Alliance Contracts

in Australia

Brain Noble
Director Operational Asset Management
Main Roads Western Australia
4th November 2010
 Alliance Contracts in Australia
Australias first Alliance was in the oil industry in mid
1990s.
First used in the water industry during late 1990s.
First road construction alliance is 2000.
Main Roads Western Australia first Alliance in 2003.
Main Roads has awarded 8 Construction Alliances
and varied two maintenance contracts into Alliances.
Our future road maintenance/management strategy
is based upon this type of contracting.
Alliances were developed from a strained
Contracting Environment
 Project Alliance Definition
A Project Alliance is where an owner and one or
more service providers (designer, constructor,
supplier) work as an integrated team to deliver a
specific project under a contractual framework
where their commercial interests are aligned to the
actual project outcomes.

In an Alliance, the Parties:

Assume collective responsibility.
Take collective ownership of all risks.
Share in the pain or gain.
 Alliance Contracting is Not Partnering

Partnering can be considered a Band-aid solution -

it does not address the contract issues:
Partnering partners tell each other that they will
act reasonably and fairly.
But when things go wrong, they often regress to
traditional litigious ways.
Project Alliance partners work together because
compensation (financial success) is tied to overall
success of project outcomes.
 While Partnering can be effective in getting
people to work together in difficult situations, it
does not address the actual issues (i.e.
uncertainty, complexity of the work) that are
making the situation difficult in the first place.
 Alliance Contract Principles

All parties either win or all parties lose.

Equitable sharing of risk and reward.
All parties have an equal say.
All decisions must be best-for-project.
No-blame culture.
No recourse to litigation.
All commercial transactions are fully open-
book.
Encouragement of innovative thinking with a
commitment to achieve outstanding outcomes.
 Open and honest communication (no hidden
agendas).
Visible and unconditional support from top
management levels of each party.
Governed by joint body (Alliance Leadership
Team) where decisions must be unanimous.
Day-to-day management by seamless
integrated project team (Best for Project).
Resolve issues within the Alliance with no
recourse to litigation.
 Payment
Uses 3 part approach.

Part 1: Actual project costs.

Part 2: Margin (profit + corporate overhead).
Part 3: Margin Incentivisation (Gain/pain sharing).
 What are the Benefits?

Creates an environment that drives high

performance.
Achieves commercial objectives of all parties.
Joint responsibility for managing risk.
Realistic target price.
Synergy driven outcomes.
High performance and innovation.
Helps build capability of all parties.
 Risk Sharing vs Risk Transfer
Traditional approach to contracting.
Transfer as much risk as possible.
Can be successful for non complex, certain,
well defined projects.
When a traditional approach may not be most
suitable option.
Complex, unpredictable risks.
Tight timeframes.
Not well defined details.
 High likelihood of scope changes.
Complex interfaces.
Difficult stakeholder issues.
Complex external threats.

When faced with these factors, project

outcomes are more likely to be achieved with
collective responsibility.
Typical Alliance Structure

Alliance
Leadership Team

Alliance
Management Team
Headed by
Alliance Manager

Project Team
 Alliance Leadership Team Responsibilities

Alliance Leadership Team

Create an inspiring vision
Establish principles & set challenging objectives
Approve performance targets
Set policy & delegations
Approve Alliance Management Plan
Appoint the Alliance Management Team members
Champion the vision, principles & objectives
High level support / stakeholder interface
Harness best resources
Monitor team performance
Resolve conflict within the Alliance Leadership Team
 Alliance Management Team
Responsibilities

Alliance Management Team

Deliver outcomes to meet / exceed objectives
Appoint / empower wider team
Day to day management of the project
Provide effective leadership to the wider team
Measure / forecast / report performance to AB
Take appropriate corrective action
 Procurement stages for an Alliance
Contract

3 phase process

1. Selection of Partners.
2. Interim Alliance.
3. Full Alliance.
 Selection Interim Full Alliance

Selection
of Preferred Commercial
Proponent Discussions

Are Key
No
Issues
Agreed?

Yes
Interim Alliance Period

Is
No The Target Outturn
Cost
Agreed?
Walk Away
Yes
Alliance Agreement

All parties have the right to Only owner has the right to terminate
walk away up to this point For convenience from this point
 1ST Phase
Selection of partner(s)

The most important step for the owner to

achieve a successful Alliance is to choose the
right partner.
 Selection

Selection Criteria
Non Cost
Technical, financial, and management capacity.
Understanding of and commitment to the Alliance
way of doing business.
Preliminary ideas on innovations and execution
strategies plus the potential to deliver outstanding
design and construction outcomes.
Willingness to commit to the project objectives and
pursue breakthrough outcomes.
Ability to work with the owners personnel in a high-
performance team.
 Selection

Commercial (Cost) Considerations

Agree on the primary commercial
arrangements.
Ensure that no fundamental roadblocks are
left to emerge during Interim Alliance phase.
Audit the financial records and costing
structures of the prospective non-owner
participants to assist in agreeing the Margin
(corporate overhead & profit).
 Selection

Corporate overhead can usually be easily

established based on the audit.
Profit can be harder to determine. It should take
into account:
Actual past profit.
Current corporate expectations and actual trend.
Difference between the audited project figures
and the prospective Alliance project such as
risk profiles, nature of work, etc.
 2ND Phase
Interim Alliance Agreement

Develop Target Outturn Cost (TOC) and Time

Schedule.
Value management / value engineering.
Risk & opportunity workshops.
Planning & design.
Systems and procedures development.
Alliance team development.
 Interim

Interim ISA Payment

Non Owner Participants (NOP)
reimbursement is usually limited to actual
costs.
If the parties enter into Alliance Agreement,
the NOPs receive a margin on Interim Alliance
Phase work.
If the parties dont enter a Alliance Agreement,
then payment of the margin to NOPs is based
on reasons they didnt enter into the
Agreement.
 Interim

Target Outturn Cost (TOC)

Jointly developed during the Interim Alliance by the
parties.
First real test of the new Alliance.
TOC is the key to the payment model:
Used to determine the gain/pain portion payable to
each non-owner participant.
Used as the target against which the actual cost
will be compared to determine the extent of under /
overrun that is to be shared amongst the Alliance
parties.
 Interim

TOC is not an estimate of the full cost of the

project to the owner.
The TOC does not include any pain/gain
payments.
 Interim

Apparent conflict between owner pushing for a

low TOC while the non-owner parties pushing
for a high TOC.
Several factors counteract this conflict:
Transparency: TOC is developed jointly on a
full open book collaborative basis. Nothing
can be hidden.
If TOC is too high, the project may not proceed
(not in the best interest of any party).
 Interim

If TOC can not be agreed, non-owner parties

may not receive any margin for Interim work
accomplished.
Potential for damage to reputation and future
business relationships if owner feels non-
owner parties conspired to inflate the TOC.
 3rd Phase
Alliance

Delivery of Services
 Payment Structure
Full Alliance

Profit
Part 2
Part 2 is at risk (Margin)

oheads
Corp. Project-specific
under the Part 3
risk/reward

overheads
arrangements

Part 1
Part 1 costs are guaranteed (Costs)
irrespective of the
Direct Project Costs
outcome of the Part 3
risk/reward arrangements
 Full Alliance

Part 1: (Reimbursement of project costs)

Guiding principles:
Each party is paid actual costs incurred on the
project, including costs associated with rework.
Payment under part 1 must not include any
hidden corporate overheads or profit.
All project transactions and costs are open book
and subject to audit.
NOPs are guaranteed part 1 costs.
 Selection Interim Full Alliance

Part 2: (Margin = corporate overhead + agreed

profit).
Margin is set before entering into the Interim
Alliance Phase.
Generally a fixed lump sum as a % of TOC.
Margin is not subject to adjustment regardless of
the actual costs expended.
Margin is only adjusted in case of a Scope
Variation (usually very few under an Alliance).
 Full Alliance

Part 3: (Sharing of pain and gain)

Intended to ensure that the NOPs assume an
equitable share of the gain / pain along with
the owner where the actual performance is
better / worse than agreed targets.
Guiding principles:
gain / pain should be linked to outcomes that
add to (or detract from) the value to the owner.
 Full Alliance

All possible project outcomes must result in

win / win or lose / lose (i.e. everyone wins or
everyone loses together).
Performance that is better than the agreed
targets lead to superior returns for NOPs and
performance that is less than the agreed
targets leads to lower returns for NOPs.
 Full Alliance

Part 3: (Sharing of pain and gain)

Overrun
Underrun
50% 50%
Owner NOPs
50% 50%

Target Outturn Cost

Owner NOPs
 Full Alliance

Managing Change
As a general principle, the parties collectively
assume all risks associated with the delivery of
the project, regardless of:
Whether or not those risks are within the
control of the parties.
 Full Alliance

Whether or not they have considered them in

advance.
Whether they could reasonably have been
foreseen or not.
Therefore, situations that would be treated as
variations under a traditional contract are not
variations under the Alliance rather they are
just part of the delivery of the project.
 Issues / Downsides?
Potential Downsides:
Perception of lack of certainty in cost outcome
for the owner.
Requires significant involvement and
commitment of owner personnel and senior
management to support process.
Requires significant cultural shift away from
traditional adversarial approach to one of
integration, collaboration and high
performance teamwork.
 Substantial costs to establish the alliance and
develop and maintain the alliance culture.
For government projects it raises probity
issues that need to be managed carefully.
Parties need to waive legal rights that they
would normally pursue in the event that things
go wrong.
 Reasons for Poor Outcomes

Expecting benefits without investing effort.

Selection of an inappropriate team.
Not addressing value for money concerns.
Under estimating the commitment required by
the parties senior representatives and
experienced staff.
Parties may be tempted to make unilateral
decisions.
Attempting to transfer risks to other parties.
Relying upon legal recourse.
 Characteristics of high performing alliances
A single cohesive team without any us and them
attitudes.
High performance culture amongst the team
characterized by:
Clear understanding of purpose/mission of Alliance.
Unequivocal commitment to meet or exceed
demanding objectives.
Willingness to commit to targets without knowing
how they can be achieved.
People who mean what they say, and do what they
say they will do.
 Individuals who are willing to accept
responsibility for their actions.
Open and effective communication.
Successes are acknowledged and celebrated.
Very close collaboration between designers and
constructors collaboration that never stops,
right up to final completion.
All energy focused on optimizing project
outcomes no time at all wasted on position
protecting or case building.
Very fast integrated decision-making.
 Benefits for Non-owner Parties

Potential for good returns within acceptable

limits of risk.
Enhancement of reputation leading to
increased prospects of repeat and referred
work.
Strengthening of relationship with owner and
the other parties (forming the basis for
possible future Alliances).
 Greater insights into project delivery from an
owner perspective, enabling constructors and
designers to better understand and service
their clients.
Increased job satisfaction for staff with
associated benefits to overall organizational
culture.
Significant increase in communication and
general project management skills.
 Key steps to insure success
Owner must have a good understanding of the
principles underlying Alliancing and why it has
succeeded on other projects.
Select the right partners using appropriate
criteria.
Ensure that all key stakeholders are committed
to achieving or exceeding the project
objectives.
 Outcomes of Alliance Contracts in
Australia

RMIT University have studied 217 Australian

Alliance Contracts from 1996 to 2006.

Industry Number of Alliances

water 81
road 62
rail 27

oil, gas & energy 25

Defence, mining & ports 6 in each area

building 4
The number of Alliances in Australia

Time Number
1996 / 1997 5

1998 / 1999 11

2000/ 2001 14

2002 / 2003 28

2004 / 2005 35

2006 / 2007 87

20008/2009 37
Value and Number of Australian Alliances
(1996 2008)
Value $A millions Number
0 to 50 58

51 to 100 40

101 to 250 58

251 to 500 30

501 to 750 12

751 to 1000 7

1001 to 1500 2

1501 to 2000 7

2001 to 3000 + 3
 30 Government Alliance Contracts

Final Costs Vs Target Outturn Costs;

83% less than TOC,
range 1%-29% variance from TOC.
17%greater than TOC,
range 3%-6% of TOC.
37% under planned duration,
range 0.5 to 18 months.
20% exceeded planned duration,
range 0.5 to 6 months.
i. Project Alliancing Practiticoners Guide
Victorian Department of Treasury and Finance
www.dtf.vic.gov.au/projectalliancing

ii. Project Alliancing Activities in Australasia 2008

Alliance Association of Australiasia
www.alliancingassociation.org

iii. Introduction to Project Alliancing

Presentation to Institution of Engineers, Australia
August 2000, Brisbane Australia
by Jim Ross.