Recently a number of our employer clients have told us they are not entirely satisfied with the alliances that they have entered into. Whether this is a mere coincidence or represents a broader trend away from alliancing is unclear, but the list of complaints seems to be fairly consistent.
Benefits of alliancing
The argument in favour of alliances is well rehearsed: traditional forms of contracting cause parties to adopt defensive behaviour, which ultimately leads to disputes. Such defensive behaviour is also said to divert the attention of the parties away from the key objectives of furthering the project.
Alliancing means different things to different people. In some cases it simply involves incorporating partnering ideals into a construction contract rather than having a non-binding partnering charter. For our clients, alliancing involved a panel of contractors appointed by the client to deliver a programme of projects, with work allocated between them, multi-party collaboration and shared incentives for achieving the client’s outcomes. Each contractor is motivated to do well by peer pressure, because it doesn’t want to “let the side down”. As with all partnering/alliancing models the aim is to promote openness, trust, and sharing of risk, responsibility and reward. Commercial interests are aligned with actual project objectives and the focus is on the best arrangement for project delivery rather than on the parties’ own interests.
This all sounds good in theory. However, in practice we hear that all is not what it seems:
- The reality is that “peer pressure” doesn’t tend to be a powerful motivator at the micro (day to day) level and clients lose their “one to one” commercial leverage against contractors who perform poorly or do little things wrong. Clients are struggling with their perceived lack of authority when problems arise.
- Reaching a consensus often proves difficult and, in some cases, parties use the requirement for unanimity in decision making to achieve an ulterior commercial objective.
- Alliances generally dispense with the “teeth” typically found in traditional construction contracts to deal with poor contractor performance or to drive excellence. For example, the contractor is unlikely to be liable, in the traditional sense, for defects and will usually give no warranties. Often it is only the contractor’s profit margin that is at risk if the works are not performed in accordance with the contract. Some clients are sceptical that the loss of the relatively small contractor margin (as compared to the overall project budget) has provided sufficient performance incentivisation for contractors.
- A common theme is the time and effort involved in distinguishing between the contractors’ genuine overheads and their profit margins.
Is alliancing for you?
There are several high profile examples of successful alliances, particularly where risks are unpredictable, complex and innovative solutions are required and are best managed collectively. It is on that type of project that alliancing comes into its own. However, it is not a panacea and any alliance should be entered into with caution. It should only be considered after a careful analysis of project characteristics, costs, risks and benefits and market conditions. Clients also need to be genuinely willing to take on the additional risks and responsibilities inherent in any alliance in order to benefit from the perceived advantages.
In other cases a more traditional contractual structure can work more effectively, by carefully considering how best to allocate risk, and to whom, and by ensuring that a sensible dispute resolution mechanism is in place.