Practical Law

It was only to be expected. Hard on the heels of FAC-1 (the framework alliance contract published by the Association of Consultant Architects, the group responsible for PPC2000) comes a guidance note from the NEC brigade, issued in liaison with the Infrastructure Client Group. It patiently explains that NEC3 offers an “ideal” (translation: “better than FAC-1”) contract model for creating an alliance. But does this claim stand up in practice? And how well does NEC3 address the very specific challenges posed by an alliance model?

How does the guidance operate?

The guidance proposes that an alliance can be created as follows:

• Each party enters into a separate NEC3 contract covering its contribution to the alliance, either directly with the employer or as a subcontractor to another party.
• All partners are linked by including Option X12 (Partnering) in their contracts.
• The standard NEC3 terms are modified so that certain risks are borne at alliance level (rather than by individual suppliers) and to align each partner’s return with the overall outcome of the venture, instead of being based on its own performance.
• The Works Information (or Service Information/Scope, depending on which NEC3 form is used) in each contract outlines not only the work to be performed, but also the overall objectives and how the participants will collaborate to achieve them.
• The Partnering Information (required by Option X12) describes the joint working arrangements in more detail, including matters such as the organisational model, decision-making processes, allocation of work and responsibility, common systems (including how standard NEC3 processes such as the programme, risk register and early warning will work across the alliance), cost measurement and reporting, supply chain strategy, incentive mechanisms, dispute resolution and so on.

The Works Information and Partnering Information

As the guidance notes, the Works Information and Partnering Information will need to be carefully drafted to avoid conflicts, and the structure must be flexible to allow additional work and partners to be brought in later if required. This must be right, but it highlights one of the key challenges inherent in trying to adapt NEC3 for an alliance; namely, that the contracts themselves can at best provide a framework only. Of course, this is the case with any NEC3 contract, and it is a truism that getting the Works Information right is critical if NEC3 is to work as intended. However, it is all the more so in an alliance world, where (as the guidance acknowledges) it is the underlying documents that will provide the “meat on the bones”.

That is all very well if the employer is able to specify at the outset exactly how it expects the alliance to operate. But, in reality, I suspect that very few clients will be equipped to do this, especially when using the alliance model for the first time. Indeed, it probably makes little sense for them even to try, at least when it comes to how the alliance will function at a day to day level. Frankly, the alliance partners are likely to be better placed to define how they will work together in practice.

However, the concept of the alliance “setting its own rules” does not sit easily with the general thrust of NEC3, under which the procedures to be followed, and, indeed, the employer’s budget, are either set out in the conditions of contract or prescribed by the employer. This is not merely a matter of form, since much of the strength of NEC3 lies in rigorous adherence to its procedures and treating changes as compensation events. Where flexibility is of the essence and key elements of the contract are (for good reason) left to be worked out by the parties later, it is far from clear that the disciplines embodied in NEC3 will work nearly as well.

Other observations

A few other thoughts on reading the guidance:

• In a classic alliance model, all the participants will enter into a multi-party “alliance agreement” regulating the arrangements between them. The guidance suggests that using NEC3 with Option X12 removes the need for an overarching agreement, but this will only work if all the contracts contain aligned terms and processes. As I mention previously, this is likely to prove complex to achieve in practice. In any event, there is at least a psychological case for requiring all parties to sign up to a single agreement that reflects the combined objectives of the group as a whole.
• The guidance proceeds on the basis that the scope of work to be undertaken is defined up front, with only the division of labour left to be agreed later. Again this differs from the classic alliance construct, where the employer merely specifies the problem and leaves the participants to come up with proposals for how to solve it.
• The guidance suggests adjustments to the NEC3 standard risk profile, for example limiting the categories of “Disallowed Cost” and including an incentive model under which all parties share in savings or overruns against the “employer’s budget”. However, these changes fall short of the wholesale re-alignment of risk demanded by classic alliance theory. For example, the indemnity provisions in section 8 have been left intact and there is no sign of a “no claim, no blame” clause. Also matters such as the time impact of compensation events are left to be decided at individual contract level, and each partner’s performance is measured separately against his own KPIs.
• The guidance correctly notes that the role of the project manager under the ECC contract will need to change, but is regrettably vague as to how this might happen. The truth (another truism) is that the project manager is key to the smooth running of an NEC3 ECC. But it is difficult to see much of its role surviving in an alliance world, where decisions are typically made by consensus rather than instructed on behalf of the employer. The idea that the “alliance”, which is, at best, an amorphous concept, can somehow take this on feels to me like an uneasy fudge.
• Finally, the incentive model raises at least two issues. First, it is still ultimately focused on delivering cost savings, which in the real world means initial capital cost rather than whole life value. Secondly, as the guidance recognises, the problem with incentives over a long-term programme is that the prospect of distant reward offers little motivation for teams driven by the need for short-term returns. Allowing the participants to “bank” gains on an interim basis runs the risk of encouraging a focus on short-term objectives (at the expense of shared final outcomes) and also raises the spectre of clawback if the forecast gains do not ultimately materialise.

Conclusion

Of course, it is easy to criticise. But there is no doubt that the guidance offers a vision of a step beyond the current NEC-enabled partnering world, even if it is only a halfway house on the journey towards a full alliance.

In truth, alliancing is only really suitable for large and complex programmes of work, where attempting to define risk allocation and pricing in advance is unlikely to offer value for money. The real question is whether contractors, consultants and suppliers will be prepared to invest their resources jointly in such endeavours, and to share the risks (and potential rewards) associated with doing so. Also, how many clients are ready to embrace the change in mindset needed to put the alliance concept to work?