The Alliance method is a collaborative approach to contracting where all participants work in an open manner to deliver the project, sharing the risk and rewards of completing the project on time and on budget. The Alliance relationship is based on the following principles:
• emphasis on the business outcomes of all parties (i.e. win - win)
• clear understanding of individual and collective responsibilities and accountabilities
• equitable balance of risk and reward for the parties (including sharing of pain/gain in terms of outcomes)
• encouragement of openness and co-operation between the parties
• encouragement to develop and apply innovative approaches and achieve continuous improvement
• access to and contribution of the expertise and skills of all the parties, and
• commercial basis which offers the opportunity to achieve reward commensurate with exceptional performance.
The Alliance method is best suited to projects where:
• output specifications cannot be clearly defined upfront and/or there is a high likelihood of significant scope changes
• there are complex stakeholder issues or external threats or opportunities that are best managed collectively
• there are tight timeframes, and
• there is a need for owner involvement during construction.
The commercial goal of contractors is to maximise revenues and minimise risk. This is achieved in an Alliance by locking in a profit margin, avoiding major downside risk and retaining opportunity for upside risk. Downside risk sharing by the contractor is typically limited to the profit margin. The impacts of cost overruns are borne jointly by the public sector party and the private sector, although the latter only has its margin at risk.
The process for the Alliance method is generally:
• the public sector party engages expert advisers; however, the private sector partner is likely to provide experts as well
• under a Pure Alliance the public sector party develops the project design and negotiates the Target Outturn Cost (the target cost) collaboratively with the selected private sector party
• under a Competitive Alliance the public sector party develops the project design and negotiates the target cost in parallel with two potential private sector contractors. The target cost is finalised with the preferred contractor. A Competitive Alliance attempts to provide a better balance between ensuring a competitive price and improving project outcomes through early contractor involvement, which provides the opportunity for design innovation
• the public sector party engages an external auditor to verify the target cost and to confirm the amount was developed in accordance with the agreed principles
• the alliance agreement is finalised and funding approval is obtained/confirmed
• detailed design work is undertaken
• the private sector partner leads the construction of the project
• an ongoing audit program is used to ensure what items are reimbursable and what items are deemed to be covered by the gain/pain share arrangement, and
• the contractor is paid on the basis of progress (generally on a cost of work completed, rather than a cost to complete basis).
The principal advantage of an alliance is the ability to commence construction before plans are finalised, while the two principal disadvantages are likely higher cost (as costs are not determined in a competitive process) and the weakened incentive to complete on time as a result of the practice of making progress payments.