Legal energy: alliancing

In the early nineties, when the construction industry was weathering similar economic conditions as today, a new procurement method was pioneered by BP on its North Sea Andrew and Hyde Project. Called “alliancing”, it was described by BP as being not a “nice-to-have”, but a “matter of survival”. In the event about 20-30% of the project cost was saved and it was delivered six months ahead of schedule.

Alliancing was a response to the tough conditions and the reality of BP’s experience with its contractors – short termism, adversarial relationships and skills ineffectively used on both sides.

Sound familiar? Despite BAA adopting alliancing with success for Heathrow Terminal 5, it has failed to take off in the UK as a mainstream procurement method. It was used overseas, however and has shown itself to be an ideal approach for energy, infrastructure and transport projects involving complex technologies that require innovative and flexible approach to design and delivery. One good example is Australia, where project alliancing is widely implemented. Alliancing could be just what is needed to deliver the complex energyand infrastructure projects that will need to be procured in the UK in the next decade.

Alliancing, for the purposes of engineering, procurement and construction projects, involves an owner forming a collaborative arrangement with one or more “service provider” for the purpose of delivering a specific project. The fundamental purpose of this arrangement is to create an alignment between all the core participants to achieve outstanding results for the project, as opposed to the traditional model of merely delivering a project on time and on budget.

The key characteristics of an alliance are:

• A truly integrated team in which owner and service providers operate under a single agreement which encompasses all participants
• Collective assumption of risk
• A no fault, no blame environment
• A commercial model based on a cost-reimbursable payment scheme, which provides equitable rewards
• Unanimous principle-based decision-making.

The payment structure of a typical alliance rewards service providers commensurately with the performance of the alliance as a whole. Alliancing has shown that it can deliver outstanding results on a variety of projects. An analysis of completed projects in Australia, for instance, has shown that 80% were delivered for less than target outturn cost. In addition, 80% of projects were delivered on or ahead of schedule.

Alliancing has not received wide exposure so far in the UK, and lack of familiarity can itself create issues, such as the availability of project insurance. Arguably, some aspects of the UK legal framework (for example, the enforceable right to statutory adjudication) may be less conducive to this form of contracting than other jurisdictions. That said, the “no disputes” characteristic of the Australian model may simply be a step too far in our domestic market.

Therefore, at least at face value, it seems that the apparent shift away from alliancing back to traditional, adversarial contracting may simply be a response to difficult economic conditions. Perhaps developers and contractors are shying away from the significant commitment required from all participants to form strong alliances. Inevitably there are potentially costly adjustments to long-established internal systems, processes and personnel: for example, parties to the alliance need to be able to communicate and interpret management data.

If this is the case, it may be worth developers and service providers alike bearing in mind the reality that, whatever the economic climate, the goal will always be to deliver projects as economically and as quickly as possible. As noted above, experience has shown that alliances can achieve these aims and deliver outstanding results. That, and the fact that alliancing succeeded first of all in the difficult market conditions of the early nineties, will hopefully see all participants in the UK market keep an open mind about its potential to be a winner in bad times as well as good.

The construction industry should review the benefits alliancing has delivered overseas and could deliver in the UK.