9 March 20218 minute read

Alliance contracting in the UK infrastructure industry: An Australian perspective

Introduction

The UK favours traditional forms of contracting for construction and engineering projects. This is perhaps because they are seen as the most simple and effective ways of allocating risk between parties.

The UK government recently published the long-awaited National Infrastructure Strategy, announcing its intention to increase significantly its expenditure on infrastructure projects. The establishment of the National Infrastructure Planning Reform Programme will also streamline project approvals and cut timescales by up to 50%.

Given a recent history of infrastructure projects that have exceeded budget and timelines, and with the potential for continuing cost overruns on government infrastructure projects, is it time for the UK to reconsider traditional forms of contracting for infrastructure projects? Is it time the UK took alliance contracting seriously?

Alliance contracting

What is alliance contracting?

An alliance contract is an agreement where the parties agree to act in good faith and to collaborate to achieve a common goal. In doing so, the parties will share in the success or failure of the project. Alliancing refers to the legal/commercial relationship between service providers (designers, contractors referred to as “non-owner participants” (NOPs)) with the employer/principal (local governments or commonwealth governments – referred to as “owner participant”) for the design, construction and maintenance of a project where there are varying levels of collaboration and risk sharing.

The key characteristics of an alliance are:

  • Integration – project teams are integrated, i.e. there is not a contractor under the direct supervision of an owner;
  • One Voice – a joint governance framework is agreed whereby one representative acts for each entity – decisions are made together that are “best-for-project” with value for money always being a key objective;
  • One Outcome – the parties either succeed or fail together, with all parties sharing the risks equally between them. There is a “no blame” culture with parties not permitted to litigate, with the NOPs either receiving a “gainshare” or “painshare” depending on performance.

Of course, the Owner Participant ultimately retains the majority of the risk for delivery of the project, as payment to the NOPs is made on a cost-plus basis until the Target-Outturn-Cost is reached (i.e. the contract sum). This means that in some cases the NOPs may be fully reimbursed for all their costs, despite the project finishing late.

Alliances were initially created by BP in the early 1990s, in response to resolving the complex contracting principles that had developed in the UK oil and gas sector – which meant that drilling for oil reserves in the North Sea had become uneconomical. BP chose a notoriously difficult oil reserve, Andrew Field and developed a painshare-gainshare compensation mechanism between the seven parties to the project, ensuring their commitment to collaboration. The results were a success, with final costs coming in around GBP80 million under budget, six months ahead of schedule and the creation of a new contract methodology – alliance contracting.

When and why to use alliances and when perhaps not to use alliances

Alliancing may be appropriate where there are numerous or complex risks and interfaces. These include:

  • Working in a brownfield environment;
  • difficult stakeholder issues;
  • minimal available design information or site data;
  • tight timeframes;
  • a high likelihood of scope/constraint change;
  • complex technical challenges that require innovative solutions; and
  • lack of resourcing within the broader market.

Alliancing can avoid the creation of adversarial relationships, which can lead to delays and costs as parties dedicate resources and time into defending legal positions.

A conventional contract may be more appropriate if the risks to the project are clearly defined and ascertainable, and able to be kept compartmentalised without undue interference by the contracting parties.

There may be other issues that make an alliance undesirable. For example, a lack of suitable alliance partners, competing interests or internal constraints within an organisation that prevent it from embracing such principles of “all succeed or all fail” and “no litigation”.

Alliance contracting – the Australian experience

Over the last two decades, Australia has completely overhauled its contracting methods. Alliance contracts are increasingly used on infrastructure projects across the country, with over 250 complex projects completed to date.

A 2016 Grattan Institute evaluation of 836 infrastructure projects valued at AUD20 million or more found that cost increases accounted for nearly a quarter of the total budgets of built projects since 2001.

Compare that to a 2009 report by the Victorian Department of Treasury and Finance, which concluded that, of 46 alliance projects (all valued at over AUD100 million) 96% were completed on time or ahead of schedule. Further, the report concluded that between 2004 and 2009 a significant majority of project owners and NOPs believed that the alliance met or exceeded its requirements.

How can alliance contracting help the UK?

Traditional infrastructure projects in the UK commonly suffer time and budget issues. Examples include the Thameslink project, the Great Western Railway upgrade and Crossrail.

The UK government recognises the issues arising from traditional forms of contracting. In 1994 the Latham report recommended, among other things, a more collaborative approach to solving problems in the construction industry caused by the adversarial nature of contracts. In 2015 the Alliancing Code of Practice stated that efficiency savings could be achieved through reforming procurement practices and effecting behavioural and culture change.

Is alliancing currently used in the UK?

Yes. There are several recent examples of successful alliances in the UK. These include:

  • The Crown Commercial Service (CCS) September 2019 launch of the government’s GBP1.2 billion Modular Building Solutions project, which is designed to deliver modular buildings to the public sector. It uses the FAC-1 Framework Alliance Contract.
  • Highways England has adopted the NEC-4 Alliance Contract, subject to highly bespoke amendments for the Smart Motorways Programme Alliance. The alliance will deliver GBP7 billion worth of smart projects over the next decade.
  • Thames Water’s eight2O alliance is the largest alliance in the UK water sector. Thames Water used the alliance on the successful King's Scholars' Pond sewer rehabilitation scheme.

The most commonly used standard form alliance contracts in the UK include, the TAC-1 (Term Alliance Contract); the FAC-1 Framework Alliance Contract; the NEC4 Alliance Contract; the PPC2000 Project Partnering Contract; and the JCT Constructing Excellence Contract 2016.

The issue is not the absence of a framework to enable alliance contracting, but rather that the market’s appetite for alliance contracting is weak. Further, those alliances that are used are not “pure alliances”, due to the bespoke arrangements within the relevant contracts.

Given the cost overruns and time delays set out above, and the recent effects of COVID-19 on the construction industry, could this lacklustre appetite for collaborative contracting be about to change?

The effects of COVID-19: A push towards more collaborative working?

The impact of COVID-19 on the global economy is likely to be substantial and long-lasting. The impact on the UK and its construction industry will be similar in effect. To overcome such hardship the construction industry as a whole will need to pull together. Governments and private companies will need to be resourceful in their approach and adopt innovative strategies.

Following the UK government’s Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the COVID-19 emergency, we have seen an increase in collaborative behaviour. It will now be interesting to see whether this can be harnessed in a post-COVID-19 world as finding value for money becomes even more important.

Conclusion

For alliance contracting to grow in popularity in the UK, a shift from traditional procurement and delivery models is required. More focus is needed on collaboration and teamwork, and less on claims. Further, parties need to accept greater risk-sharing responsibility, with a focus on problem-solving rather than blame. Governments must be prepared for a more inclusive and hands-on role than usual.

The biggest shift is the one away from the adversarial nature of construction contracts. At present, this is made more difficult by the right to adjudication that is implied into construction contracts by the HGCRA 1996. The NEC 4 Alliancing contract deals with this problem by reducing the number of issues that the parties can claim for – to IP rights, death and personal injury of employees, wilful default and any other matters in the Contract Data. The parties waive the right to bring any other claims.

It will be interesting to see whether alliance contracting will gain in popularity in the industry, with appetite for risk diminishing following COVID-19. With the UK government seeking to stimulate its economy through increased infrastructure spending, and the focus on “shovel-ready” projects, alliance contracting may be the key to unlocking these projects, and potentially the only viable way that many of these projects may be able to be delivered.

Industry participants interested in moving towards more collaborative working should consider whether their own businesses would be able to accept collaborative principles, such as “no blame” and “gainshare-painshare”, and what they can do to promote acceptance of alliance contracting. This may include engaging long term partners or clients in discussing the possibility of alliancing.

It remains to be seen whether the UK infrastructure market can replicate the success of alliance contracting in Australia. For parties that are willing to embrace the principles of alliance contracting, the potential upside could be significant.

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