Alliancing on major nuclear projects

In the world of major projects, collaboration is the order of the day and increasingly we are seeing a trend (and expectation) that supply chains work together in a collaborative way to help deliver the project.

This sort of collaboration is sometimes formalised by way of a formal partnering or alliancing structure which requires the parties to a contract to work together and collaborate to deliver a project or a set of outcomes. The intention is to help avoid confrontational behaviour or behaviour intended to take inappropriate commercial or legal advantage of the other parties. The precise meaning of partnering or alliancing varies between parties, projects and contracts.

Partnering or alliancing means different things to different people, but these are some examples of what we have seen in practice recently:

'Loose' informal partnering

At one end of the spectrum, one or more parties might agree with its client to work collaboratively with other parties working on the project. This is fairly common in most contracts that relate to major projects as a 'minimum' expectation, particularly given that it's  rarely the case on a major project that distinct work packages are entirely discrete and do not involve at least some interface with other work packages being undertaken by other parties. In some cases, the parties might agree to sign up to a non-binding 'partnering charter' or partnering agreement which sets out partnering goals that each party agrees to work towards.

Formal contractual partnering

A group of parties (which may be two or more contractors/consultants and/or the client) may agree to work collaboratively on a single project.

It is common for each party within the supply chain (at tier 1 level) to have its own standalone bilateral contract with the client which allocates risk in the traditional way in relation to the particular work being undertaken by that party, but a number of parties working on a particular phase or part of the project may collectively also sign up to a separate 'partnering agreement' (which may or may not be legally binding). This type of contract will often require parties to behave in ways which are consistent with the idea of partnering (e.g. by sharing programmes of work to ensure that work spaces are shared most efficiently and to ensure interface risks are minimised).

Another example of how we have seen this work in practice is where a client has particular preference to engage a number of parties to collectively deliver a package of works rather than engaging a single supplier who is then responsible for sourcing and procuring its own supply chain. The client may have this preference because it has aspirations for the local supply chain to be heavily involved in the work to the extent they can be whilst perhaps ensuring that other larger national/international organisations who have particular expertise, capacity, resource and resilience that might be lacking from the local supply chain are also involved in the delivery of the works. This procurement strategy could be achieved by simple multi-party contracting, but this is often not attractive on major projects because is usually involves unwanted and unnecessary contract management for the client and requires the client to deal with a number of different parties if anything goes wrong.

In contrast, if the client contracts with a single contractor as the single point of responsibility for the whole of the works with the intention that such contractor subcontracts some of the work to those local supply chain members, there is the risk that the contractor simply delivers all that work itself or 'cherry picks' the profitable work that it wants to do itself and subcontracts the work packages that it doesn’t want to do. A formal partnering agreement might be useful in this scenario to help better manage the allocation and flow of work to the relevant parties that the client wants to do that work and to set out agreed processes and methodology that the parties must adhere to in relation to proper allocation of work in line with the principles and aspirations of the client.  

Consortium partnering

It is common for some organisations to form consortia to tender for certain specific projects. By working together on a joint basis such consortia can present a more attractive proposition to the client than if they were to tender separately. Examples of this might include:

• Two companies that provide the same skill sets but in two distinct geographic areas working together to win work that requires a contractor to service the whole geographic area.
• Two companies with specialist (but not overlapping skill sets) working together to provide a joined-up solution for a client (e.g., where one contractor undertakes highways maintenance and another is a specialist in traffic management).
• Where a number of smaller organisations within a local supply chain work together to establish a greater level of resilience to present a compelling alternative proposition to a single larger organisation who operates outside of the area where the project is being delivered.
• Where a specialist designer and a specialist contractor form a consortium so that they can provide a one-stop shop design and build solution to the client.

Consortium arrangements can be formalised in a number of different ways – including by way of a formal joint venture, an unincorporated joint venture, or by a more traditional main contractor / subcontractor arrangement.

Contractual alliancing

A 'pure' alliance involves two or more parties coming together to jointly achieve a common goal, sharing risks and rewards on a "no claim, no blame" basis. The alliance contract entered into between the parties would usually require costs to be accounted for on an open book basis with the alliance being managed by a "board" of senior staff, with all decisions made on what is sometimes described as a "best for project basis".

Historically, alliancing contracts have tended to be bespoke agreements (although there are an increasing number of standard form contracts which might form the basis for such alliance contract). Alliancing contracts have most frequently been adopted in monopoly industries such as within the utilities sector, but we are starting to see them being used more widely, such as in relation to the Thames Tideway Scheme, Heathrow Terminal 5 and on the nuclear power stations at Hinkley Point C and Sizewell C.

Arguably a "true" alliance as one that expressly includes a "no blame" or "no dispute" clause. That clause would usually mutually release the contracting parties' liability to each other, including for breach of contract or negligence, except to the extent that such liability arises out of fraud or wilful misconduct, with the alliance arrangements also stating that disputes are to be settled on a consensus basis. If adopting that route, the parties would usually want to consider together what risks would be insured, with what levels of deductible, and ensure that their contractual arrangements do not hamper any appropriate call on the policy or policies. A specialist broker might recommend single project insurance in those circumstances.

In an alliance, the parties would usually also keep their construction and design costs separate from their agreed levels of overheads and profit. An alliance often combines a reimbursable payment structure with the possibility of gainshare, payable under a target cost arrangement, although in some cases the arrangements are structured such that any gainshare is only due if a party achieves a step-change in performance. That is because the agreed level of overhead and profit would reward normal good practice.

Under an alliancing structure all the parties (including the client) therefore share the risks and rewards of the project.

The 'PPP' model – one example of alliancing in action

In 2019 Sellafield Ltd (a subsidiary of the NDA) established a form of alliancing arrangement to help deliver its capital projects. The main focus for Sellafield is the complex work to contain and make safe the legacy of its past activity (with an annual budget of about £3.65bn available to undertake this task). Sellafield Ltd did not consider that the traditional approach to delivering capital projects was giving them the results it wanted on cost and schedule or gave it the flexibility to learn from mistakes and successes.

It therefore implemented a Programme and Project Partners (or 'PPP') procurement model with the aim of tackling this problem through long-term partnerships between Sellafield and four separate partners to deliver around 25 major projects over the next 20 years. The PPP model features no contractual break-clauses, zero pain share and a guaranteed profit share arrangement in a move that the Sellafield team has described as a 'game-changing' model that will transform outcomes across its portfolio of construction projects while also revolutionising the industry.

Other examples of how we understand the model operates include:

• Each partner being entitled to a pre-defined corporate overhead percentage which is added to its costs, meaning contractors always recover their cost plus their business overhead and the introduction of an entitlement for the contractor to recover a minimum level of profit in addition to its cost and corporate overhead percentage. 
• The introduction of incentivised profit, with a split mandated at framework level so incentivisation is aligned to the framework’s critical success factors such that profit is split 25% for achieving enterprise-level targets such as social impact, environmental and supply chain innovation; 50% for achieving the traditional project measures of time, cost and quality; and 25% for partnering trades, where contractors are partnered and incentivised to deliver common outcomes.
• No delay damages and clarity that the contractor’s sole liability for failing to deliver on time is the loss of associated incentivised profit.
• No retention and payment terms of 30 days from the payment due date.
• Prices and programme to be built collaboratively by an aligned team and there are no mini-competitions − contractors are allocated works and use forecasts of defined cost and their COH% and profit percentages. 

The PPP model reflects principles of alliancing – the approach is one of carrots, not sticks, putting early contractor engagement at the heart of the process and ensuring that true collaboration is central to delivery. The intention is that by focussing on behaviours that drive the right outcomes, it underpins faster, more effective project delivery, creates greater stability in design and construction supply chains and promotes greater workforce flexibility and local economic benefit.

Comment

It is probably fair to say that alliancing is particularly well-suited to some of the more complex projects that are difficult or impossible to procure effectively on a bilateral lowest-cost basis and so, whilst some form of collaborative partnering is relatively commonplace on all major projects, it is fair to say we are starting to see alliance structures being considered and used more and more on major projects as well.

It is probably still the case that the market's appetite for alliance contracting is not as strong as it could be. What this inevitably leads to is a contracting arrangement which is 'badged' as an alliance but is not quite a 'pure' alliance due to some very bespoke arrangements within the contractual documents. However, it is clear that the direction of travel on major projects is towards alliancing and we are going to see various forms of alliancing models being increasingly implemented in the future.

For the parties to an alliance or a partnering project to succeed, they need to believe that if they work together they can all 'win' and agree mutually beneficial goals that align their businesses so that all parties profit if they succeed in delivering the project.