Alliance contracting: breaking with tradition

This is the final post of a series of quarterly blog posts on alliance contracting and it looks at the extent to which alliancing has been adopted in particular sectors in the UK. It considers some of the key differences between traditional contracts, partnering agreements and ‘pure’ alliancing contracts, and whether the perceived benefits of alliancing can be realised within a traditional contracting mind-set.

The rise and growth of alliancing

‘Alliancing’ offers a different approach, compared with traditional forms of contract, to co-operation between clients and contractors intended to help to deliver the framework for large multi-disciplinary projects. It first came to prominence in the engineering and oil industries as a means of furthering the delivery of complex offshore oil and gas projects. By emphasising project management culture, alliancing pioneers established a procurement strategy that encouraged additional value to clients by mitigating risk through shared responsibilities.

It has been in the Asia-Pacific region, most notably in the construction industries of Australia and New Zealand, where alliancing has since been refined. For example, it was reported that the combined total value of alliance projects in the road, rail and water sectors in New South Wales, Victoria, Queensland and Western Australia, between 2004 and 2009 was $32 billion. Recent trends suggest that the move towards alliancing has gained some momentum in the UK, both within the private and public setting, in particular in the rail and healthcare sectors.

Rail infrastructure

Network Rail is known to have embraced alliancing. It has developed a range of collaborative contracting models to underpin major infrastructure works, which give rise to the need for partnership, flexibility and risk allocation, rather than the more traditional ‘hub and spoke’ style of contracting. It is widely recognised that while traditional contracts can work well when a specific project has few unknowns, they can be cumbersome if attempting to allocate risk and commercial frameworks to highly complex projects.

As recently as March 2016, the Department for Transport, Network Rail and South West Trains announced plans to invest more than £800 million in Waterloo station and the surrounding rail system to increase passenger capacity. The investment will provide for larger platforms, new track and signalling, increased and improved facilities and a fleet of new trains. This programme will be delivered by an alliance of Network Rail, contractors and designers in what is described as a ‘pure’ alliance model supported by a complex incentive model.

Healthcare

Increasing demands on the NHS in the face of austerity have led to a greater need for integration and efficiency. The NHS Five Year Forward View published in 2014 directed commissioners and health care providers to deliver integrated care to patients under a framework of alliance contracting. The hope was that increased cooperation between providers and commissioners with a shared obligation (and incentive) to act for the project, rather than for individual organisations, would encourage mutual decision making, responsibility, expertise and ultimately the provision of better joined-up care.

The NHS Standard Contract has recently been updated and is mandated for use by commissioners for all healthcare services other than primary care. NHS England has published a draft model alliance agreement (available on request) which commissioners may use as a starting point for developing their own alliancing arrangements with providers. This is to be used in conjunction with a range of health and social care contracts, including the NHS Standard Contract. It allows commissioners to enter into a contract with a single prime contractor, allocating risk and reward between them. The prime contractor sub-contracts specific roles and responsibilities (and allocates risk) to other providers. The prime contractor remains responsible to the commissioners for the delivery of the entire service, and for the co-ordination of its ‘supply chain’ to further its ultimate delivery.

Different levels of contracting

As demonstrated by these examples, the spectrum of contracting is wide. At one end is the traditional contract where parties retain individual legal responsibility. At the other end, parties can agree a ‘pure’ alliance agreement. In between, there are a variety of contracts which involve elements of traditional contracting, partnering and the integration of alliancing principles. The parties can of course dictate the extent to which they move along this spectrum.

Thinking about how parties expect to resolve disputes can help highlight some of the differences between these approaches. For instance, in a traditional contract, the parties, to a greater or lesser extent and depending on the specific terms agreed, are self-interested. The contract comes out of the drawer in the event of a dispute and the parties will seek to enforce their contractual rights against each other.

Partnering is a step further along the spectrum, and generally requires a commitment by those involved in a project to work cooperatively, rather than be adversarial. However, when partnering objectives are agreed upon, provision is made for dispute resolution and parties retain their independence and may individually suffer or gain from entering into the partnership.

By contrast, pure alliancing, is different. By signing a contract that commits them to work collaboratively for the duration of a project, the parties agree to share most of the risks and rewards. For instance, where a project exceeds anticipated expenditure, the employing organisation cannot expect the contractor to take the hit. Instead the partners are bound to reimburse each other’s costs, preventing them from suing each other. Alliancing aims to ensure that the parties form a cohesive entity that jointly shares risks and rewards to create a ‘win-win’ or ‘lose-lose’ culture.

Conclusion

For alliancing to gain greater popularity as a contractual model, a culture shift away from blame and litigation is undoubtedly needed. The rail and healthcare industries, in particular, have recognised the need for improved supply chain relations, through greater collaboration and increased efficiency. Without a doubt, past projects and recent economic conditions have highlighted the need for innovation and leading-edge thinking and an environment of openness and trust. The traditional contracting mind-set in which parties’ primary concern is to limit their own risk and exposure can very easily undermine an alliance. However, following the lead set by Network Rail and the NHS, contracting parties in other sectors may begin to recognise the potential benefits in adopting alliancing as a credible alternative in the post Brexit era.

This article originally appeared on Practical Law’s Construction Blog.