Jordan ... region has not been at the forefront “collaborative working”.
Alliancing: are we left behind?
STUART JORDAN* discusses alliancing as an approach to collaborative working on a project, where all team members take collective responsibility for the risks of delay and defects in contracts.
01 December 2017
Many observers would mark out the Middle East (perhaps harshly) as being quite uncompromising in the way project risks are placed in construction contracts. More than this, the approach to contract risk in the Gulf is sometimes likened to the more adversarial positions which used to be prevalent in other regions. In other words – some say – the Middle East approach is worse than too-tough; it’s old fashioned!
We should test that theory. The Gulf region has been quick to adopt innovation in our industry: from spectacular engineering and construction solutions, prefabrication to the widespread mandating of building information modelling (BIM) in the design process.
Against that, it has to be said that the region has not been at the forefront of the move to “collaborative working”. This is based on the idea that construction projects can have better outcomes if the participants are prepared to share some risks rather than dumping them on whichever party is prepared to take them. Often that party is the least able to manage those risks and the least able to meet its liabilities when, inevitably, it fails. Some parties will take on risks simply because they are either desperate for the work or not smart enough to appreciate them, or both. We all agree this is unlikely to end well.
That’s the problem defined – but is “collaborative working” the solution? There is a whole range of collaborative arrangements. The best-known buzzword is “partnering”. This can be no more than some practical steps that aim to improve cooperation, such as: early warning, joint troubleshooting committees, co-location of project teams and mediation.
More integrated partnering models involve the real sharing of risk; for instance, parties agreeing to share the cost of delay and disruption, or of defects, regardless of which party was at fault. The idea is based on encouragement of teamwork and trust rather than strict contractual rights and obligations. Naturally, we lawyers are sceptical about the viability of such arrangements, and not just because they would do us out of a job. It is fair to say that it has also been hard to convince the developers and contractors themselves – and still less the project funders and other interested third parties – even in the most “progressive” markets.
Alliancing is, in many ways, the “far end” of collaborative working. It applies the partnering ethos across all project participants – perhaps several trade contractors, designers, BIM managers and project managers. All these participants share project risks between themselves and not just bilaterally between each of them and the employer. This is done through shared incentives (positive and negative) which are dependent on the outcomes for the whole project and not just on the participant’s individual performance.
There are many ways to arrange an alliancing model. Some typical features might be:
• Shared cost overruns, in which all participants are paid less than their full entitlements when project out-turn cost exceeds a pre-agreed target cost. Participants can share cost savings in the same way if out-turn cost is less than the target;
• Shared bonus (or delay damages) for early or late project completion; and
• Shared incentives for the collective achievement of key performance indicators such as health and safety or environmental targets.
This is radical. Alliance participants are relying on everyone else’s performance to determine their own returns. Apart from the added uncertainty, these parties will not have chosen each other, have no management control of each other and no recourse against each other for failure. The conventional checks and balances in contracts are intended to be replaced by a culture of communication, cooperation and improvement.
In practice, parties can opt for something less than the “all-out” alliancing model. They can agree, for instance, that only small amounts of money shall ride on these project outcomes and that – outside of this limited sharing – parties are still accountable for their own performance.
There are difficult questions with highly-integrated alliancing, such as: What do you do when disagreement enters this network? And what ultimately can you do with poorly-performing members? Even the most idealistic arrangements must be able to deal with these difficulties. We shall return to these questions, in looking at the new NEC Alliance Contract, due for release in 2018.
So, is this region left behind on collaborative working? Not necessarily. Many collaborative measures are embedded in the contract terms in the Gulf region, increasing communication and cooperation. The more radical risk-sharing of alliancing is a different matter. This is, perhaps, for consideration with specialised participants who know each other and are assembled to take on a challenging first-of-a-kind project. In other words, I would look at this model for practical reasons rather than idealistic ones. n
* Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading international law firm. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries. He has extensive experience in the Middle East, Russia and the UK.
