The project alliance model
Project alliances have become popular in recent years with many different forms of alliancing being used on a wide range of major projects, including road and rail infrastructure projects, dam upgrade and new dam projects, and water and gas pipeline projects.
The so-called ‘pure alliance’ model will typically include the following features:
- it is a contractual arrangement – unlike much ‘partnering’, which is more a means of management – and tends to be limited to a specific project – unlike many strategic alliances;
- the owner, contractor, designer and others combine to form an ‘alliance’; personnel and other resources are pooled and act as an integrated team and innovation is encouraged;
- good faith obligations apply and usually no bank guarantee security is provided;
- the alliance is controlled by an ‘alliance board’ or ‘alliance leadership team’ (ALT) and decisions are made on a ‘best-for-project’ basis;
- all participants are represented on the ALT, and unanimous decision making is required on the ALT, with only few exceptions;
- the parties adopt a ‘no blame, no disputes' regime and give mutual releases, again with only few exceptions (such as for wilful default and insolvency); this requires a ‘leap of faith’ ;
- essentially, it is a sophisticated ‘cost plus’ regime involving an ‘all for one, one for all’ approach in which the parties will all benefit from good performance and all suffer from poor performance against agreed targets;
- there is limited scope for adjustments to the target cost and target completion date (i.e. few ‘variation’ claims are permitted);
- the commercial objectives of the participants are aligned using a risk/reward regime involving gainshare/painshare in which actual performance is assessed against a range of agreed targets; the broad objective of the risk/reward regime is to incentivise the alliance participants to achieve outcomes that are better than ‘business-as-usual’ outcomes;
- importantly though, the worst outcome for non-owner alliance participants if the project outcomes are poor is usually that they will not be paid their margin (or ‘fee’) for corporate overheads and profit; all other costs will be borne by the owner.
A typical cost-based gainshare/painshare arrangement that focuses on comparing actual cost against target cost might look like the graph below.
So-called ‘hybrid’ alliances occur where owners seek to ‘tone down’ some of the features of the ‘pure’ alliance. For example:
- by introducing a deadlock breaking procedure to deal with issues that cannot be resolved by unanimous agreement at the ALT or by giving the owner a casting vote on certain issues; or
- by broadening the exceptions to the ‘no blame, no disputes’ regime.
However, ‘toning down’ the pure alliance model may, in some cases, nullify opportunities that pure alliances are designed to provide. Why use a project alliance?
Why use a project alliance? Reasons may include:
- tight time constraints that do not permit more traditional methods to be used;
- lack of definition of project scope;
- project complexity may require more innovation and flexibility (encouraged by the absence of the usual risk of litigation);
- the ‘culture’ of the owner may be such that a non-adversarial, integrated, performance-based arrangement is a better ‘fit’; or
- the owner may not be able to afford, or may not wish to pay for, the ‘risk contingency’ that will be included in the price under more conventional delivery methods.
Challenges for the project alliance model
Certain features that are commonplace in project alliances – exposure of the owner to 100 per cent of the cost overrun risk if the ‘pain’ threshold of the other alliance participants is reached; unanimous decision making; and the ‘no blame, no disputes’ regime – will make the uptake of the project alliance model a challenge in cases where:
limited recourse financing is involved and the financiers require ‘hard’ guarantees on out-turn cost, completion dates and facility performance;
It is becoming increasingly popular to introduce a ‘sub-alliance’:
- below an upstream main alliance structure; or
- below an upstream traditional contract structure.
Depending on the project, sub-alliance structures can work well – but a number of issues need to be considered, including:
- if the sub-alliance arrangement involves an uncapped reimbursable cost component, will that increase the exposure of the upstream parties to cost over-runs (especially for the owner in the upstream alliance)?
- if the sub-alliance arrangement involves a ‘no blame, no disputes’ regime, will that diminish the rights of recourse of the upstream parties?
- where the upstream arrangement is a traditional contract structure, will the sub-alliance arrangement comply with any mandatory provisions of the upstream contract regarding subcontracts and subcontracting (e.g. requirements for collateral warranties, novation deeds or step-in rights)?
- will the sub-alliance arrangement prejudice any of the participants' insurances (e.g. by affecting an insurer's rights of subrogation)?
There is no ‘one size fits all’ when it comes to contracting strategies – there are many options.
The model that will best suit a particular project will depend upon a range of factors, including:
- the nature of the project and the risks involved;
- the time, cost, quality and performance parameters; and
- the skills, aims and needs of the project participants.
Taking a sensible and informed approach to the selection of the contracting model and the allocation of risk will enhance the prospects of success for a project.