Jordan ... eyeing balanced contracts.
Can alliancing work in the Gulf?
01 July 2015
STUART JORDAN* analyses new contracting arrangements such as alliancing where risk and responsibility is shared between the employer and contractors and assesses prospects in the Gulf.
In the eyes of many people in our industry, the Middle East construction industry is old fashioned and not very open to new ideas. This view implies that new ideas are good ideas – which isn’t always the case.
Certainly, in the case of construction procurement models, the Gulf remains quite attached to single-stage competitive lowest price tender selection. Everyone knows where they stand and, as between employers and contractors, they stand quite far apart from each other! Relationships tend to be arm’s-length and driven by the formalities of the tender process. And the terms of the contracts formed in this way tend also to be tougher on contractors than we see in other parts of the world.
It is no surprise, therefore, that this region hasn’t been the most fertile ground for new and “softer” contracting arrangements. We have seen some small elements of negotiated tenders and two-stage tendering which rely on more interaction between the parties than with lowest price competitive processes. This is still very much the exception, however – and resulting contracts are usually still tough. Post-contract exchanges continue in the same vein with each party generally making sure that its position on the cause of problems and claims entitlement etc is made on the record in full.
Many people consider this approach to be “adversarial” and detrimental to the projects themselves. This is the essential point behind all attempts to “modernise” construction globally. It is not about whether one party or another is advantaged, but that there is an inbuilt inefficiency in old and adversarial practice which results in projects not being completed in their optimum time, cost and quality. This is, they say, a “lose-lose” result for both parties and there are better ways. This is the claim we should examine.
New ways
Partnering became popular about 20 years ago in the US and the UK. The term covers a wide range of approaches to contracting. At the least intrusive end (soft partnering), the idea is that parties will act collaboratively and in good faith but the essential contract terms on risk and responsibility are not changed. Parties are still held to their contract obligations but there is a “gloss” added in the form of “partnering protocols” which are expressly non-binding. These are usually set in less objective terms – aspirations and outcomes. One big question is, what happens when a party complies with this protocol, to its detriment under the actual contract, but the other party does not. Is there a remedy? Would it be better to make the protocols binding then? Given the imprecise language in them, this would create even more problems.
At the other end of the range (hard partnering), the parties do amend the contracts to support the philosophy by using more proactive communications, liaison committees and similar troubleshooting to help cooperation. These process requirements are, at least, easily understood as practical and contractual obligations. Such provisions are part of many modern contracts which have no claims to partnering features.
This is a highly simplified summary. Partnering is an elastic term and it can mean as little as a framework agreement or just a general understanding that parties will work together over a series of projects – strategic partnering.
Alliancing
The big step away from the “old ways” is when parties looking for a form of hard or contractual partnering agree fundamentally to change the risk allocation in the contract so that risk and responsibility are shared. This is generally called alliancing – also an elastic term, sometimes used interchangeably with any sort of partnering which has this risk allocation feature. Others use the term alliancing to cover only multi-party arrangements in which (in the fullest version) the entire design team and the contractors will share risk between themselves and with the employer.
Whichever it is, the idea is that the parties agree not (or not always) to hold each other liable for their respective failures, that is a “no-blame” culture. That raises the question as to what happens (more pointedly, who takes the hit) when failure happens. The other essential element is, therefore, decision-making, the basis for which is “best-for-project” rather than “best-for-me”. Decisions are to be made unanimously between both (or all) parties. This, of course, is an “agreement to agree”, so the contracts still need to decide who makes that decision if unanimity is not possible. The outcomes can look bizarre – for instance, a contractor getting paid full rates to redo defective work while everyone else is suffering delay and disruption. Some arrangements use a contingency fund for such situations. Cynics can point out that alliancing doesn’t solve problems; it’s the pot of money.
It is unfair, of course, to describe alliancing just in terms of the contract provisions. Much more important is the cultural background: the ability and willingness of the parties to embrace these ideas. The plan is not to tolerate failure nor to reward it but to create the conditions to avoid failure, to achieve best practice and to generate continuous improvement. Particularly in multi-party alliancing, this needs to be the central discussion from the very first procurement tasks. Each participant is effectively relying on the performance of everyone else and not just the employer or client they are contracting with. There can be no question of the employer just putting the team together and then asking them to share risk in this way.
So is alliancing going to become popular in the Gulf? I really doubt it. The realistic objective is surely just traditional arm’s-length contractual relationships governed by clear and balanced contracts. That means contracts which promote communication and cooperation, without risk-dumping and without subjective, unknowable and unmanageable risks allocated. That is enough for me.
*Stuart Jordan is partner and co-head construction for the international law firm King & Wood Mallesons (KWM). Based largely in Dubai, UAE, he specialises in engineering and construction matters, cross border, both front end and disputes.
