge, skills and resources are shared;
flexibility: There is flexibility to adapt to scope changes, risks and opportunities as they arise during delivery of the project;
early commencement: The project may be able to commence earlier than may otherwise have been possible in a traditional contracting environment; and
innovation: Innovations are encouraged, which may result in cost savings and better Value-for-Money for the Owner.
These are seen as the key value drivers of alliancing, the means by which the objectives of the Owner's VfM Statement are achieved at a fair cost (i.e. referenced back to best-in-market costings).
A number of risks arise when an alliance, rather than a traditional 'risk transfer' contract, is used to deliver a project. It is crucial to understand those areas where the Owner may be 'trading-off' its usual rights under traditional project delivery models, in return for the benefits which should be obtained through entering an alliance agreement.24
| Tailoring the PAA to address risk Alliance contracts have become increasingly standardised over the last few years, which provides industry Participants with certainty about their obligations and reduces some of the process costs of procurement. However, there are a number of risks associated with using standardised contracts. It is important for Owners to ensure that any alliance contract is appropriately tailored to deal with the risk profile and commercial objectives for their specific project. |
The risks which are often associated with alliance contracts, and which need to be understood when adopting the alliance approach, include:
capability: The Owner's team may not be sufficiently capable (e.g. skills, experience, behaviours) to deal with the complexity of the project and alliance delivery method.
'soft' TOC: An approach to the selection of NOPs, which does not evaluate price elements combined with any imbalance between the commercial capabilities of the NOPs and the Owner, may result in a 'soft' TOC which inflates the Owner's cost of delivering the project.
pricing: Because the NOPs are generally less exposed to the same risk under the alliance model (due to capping and sharing provisions), this should be reflected in a lower price paid by the Owner than for a traditional contract with a higher risk profile (for the same project risks).
Owner's exposure to risk: Under an alliance, the NOPs' pain share will sometimes be limited, whereas under a traditional contract the NOPs will usually bear 100% of the 'pain'-this means that, under an alliance, the NOPs face much lower exposure to consequences of poor project delivery. This may result in NOP corporations not providing their best team for the life of the alliance project. This is because, naturally, there is often competition as to where the most capable resources will be assigned. It makes sense to allocate top-performing individuals to projects with a more challenging risk profile where the NOP corporations have greater exposure.
use of subcontractors: The NOPs may use subcontractors, rather than their own staff, to deliver the project. The use of subcontractors will also attract an additional layer of fees.
risk allocation: The Risk or Reward Regime may not reflect, and deliver the intended benefits of, the risk and opportunity-sharing approach, e.g., where the NOPs' pain share is capped, the Owner will bear all design and construction risk once that cap has been reached.
additional costs: The remuneration framework may inadvertently incentivise the NOPs to exceed the original scope and Business Case requirements; this means that the Owner may incur additional, and unnecessary, project costs (any material scope changes must be approved by the Owner).
no legal recourse: A failure to perform a behavioural obligation (in accordance with the PAA) through wilful default may give rise to legal recourse for the Owner.
senior personnel required: Alliancing may require more involvement by senior representatives from the Owner in the early project stages to develop the alliance than traditional forms of contract.
cost overruns: Given that all agreed NOP Participant costs will be reimbursed to the NOP Participants, there is potential for significant cost overruns to arise under the Risk or Reward Regime.
It is important to understand each of these risks and their remedies. In particular:
terminology used in the PAA and its practical application;25
the Commercial Framework and its appropriateness for the individual project and Participants;
resources required for the alliance, and the start-up and management costs during the procurement and delivery phases;
risks the Owner will bear under the Commercial Framework; and selection process approach.
| Use experienced alliance practitioners to assist in tailoring the approach The Owner faces the risk of suboptimal VfM results if advisers engaged for the project tend to follow established processes or 'recipes' for alliancing established by others. It is important for Owners to access experts who can assist the Owner to tailor the planning, development, procurement and delivery of their alliance project in a way that engages the industry effectively and applies good commercial analysis of the project. |
Once there is a detailed understanding of the risks and 'trade-offs' mentioned above, these can be appropriately managed by implementing a tailored approach to each alliance project. The alliance should be structured to ensure that the commercial objectives of the NOPs, and the VfM objectives of the Owner, are aligned.
In order to deliver the value proposition of alliancing, the alliance also needs to be structured to ensure that all Participants are held to account on the behavioural and cultural commitments of the alliance approach. For example, although most alliance agreements include a set of principles on which the culture of the alliance is based, broad 'motherhood' statements should be avoided, with the aim of an objective set of behavioural criteria.
As described in section 2.3.2, a formal charter of behaviours or rules of engagement for all Participants will help to define terms such as good faith and best-for-project for the Participants, and provide more certainty about how those definitions should be applied and enforced in the context of the PAA. A charter of behaviours (i.e. an Alliance Charter) should be tailored to meet any unique requirement(s) of a specific project and be finalised during commercial negotiations.
| Develop an Alliance Charter Owners should develop a 'charter of behaviours' to which Participants must commit and which is formalised in the PAA. A formal charter of behaviours would move away from broad 'motherhood' behavioural statements, towards more objective and understandable behavioural criteria. It would help define the required standards of conduct for the Participants, providing more certainty about many of the mechanisms in the PAA that rely upon those standards. Guidance Note No 3 provides a template form for an alliance charter. |
| Alliancing is dependent on establishing an effective team culture Team effectiveness is underpinned by the prevalent culture, evidenced by the way team members behave and interact. Team culture is set by leadership and if proactively managed can be a very powerful enabler of team performance. In an alliance, the ALT should lead as early as possible the development of a culture that enhances achievement of the alliance goals and Owner's VfM Statement. The desired culture should align to the behaviours required to enable the key alliancing features such as good faith and 'no disputes' to operate. Often the desired behaviours are described through establishing an Alliance Charter which documents the alliance values. However, the real culture of a team is demonstrated in how the team behaves and interacts. Effective alliance teams have very strong cultures led from the top where the desired behaviour is demonstrated consistently by senior members of the alliance-they 'walk the talk'. The alliance team members see the senior leaders exhibiting the right behaviours and this leadership by example sets the expectations of the rest of the team. It clearly outlines what is and is not acceptable in that team. In establishing a culture, it is important that 'hygiene' factors such as performance measures and delegations align to the desired behaviours. Examples of misalignment include when a team may require 'learn from our mistakes' to be part of the culture, but individuals may be 'punished' for reporting mistakes. Another example may involve individuals being required to take responsibility and make decisions, although the delegations do not support them doing this. Culture can take time to establish. Leadership must determine how different the desired culture is from the current cultures of the Participants and determine how to achieve the desired culture. This should always be considered in the context of the alliance objectives that are founded on the Owner's VfM Statement. The desired culture is not an end in itself but one of a number of foundations for achieving the Owner's project objectives. Investing in getting the culture right, will ensure that the benefits of alliancing are optimised. |
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24 Refer to Guidance Note No 3, Key Risk Areas and Trade‐Offs, Department of Infrastructure and Regional Development, Commonwealth of Australia, March 2011.
25 Refer to the Guidance Note No 1, Language in Alliance Contracting: A short Analysis of Common Terminology, Department of Infrastructure and Regional Development, Commonwealth of Australia, March 2011.