Key features of an alliance contract

A traditional contracting model usually involves allocating risk to one party or another with the intention that if something goes wrong each party can use the contract to identify which party is responsible. This can often result in a stalemate where neither side is prepared to accept responsibility for a particular issue that has gone wrong which in turn can lead to formal disputes and potential legal proceedings – often a time consuming and costly process. This can have a detrimental impact on the behaviour of the parties during the remainder of the contract term.

Alliancing differs from this because the emphasis is on delivering the project on-time and on-budget, so it is all about embracing risks rather than being concerned with risk allocation. It requires the parties to work together to collectively identify threats to the successful delivery of the project and to find answers and solutions to those threats, rather than apportioning blame. The parties must fully embrace the concept of alliancing if they want to achieve their aims and not revert to the traditional contracting mentally of pointing the finger if a problem arises.

A ‘pure’ alliance contracting model should adopt a ‘no-blame, no dispute’ culture. In other words, the alliance partners should agree not to bring legal actions against each other (usually with a small number of exceptions such as in relation to wilful default and insolvency) in the event that the project is not delivered in accordance with the agreed performance objectives.

This does not mean that the alliance partners will not have disagreements – it would be highly unusual if they didn’t, and it is usually an indication of a high-performing team if disagreements are undertaken in a healthy and constructive way. The contract should provide a mechanism for how disagreements are addressed and resolved on a cost-effective basis, but this should be achieved without ‘finger pointing’.

This principle is based on the idea that alliance members put the project first and make decisions which are consistent with the collective aims and objectives of the alliance, rather than in their own self-interest. This might include for example, introducing principles of ‘best athlete’, where the most suitable resources from within the alliance are allocated to a particular part of the project based on what is in the best interests of the project. All alliance partners should participate in a joint management structure with each participant having an equal say in decisions made for the project. Careful consideration should be given in relation how to mitigate the risk of any one party in the alliance having a disproportionate say in decisions or undermining other alliance members.

Flexibility underpins the alliance model, which allows the contract and alliance members to adapt easily to the changes that become necessary on large scale, multidisciplinary projects. The contract should have mechanisms within it that facilitate and enable the parties to address complex design, construction and environmental issues that may not be evident at the outset of the project in a balanced and fair way.

Whilst traditional contracts can (and often do) provide for changes as the project evolves, it can be more difficult due to the fixed and rigid scope of works. In contrast, change and innovation in delivery are expected under the alliance model and timescales and termination rights are therefore more flexible. This can lead to greater uncertainty (particularly in relation to time and budget) but if the cost model is set up with this in mind then the increased flexibility should lead to a successful project outcome notwithstanding that the ‘road map’ to get there is not necessarily known from the outset.

The nature of an alliance and the requirement for all alliance members to work together to achieve a common goal should mean that parties can and should focus on proactive project management in order prevent problems escalating, as opposed to reactive management when problems arise, which is more common under traditional contracting methods.

The key to successful alliancing is to align the alliance members’ interests. It might be relatively easy for alliance partners to agree that they share the same goal – to achieve the successful delivery of a particular project – but their interest in doing that will rely almost entirely on the (financial) reward they will get from doing so.

Under traditional contracts (e.g., where a defined scope of work might be delivered for a fixed price) a contractor will usually uplift its prices to include a risk premium to reflect the costs it might incur if certain risks that are allocated to it materialise. This results in greater upfront pricing where the contractor gets paid for potential scenarios that might never happen. Alliance contracts address this by providing an incentive for the alliance members to work together through a shared reward painshare and gainshare scheme which rewards overall alliance performance.

A successful alliance contract requires the commercial model to accommodate two key principles: (1) reward being dependent on collective success rather than individual performance; and (2) reward being calibrated such that each party stands to really benefit from the successful completion of the project (i.e., they are sufficiently incentivised to take action rather than ‘sit on their hands’ and the commercial model doesn’t unfairly penalise an alliance member because of the failure of another party to fully engage in the process). This is tricky to get right, but if done well, it can underpin a very effective alliance.