Practical Law

Although alliance contracting has been used in the UK over the past 15 years, it has never quite won the affections of contracting parties here which has been achieved in other jurisdictions.  However, recent trends suggest that the move towards alliance contracting is gaining momentum. Network Rail has already moved to the alliance model for major infrastructure works and the Department of Health has used the alliance model for a major IT and services outsourcing project for the NHS.

This is the first of a series of quarterly blog posts on the subject of alliance contracting. This post compares this innovative form of contracting with traditional forms of contract and considers the benefits and risks involved for businesses operating in a range of sectors.

Overview of alliance contracting

Alliance contracting offers a different approach to co-operation between clients and contractors compared with traditional forms of contract. Also known as “collaborative contracting”, it is a delivery framework for large multidisciplinary projects, focusing on a co-operative process which aims to promote openness, trust, risk and responsibility sharing, innovation, high performance and the alignment of commercial interests between parties who aim to deliver a project in a collaborative and constructive way.

It seems the current legal and regulatory environment in some sectors may be moving towards a partnering approach to contracting. The new EU Procurement Directive which was implemented in the UK earlier this year introduced the concept of “Innovation Partnerships”. This allows public authorities to call for tenders to solve a specific problem without pre-empting the solution, encouraging tenderers to come up with innovative solutions in alliance with the authority. The NHS (Procurement, Patient Choice and Competition) Regulations 2013 require commissioners to contract with the most capable providers and, in the wake of the Health and Social Care Act 2012, they are now seeking to implement a partnership approach to commissioning clinical services to overcome some of the constraints associated with traditional contracting.

The growth of alliance contracting resulted from dissatisfaction within the oil industry with delays in delivery together with escalating costs. This led to parties being caught up in litigation for years and their lawyers trying to account for every eventuality in increasingly long and complicated contracts.  It emerged in the 1990’s, seeking to promote collaborative working and since then, alliance contracting has become widely used in projects in the Asia-Pacific region, most notably in construction projects in Australia and New Zealand.  The results have often been impressive and include reductions in costs, fewer delays and excellent health and safety records.

How does alliance contracting compare with traditional forms of contract?

Businesses should be aware of how the structure of an alliance contract differs from traditional forms of contract and the associated benefits and risks:

• Flexibility

Flexibility underpins the alliance model, which allows the contract and parties to adapt easily to the changes that become necessary on large scale, multidisciplinary projects enabling the parties to  address complex design, construction and environmental issues that may not be evident at the outset of the project. This is perhaps the key advantage of the alliance model.  By contrast, change is not easily accommodated in traditional contracting.

Change and innovation in delivery are expected under the alliance model and timescales and termination rights are flexible.  There is also a flexible attitude to negotiations, the object of which is to build a relationship between parties who have entered into a long term partnership.

A potential risk associated with this focus on outcome as opposed to process is greater uncertainty, particularly in terms of timing and budget.  However a unified cost structure as well as enhanced project synchronisation is designed to counter this uncertainty and achieve completion on time and within budget.

• Collaboration

The alliance model is based on one unified agreement under which all parties share the benefits and risks.  This can be contrasted with traditional contracting models where each party operates under its own separate contract containing separate objectives.

In an alliance, any “gain” or “pain” is linked with good or poor performance overall and not to the performance of individual parties.  The idea is to create an integrated structure whereby multiple suppliers work together under one central alliance in order to deliver the project as a whole.

The advantage of the collaborative framework is the promotion of a set of shared values leading to unanimous and principle-based decision making.  This is supported by a number of good faith obligations such as co-operation and communication between the parties and requiring the parties to act fairly, honestly, transparently and with integrity in relation to the delivery of the project. The combined expertise of the parties can further the interests of the project as a whole and mitigate risk.

The potential drawback is that the success of the project depends on personal commitment and trusting relationships which may be difficult to develop.  Parties will also have their own commercial drivers which may dictate how they get involved in collective decision making.  Having said this, these risks are also present in traditional forms of contracting, regardless of how well drafted the relevant clauses may be.

• Dispute resolution and risk allocation

There is a no fault, no blame attitude to disputes whereby each party is released from liability in respect of the project (except in the case of “wilful default” or the occurrence of an insolvency event).  Conversely, traditional contracts expect disputes and seek to provide for fault and risk allocation at the outset.

The shift away from fault allocation and adversarial dispute resolution methods in the alliance model is considered to promote a forum for the effective resolution of disagreements amicably and on a cost-effective basis,  although sometimes an ultimate deadlock breaker is appointed.

This should mean that parties can focus on promoting active project management to prevent problems escalating, as opposed to “reactive” management when problems arise.  Despite this, there is a risk of legal uncertainty, including lack of precedent, as to the enforceability of “no blame” provisions.  The extent to which such risks may be mitigated through the use of commonly used standard forms and clear KPI’s remains to be seen and this will be the subject of a future blog post.

• Alignment of interests

The interests of the parties in an alliance are aligned to the same commercial outcomes under one overarching performance framework whereas traditional models encourage parties to look after their own interests under their separate respective contracts.

As the parties are encouraged to act in the best interests of the project as a whole, alliancing has the potential to reduce costs and project duration, and improve the quality of deliverables.  By contrast, it is generally acknowledged that fixed price contracts have the disadvantage of requiring suppliers to include a “risk value” in their contracts which can result in higher upfront pricing.  Alliance contracts address this by providing an incentive to work together through a shared reward painshare and gainshare scheme which rewards the value to the alliance performance. There is of course a risk of higher initial investment, for example, in terms of developing new processes, training and team building.  On simple projects where the management is unlikely to change, the upfront costs may never be offset.

However, proponents of alliancing believe that value for money will be achieved over time through a series of projects, and improvements will be felt with continued progression.  Businesses can therefore ensure that the cost saving benefits outweigh the initial cost of moving to the alliance model, taking into account the size and potential recurrence of the project.

The next post in this series considers painshare and gainshare provisions that are key to a number of alliancing contracts.