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Weighing up Alliance Contracting on Major Infrastructure Projects

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Alliancing is a complex form of procurement which aims to bind owners (usually government bodies) together with external parties such as consultant teams and contractors.
These external parties are referred to as Non-Owner Participants (NOPs).

Procurement models such as alliancing can be used across a wide range of industries and are also a modern staple of large-scale infrastructure projects. To explain the process plainly, the National Alliance Contracting Guideline describes the process as: “The Alliance Leadership team strives to achieve value-for-money by;

  • Bringing together a Collaborative team,
  • Fostering Commercial Arrangements,
  • Developing Project Solutions,
  • And costing a Target Outturn Cost (TOC).

The setting up of an Alliance team is done under a Project Alliance Agreement (PAA) and creates Commercial Frameworks for the project. This also establishes a ‘pain-share gain-share’ approach where the Alliance participants agree to share any cost underrun and bear the costs of any overrun. The financial risk is not always equally shared in this process with this pain share agreement reverting to the owner at specified points detailed in the PAA.

You might be asking yourselves after all, what does this procedure accomplish?

The aim of Alliance contracting is to produce a framework to deliver the project solution (Best for Project) which reflects the appropriate level of risk and drives desired behaviours in the Alliance team in producing this project solution. This is all leads to the point where a collaborative culture must be assumed in Alliance contracts to provide risky projects with the greatest capacity for constructive project solutions. This procurement strategy therefore, tends to move away from traditional forms of contracting, which one way or another produce an adversarial culture that is presumed to foster negative outcomes.

If collaboration and appropriate risk allocation is the upside of alliancing, then what is the downside?

 Unfortunately, cost. Alliance contracts are expensive to set up and run. While one feature of an Alliance contract is that partners can audit each other’s books (open book policy), the process is expensive to manage for all parties and the project budget ultimately bears the burden. Although uncommon, this can also result in the indirect costs (such as contractor preliminaries, design fees, and owners’ costs) being higher than the direct cost of a project.

What parameters should be met by a project for alliancing procurement strategies to be beneficial?

The National Alliance Contracting Guideline describes two parameters which need to be met in order to consider Alliance contracting which are;

Project Value – projects budget should be greater than $50 million due to start-up and management costs; this would be defined at the business case phase if not earlier depending on the stage of the project.

Resourcing – key members of each organization represented in the Alliance team must be available to create the framework and agreements to enact the PAA. This then stretches to the wider organizational resourcing requirements as these teams tend to be larger than teams in traditional procurement.

One other parameter which is worth considering is the programming (timing) requirements of the project. If there are time constraints this form of contract may assist in meeting the project goals in the required timeframes. If timing plays no factor in achieving the project goals (not affecting the critical path of a major program of works) then a different procurement model might also be serviceable.

Alliance contracts have proved extremely successful on high-value, high-risk projects where construction takes place over months, not years, and where complex staging and closures (occupations) primarily drive the critical path. Grade separation projects across Australia have successfully used this model.

Have a query about alliance contracts? Contact one of our specialists here →

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