All about Alliancing – why, what, where?

Regular readers will know that we’ve written about collaboration before on these pages. But how can it be achieved? What options are out there for contractually encouraging and allowing collaboration? One option often cited, but not so often adopted is alliancing. Though very similar to partnering, it is generally regarded as being distinct.

Concepts of partnering have been around for some time. The aims of reducing confrontation and increasing collaboration in construction go back long before the Egan and Latham reports.

There are options for some form of collaboration in many of the standard form contracts. The use of BIM has been encouraged by most of the standard forms in one way or another. This is usually through a detailed set of clauses, or through the adoption of the BIM protocol. The NEC suite of contracts goes a step further with their mandated spirit of “mutual trust, and cooperation”. The JCT also has its Constructing Excellence partnering contract – aimed at improving cooperation and collaboration.

However, there are several standard form contracts now designed to deal with alliancing. Last year, the NEC launched their alliance contract. Another often quoted form is the FAC-1 from Kings College and the ACA.

So what is Alliancing and how does it work?

The core aim of alliance procurement appears to be collaboration and cooperation. The goal being to allow flexibility and encourage the achievement of project goals by all parties.

The intention is to establish a joint commitment to working together. Alliancing has origins in the oil and gas sector. The method involves a number of key features:

• Open-book accounting for all parties.
• Joint liability for parties.
• Active encouragement of innovation.
• Jointly aligned and agreed quality requirements.
• Sharing of risks and rewards.
• Open communication
• Collaboration on project information.
• There is also the potential of shared insurance risk.

Often parties will come together forming a special purpose vehicle (SPV) for a particular project.

The idea is that rather than becoming entrenched when facing difficulties, parties will work together to find solutions. The contract will allow this flexibility, through pain and gain sharing, rather than damages and penalties.

Alliancing differs from partnering inasmuch as under a partnering agreement, parties keep competitive independence. It has been argued this might be more likely to encourage disputes. In an alliancing agreement the parties are working to common goals, sharing risk and reward.

Concepts of ‘good faith’, openness and collaboration tend to feature heavily in alliancing agreements. Good faith in particular can be a confusing concept legally, as it has a particular meaning depending upon the country in which you operate. However, there have been court cases in recent years which have accepted the concept of good faith in commercial contracts.

When taken to its ultimate end, alliancing can lead to the use of a joint insurance policy, what’s known as ‘Integrated Project Insurance’. Insurers are cautious about such policies and they remain rare. Yet, in a trial at Dudley College in the West Midlands, the approach was hailed as a great success.

Where is it used and why? What are the Risks?

Alliancing tends to appear on medium or larger projects. The smallest we’ve found reported is a £7.5 million housing project. There are high-profile government procurement examples, such as Dudley College and major energy projects around the world. However, the chances are that no matter where you find yourself in the supply chain, you could encounter one of these projects, particularly as they begin to gain popularity.

There are many reasons parties might enter into alliancing as a procurement route, not least the fact that a number of public sector contracts are being let on that basis. There have been examples of significant time and cost savings on projects. Though the Dudley College project was a little over budget and a few weeks late, it was well within the parameters set by the contract. Considering the outcome of other public works contracts, this might be regarded as a success.

Furthermore, there appears to be increasing pressure to work collaboratively. This pressure may be from government in terms of regulation following the Grenfell and other failures, or from general industry initiatives such as soft landings, the use of BIM and broader changes in technology. It seems likely there will be an increased move towards such forms of contracting and away from traditional forms.

The risks, like the reasons for alliancing are multiple, but can be managed. A significant risk appears to be a failure to understand the difference between traditional contracting and alliancing. Very often contractors or their advisors might try to treat an alliance project in the same way they’ve always treated projects. This would be a mistake. As with anything in commercial life, there is a need to understand in some detail what’s being entered into contractually.

Alliancing requires a change in mindset for most parties. Parties may need a change in leadership skills. They may need more direct involvement from management, and a clear focus on planning and design, as well as execution. If all parties are not aligned on these and the project goals, there is a risk of failure.

However, it seems that despite a slow start, alliancing is very much here to stay. The likes of Network Rail and the NHS, defence estates and others are incorporating some form of alliancing into their major projects, along with some commercial developers. Now might be a good time to find out more and ensure you are ready should you need to work under an alliancing agreement.