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Alliance Contracting—Evolving Alternative Project Delivery (2015)

Chapter: Chapter One - Introduction

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Suggested Citation:"Chapter One - Introduction ." National Academies of Sciences, Engineering, and Medicine. 2015. Alliance Contracting—Evolving Alternative Project Delivery. Washington, DC: The National Academies Press. doi: 10.17226/22202.
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Suggested Citation:"Chapter One - Introduction ." National Academies of Sciences, Engineering, and Medicine. 2015. Alliance Contracting—Evolving Alternative Project Delivery. Washington, DC: The National Academies Press. doi: 10.17226/22202.
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Suggested Citation:"Chapter One - Introduction ." National Academies of Sciences, Engineering, and Medicine. 2015. Alliance Contracting—Evolving Alternative Project Delivery. Washington, DC: The National Academies Press. doi: 10.17226/22202.
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Suggested Citation:"Chapter One - Introduction ." National Academies of Sciences, Engineering, and Medicine. 2015. Alliance Contracting—Evolving Alternative Project Delivery. Washington, DC: The National Academies Press. doi: 10.17226/22202.
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Suggested Citation:"Chapter One - Introduction ." National Academies of Sciences, Engineering, and Medicine. 2015. Alliance Contracting—Evolving Alternative Project Delivery. Washington, DC: The National Academies Press. doi: 10.17226/22202.
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Suggested Citation:"Chapter One - Introduction ." National Academies of Sciences, Engineering, and Medicine. 2015. Alliance Contracting—Evolving Alternative Project Delivery. Washington, DC: The National Academies Press. doi: 10.17226/22202.
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Suggested Citation:"Chapter One - Introduction ." National Academies of Sciences, Engineering, and Medicine. 2015. Alliance Contracting—Evolving Alternative Project Delivery. Washington, DC: The National Academies Press. doi: 10.17226/22202.
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Suggested Citation:"Chapter One - Introduction ." National Academies of Sciences, Engineering, and Medicine. 2015. Alliance Contracting—Evolving Alternative Project Delivery. Washington, DC: The National Academies Press. doi: 10.17226/22202.
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Suggested Citation:"Chapter One - Introduction ." National Academies of Sciences, Engineering, and Medicine. 2015. Alliance Contracting—Evolving Alternative Project Delivery. Washington, DC: The National Academies Press. doi: 10.17226/22202.
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Suggested Citation:"Chapter One - Introduction ." National Academies of Sciences, Engineering, and Medicine. 2015. Alliance Contracting—Evolving Alternative Project Delivery. Washington, DC: The National Academies Press. doi: 10.17226/22202.
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Suggested Citation:"Chapter One - Introduction ." National Academies of Sciences, Engineering, and Medicine. 2015. Alliance Contracting—Evolving Alternative Project Delivery. Washington, DC: The National Academies Press. doi: 10.17226/22202.
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5 INTRODUCTION It is thought that projects can be delivered more efficiently “. . . by integrating teamwork for planning, design, and con- struction of projects” (Forgues and Koskela 2008). Integra- tion can be achieved in a number of different ways; however, fundamentally achieving integration in a highway construc- tion project requires bringing the project’s owner, designer, and builder into the project development process in a manner that allows each to contribute to the preliminary project defi- nition decisions. In the United States, the industry has turned to alternative delivery methods such as design-build (DB) (Touran et al. 2009) and construction manager/general con- tractor (CMGC) (West et al. 2012). FHWA also encourages employing alternative technical concepts (ATC) in design- bid-build (DBB), DB, and CMGC projects to gain early con- tractor involvement in the final scope of work (Actis et al. 2012). While these alternative contracting methods certainly increase the level of integration, they all are implemented using a two-party contract that, if things do not go well, can devolve into disputes that may eventually end in costly and time-consuming litigation. In the words of Chen et al. (2012) “. . . long-existing problems, such as cost overrun, delay, adversarial relationship, dispute, customer dissatisfaction and low productivity which primarily stem from the traditional ‘risk transfer’ approaches, fragmentation and inadequate cooperation in the construction industry, have led to the poor performance of construction projects.” and commitment, ensuring that all participants ‘won together or lost together,’ driving equal and collaborative relationships with open and honest communication, thus avoiding disputes. (Love et al. 2011) Barlow (2000) maintains that “. . . practitioners view alliancing as an alternative project delivery method to deal with frag- mentation and lack of integration, to improve the efficiency and performance of the construction industry.” The central theme is not the optimistic ‘win-win’ relationship often touted by proponents of project partnering (Broom 2002), but rather the more pragmatic “won together or lost together” relation- ship cited by Love et al. (2011). A Short History of Alliance Contracting The alliance concept has evolved since it was introduced in the North Sea offshore oil industry in the early 1990s as a vehicle to share the risk of complex, costly projects among all the stakeholders (Chen et al. 2012). Prior to this time, infra- structure owners had tried a number of different approaches to enhance willing collaboration between themselves and their design consultants and construction contractors. One of those was the use of nonbinding partnering workshops in the early 1990s (Ernzen et al. 2000). Alliancing is very different from partnering in that the project alliance agreement is bind- ing, and unlike partnering it excludes legal recourse through litigation (Cheung et al. 2006). Australia can be considered the momentum builder in the introduction and implementa- tion of alliance contracts. Prior to the world-wide recession in 2007, it had relied on public-private partnerships (P3) as the vehicle to deliver large complex infrastructure projects. How- ever, with the recession, “underestimated costs, overestimated revenues, undervalued environmental effects, and overvalued economic development [in P3 projects] contributed to ever increasing cost overruns, delays, loss of revenues, disputes, debt, and negative environmental and social impacts” (Love et al. 2011) and pushed the Australians to move to alliancing to better align the interests of all parties involved in deliver- ing a large infrastructure project. The result was “. . . allianc- ing [became] one of the most attractive forms for pursuing efficiency in terms of cost, time, quality and other objectives” (van den Berg and Kamminga 2006). “Governments across chapter one INTRODUCTION The missing ingredient is the formation of a true team, where risks and rewards are shared equally and among which decisions are made collectively rather than in the hierarchi- cal fashion required in a two-party contract. One solution to attaining such equity is a multiparty contract used in Australia, New Zealand, and Europe called an alliance contract (Love et al. 2011) and is described as follows: When forming an alliance’s culture, equality in sharing cost risk/ reward was commonly described as establishing good behav- ioral principles at the outset which subsequently guided par- ticipants’ behaviors. Such principles included equal ownership The Australians chose alliancing to better align the interests of all parties involved in delivering a large infrastructure project. The missing ingredient is the formation of a true team where risks and rewards are shared equally and among which decisions are made collectively rather than in the hierarchical fashion required in a two-party contract.

6 Figure 1 encapsulates the underlying focus of alliance contracting: performance. The contract is predicated on the equation shown in this figure. If alliance partners collabo- rate and perform well they are all rewarded accordingly, with the opposite being true if the alliance does not measure up to the “minimum conditions of satisfaction” (MCOS) agreed in the alliance contract. MCOS are a set of pragmatic success factors that are key to achieving the overarching objective of the alliance. For example, in the Port of Melbourne Channel Deepening Project (Case Study 8 in chapter two), the MCOS were as follows: 1. Provide competitive and efficient access to the port through innovative high-quality facilities and services. 2. Increase trade. 3. Deliver the project on time, within budget, and in compliance with environmental and other regulatory standards. (Albanese 2010) One can see that these MCOS are very specific, although not all inclusive. When an alliance agrees to a set of MCOS all decisions made regarding the project must be made through the lens of the MCOS. This process is often termed making “best-for-project” decisions (Chen et al. 2012). It implies that since the alliance is no longer a group of indi- vidual organizations, each with its own agenda and set of success criteria for a given project, the alliance is structured such that the outcome of each decision is either a “we-win” for all parties or a “we-lose” for all parties. Fostering this type of thinking strengthens the alliance’s cohesion and cre- ates an environment where, regardless of role in the project, the personnel who must deliver it identify most strongly with the alliance itself rather than their individual employers. SYNTHESIS OBJECTIVE The objective of this report is to identify and synthesize cur- rent effective practices that comprise the state of the practice related to the use of alliance contracts around the world and discuss the procurement procedures that have been used to successfully implement alliance contracting on typical trans- portation projects. The synthesis will also review current U.S. Australia support alliance contracting, which now represents one-third of the total value of public sector infrastructure projects delivered in Australia” (Duffield et al. 2014); strong testimony to the potential benefits of alliance contracting, and perhaps the motivation to look for methods by which its principles could be implemented on U.S. and Canadian infrastructure projects. Principles of Alliance Contracting Before deciding to implement a new procurement process it is important to first understand the principles upon which it is founded. The literature is rich with scholarly analyses of alliancing and how it is crafted. Before delving into the principles, it is helpful to gain a sense of what fundamental alterations to the current procurement culture are contem- plated. Rezvani (2008) provides a taxonomy of the way man- agement processes must evolve to reach a point where the necessary ingredients are present to successfully implement alliancing. It can be quickly summarized by stating that the organizations and their human resources must undergo a pro- found shift from a highly regimented culture that is vertically integrated to a relatively unstructured culture that places high value on individual empowerment as a means to facilitate a high degree of collaboration. Organizations and their people must undergo a profound shift from a highly regimented culture that is vertically integrated to a relatively unstructured culture that places high value on individual empowerment as a means to facilitate a high degree of collaboration. Rezvani’s (2008) primary message is that alliancing will be most successful in organizations where collaborative management styles are already present. Therefore, to pre- vent blindly attempting to implement alliancing when the necessary culture is not present to support success an agency can assess itself using the taxonomy and determine if orga- nizational culture changes can be made in a manner that will facilitate the new project delivery method. FIGURE 1 Alliance contracting performance spectrum (adapted from Gallagher 2008).

7 legal and regulatory provisions that might act as barriers to implementation and suggest potential remedies for an agency wishing to experiment with alliancing. KEY DEFINITIONS Throughout this report a number of procurement terms in a precise sense will be used. It is important for the reader to understand the specific definition of each of the terms to gain a full understanding of this study. The most important definition is for alliance contracting itself. The following definition is from the Australian Department of Infrastruc- ture and Transport and will be the working definition for alliancing used throughout the synthesis. It is embraced by Austroads, the Australia/New Zealand version of AASHTO, and is generally applicable to alliance contracts in other countries: Alliance contracting is delivering major capital assets, where a public sector agency (the Owner) works collaboratively with pri- vate sector parties (Non-Owner Participants or NOPs). All Par- ticipants are required to work together in good faith, acting with integrity and making best-for-project decisions. Working as an integrated, collaborative team, they make unanimous decisions on all key project delivery issues. The alliance structure capi- talizes on the relationships between the Participants, removes organizational barriers and encourages effective integration with the Owner. (Casey and Bamford 2014) Table 1 further amplifies on the definition of alliance con- tracting by listing six key principles and how each operates within the structure of the alliance contract. There are several notable aspects found in this table. First, the lack of the word “competition” in the team selection principle illustrates the Alliance Contract Principle Operational Feature Team Selection - Focus on partners’ competence, reputation, and attitude - Select personnel on a “best for project” basis Project Proposal Development - Develop the project proposal by alliance partners with the owner’s cooperation and involvement - Determine the performance targets and commercial arrangements on a negotiation basis or on a competition basis, as the case may be Risk and Reward Allocation - Share risks and rewards collectively - Create a win-win or lose-lose situation through a risk/reward regime - Align the owner’s project objectives with partners’ commercial objectives Governance and Management - Make project decisions collectively and unanimously - Deliver the project by one integrated team, no duplication of functions, and roles team - Perform variations only under very limited circumstances - Establish a peer relationship where each partner has an equal say in decisions - Share information and knowledge - Commit to “open book” in terms of cost data, documentation, and reporting Principles of Conduct - Make decisions and act in a “best for project” manner - Encourage open, straight, and honest communication among all partners - Commit to cooperation in achieving the objectives - Act fairly and reasonably instead of reaping self-interests at the expense of other partners Dispute Resolution - Commit to “no fault-no blame” culture in relation to errors, mistakes, or poor performance - Resolve conflicts and disputes internally and agree not to litigate or arbitrate Source: Chen et al. (2012). TABLE 1 PRINCIPLES AND FEATURES OF ALLIANCE CONTRACTS The alliance is structured such that the outcome of each decision is either a “we-win” for all parties or a “we-lose” for all parties. In addition to a rigorous literature review, the synthesis is based on new data from a survey of U.S. state depart- ments of transportation (DOTs) and Canadian provincial ministries of transportation, and case studies. A screening survey on alliance usage and practices elicited responses from 17 U.S. states and six Canadian provinces. Finally, 11 project case studies from Australia, New Zealand, the Netherlands, and the United Kingdom, as well as an attempt by the Washington State DOT and an analysis of poten- tial alliancing use by the U.S. Department of Defense, were conducted to furnish specific information on different approaches to dealing with alliance projects. The case study projects range from a AU$1.95 billion traditional alliance to upgrade a vital motorway (the Australian term for an inter- state highway) in Brisbane to a NZ$3.67 million alliance to furnish performance-based maintenance on an urban free- way. The projects were selected because each demonstrated a specific approach to alliance contracting that allowed an in-depth illustration of important information derived from the survey and the literature.

8 shift in organizational culture that must take place to imple- ment alliancing. The term “best for project” infers a form of the U.S. qualification-based selection (QBS) procurement method currently used by agencies to select engineering design consultants and CMGC contractors. The second dif- ference is the involvement of the owner in the development of the alliance project proposal. The closest North American analog would be the use of ATCs in DB and DBB projects. This mechanism allows the owner to make limited input to the ultimate proposal, but only in approving or disapproving the contractor-initiated ATCs. The dispute resolution principle is the one that is the far- thest away from current North American project procurement culture. Many states and provinces have laws that guarantee an entity that is party to a public construction contract the right to use litigation to seek redress of wrongs committed to the state such as breach of contract. “Because the right to sue the State is determined by statute, there are special limitations and requirements that do not exist when a non-government entity is being sued” (Stacey and Nicholson 2010). Many state DOTs are also required to utilize alternative dispute resolution methods, such as arbitration or dispute resolution boards before entering into litigation (Caltrans 2012). Thus, to introduce alliance contracting may require the agency to obtain a waiver from current statute or enabling legislation to permit it to enter into a contract where the private entities are not allowed to seek relief in the courts. Table 2 contains a list of international terms, their definitions, and equivalent U.S. terms if applicable. International Term Definition Equivalent U.S. Term Definition and Key Differences from International Term, if Any Actual Outturn Cost (AOC) “The sum of actual direct project costs and overhead and profit fees.” (ADIT 2011) Actual Project Cost The sum of the contract amount plus the cost of changes authorized and agreed during the project. Alliance “A delivery model where the owner(s), contractor(s) and consultant(s) work collaboratively as an integrated team and their commercial interests are aligned with actual project outcomes.” (ADIT 2011) Alliance Same as international term Client The entity that owns the completed infrastructure; may be either a public or private entity. Agency or Owner Same as international term Collaborative Alliance An alliance where work is allocated to Non-Owner Participants (NOPs) recognizing that “[the] relative performance between delivery teams fluctuates. The system allows for poorer performing delivery teams to improve their performance and increase their share of work accordingly. Likewise, high-performing delivery teams must continue to improve or risk being outperformed by another delivery team and losing their share of work.” (NZTA 2012) No Equivalent U.S. Term This alliance operates somewhat like a U.S. federal major task order (MATOC) IDIQ contract where the agency selects several IDIQ contractors and they compete for task orders inside the contract. Commercial Framework “This sets out the structure and principles that govern the NOPs’ remuneration for the project.” (ADIT 2011) Commercial Terms and Conditions Same as international term Competitive Alliance “An alliance where tenderers are selected primarily on the basis of price competition. Typically, two tenderers are funded by the alliance owner to develop a design, target cost, and schedule for a project. The [TOC]… is used for the selection of the preferred tenderer after which an alliance is entered into for the delivery of the project.” (Queensland 2008) No Equivalent U.S. Term This alliance operates somewhat like a U.S. low-bid DB contract where each team submits a technical proposal and a price and the team with the lowest priced, technically acceptable proposal is selected. Early Contractor Involvement (ECI) “A two-stage relationship-style delivery model, generally structured to resemble a project alliance model during the first stage and a D&C [DB] model during the second.” (Casey and Bamford 2014) Construction Manager/General Contractor (CMGC). “…the contractor is selected during design and furnishes preconstruction services” (DBIA 2009). The CMGC contractor is normally selected later in the project design process than it is in ECI. Also called CM-at-Risk. Earned Value Analysis (EVA) “…a process or discipline for assessment of the true time and cost performance state of the programme [sic] compared to a ‘baseline’ forecast.” (SCIRT 2014) Earned Value Analysis (EVA) “…[a] method of measuring a project’s progress at any given point in time, forecasting its completion date and final cost, and analyzing variances in the schedule and budget as the project proceeds.” (WBDG 2010) Forward Works A program can be sub-divided into a number of projects after which contractors can be selected. (VDTF 2006) Capital Improvement Program The agency’s future work load. The state transportation improvement program (STIP) is an example. Gainshare/ Painshare “…the profit of the parties would be reduced in the case that the Project Target Cost is exceeded and increased in the case where the actual costs are less than Project Target Cost, in accordance with agreed formulae.” (ACA 1999) Shared Savings Incentive/ In projects where a GMP is used as a pricing structure, some contracts contain a clause where the owner and the contractor split any savings if the actual cost is less than the GMP. There is no known sharing of costs overruns in the U.S. system. TABLE 2 KEY INTERNATIONAL AND U.S. PROJECT DELIVERY DEFINITIONS

Area (KRA) on actual performance outcomes achieved by the NOP, compared to pre-agreed performance targets. There are cost and non-cost KRAs; e.g., timely completion, safety, quality, environmental outcomes, community outcomes, and traffic management.” (ADIT 2011) Disincentive (I/D) Scheme contractor a certain amount of money for each day identified critical work is completed ahead of schedule and assesses a deduction for each day the contractor overruns the I/D time.” (FHWA 1989) Non-owner Participants (NOP) “Non-owner participants that form part of the direct project stakeholders who represent the commercial/legal framework of the project organization…the NOPs comprise one or more private sector service providers delivering the capital works project.” (ADIT 2011) Industry Parties to the Contract Those entities that are signatories to the given contract and with whom privity is established with the public owner/agency. Owner’s Comparative TOC An independent cost estimate “which is developed by the Owner in parallel with the Proponent in NOP selection processes. This will provide an independent comparison for the Owner during evaluation and provide the OE [Owner’s Estimator] with a useful tool when analyzing the Proponent’s TOC” (ADIT 2011) Engineer’s Estimate A cost estimate prepared by the agency that “serves as a basis for probable construction cost; supports decision-making on project scope; and serves as a guide to evaluate bidders’ proposals.” (CLFHD 2011) International Term Definition Equivalent U.S. Term Definition and Key Differences from International Term, if Any Project Partnering Project delivery system that differs from project alliancing in that it is both a relationship management system and a project-delivery system, but where partnering encourages closer relationships and shared goals, alliancing mandates them. (Casey and Bamford 2014) Partnering “…long-term agreements between companies to cooperate to an unusually high degree to achieve separate yet complementary objectives.” (CII 1991) Similar to international definition but not considered a project delivery method in the United States. Pure Alliance “Project delivery strategies, several participants joining together to share risks and outcomes on a project. Sponsor and commercial participants’ objectives are aligned to maximize performance, proactively manage risk, reduce cost, and achieve outstanding results in attaining client’s objectives. (Cheung et al. 2006) Pure Alliance Same as international term Risk Allocation In traditional methods of project delivery, specific risks are allocated to participants who are individually responsible for best managing the risk and bearing the risk outcome. (Casey and Bamford 2014) Risk Allocation Same as international term Risk Sharing in Alliances “… all the parties either benefit together or not at all; parties consent to their level of contribution and risk and jointly incur rewards or losses.” (Casey and Bamford 2014) Risk Management “… an ongoing, continuous process of monitoring and managing all kinds of risks.” (FHWA 2012) Risk Transfer Mitigating risks inherent to government projects by transferring them to another entity such as an insurance policy, privatization, or contract assignment. Risk Shedding The use of the contract to minimize the amount of risk the owner is exposed through contract clauses that place responsibility and liability on the contractor. Strategic or Program Alliance “A long term business strategy linking together client, contractor and supply chain. Establishment of inter- organisational relations and to engage in collaborative behaviour for a specific purpose.” (Queensland 2008) Strategic Alliance Same as international term Target Out- turn Cost (TOC) “The agreed target cost set at the start of the project. In the project the AOC is compared with the TOC to determine cost underrun or overrun. An AOC close to the TOC demonstrates value for money.” (ADIT 2011) Guaranteed Maximum Price (GMP) Same as international term; however, if the owner chooses to change the scope of work the GMP will also change to match it. Tendering “…the process of submitting a proposal (tender) to undertake, or manage the undertaking of a construction project.” (ADIT 2011) Bidding Same as international definition Value for Money (VfM) “Value-for-Money is a measure of benefits (which covers quality levels, performance standards, and other policy measures such as social and environmental impacts), balanced against the price and risk exposure of achieving those benefits.” (ADIT 2011) Value For Money (VfM) “A project is said to have positive VfM when, relative to other procurement options, it is forecast to deliver and/or is demonstrated to have delivered the optimum combination of life cycle costs and service quality that will meet the objectives of the project.” (VDOT 2011) Key Result “A performance-related bonus or penalty payment based Incentive/ “… a contract provision which compensates the Independent Cost Estimator (ICE) “A peer reviewer that must be independent of the organization and the project, unless otherwise formally agreed with the NZTA.” (NZTA 2012) Independent Cost Estimator (ICE) A separate entity that “to maintain independence of the [estimate] does not report to, or receive oversight from, the [agency] Estimating Office and/or the [agency] Project Manager. (MnDOT 2013) No Equivalent International Term Integrated Project Delivery “[a] project delivery approach that integrates people, systems, business structures and practices into a process that collaboratively harnesses the talents and insights of all participants to optimize project results, increase value to the owner ….” (AIA 2007) Key Performance Indicators (KPI) “Jointly developed and agreed performance scores measured on a scale between -100 and +100, with zero designated as the neutral performance score, and +100 representing an outstanding performance outcome for a NOP. KPIs measure specific and defined aspects of performance within KRAs.” (ADIT 2011) Performance Specifications or Performance Criteria Standards or goals that are established in the contract to describe the required outcomes. These are measured in qualitative terms more often than quantitative terms. They are also less formally controlled than KPIs. TABLE 2 (continued)

10 STUDY APPROACH The approach used to complete the synthesis relied on two independent sources of information: • Literature review and • Case studies of alliance projects. The first was a comprehensive review of the literature. An effort was made to seek not only the most current informa- tion but also historical information so that the change, if any, over time in alliance practices could be mapped and related to the current state of the practice. Finally, case studies were undertaken using both direct interviews with project partici- pants and by extracting case studies from the literature and then reformatting each to match the output derived from the direct interviews. Literature Synopsis Alliance contracting as a project delivery method for major infrastructure projects is increasingly being used in highway construction projects in Australia, New Zealand, and other nations. The literature review found examples of various alli- ance projects in the ten countries shown in Table 3 and there are most likely alliance projects in the private sector in many more. The offshore oil industry developed alliancing and continues to use it for its major projects (Chen et al. 2012). Alliancing versus Partnering The trend began two decades ago as a number of individuals criticized poor project performance in the public construction industry. At about the same time, partnering was introduced as a panacea for the highly adversarial and litigious environ- ment found in the U.S. low-bid highway construction industry (Weston and Gibson 1993). The Construction Industry Insti- tute (CII) (1991) developed partnering to provide opportunities to improve total construction quality and cost-effectiveness by creating an atmosphere that encourages innovation, team- work, trust, and commitment. The CII regarded partnering as a process to foster collaborative business practices and gain the commitment of organizations in achieving common proj- ect goals, as well as share a basic trust and understanding of each other’s values and expectations. A UK study by Latham (1994) found that ineffective and adversarial industry prac- tices were not capable of delivering value for the owner and urged reform. He argued that partnering offers significant benefits by improving quality and timeliness of completion while reducing costs. Egan (1998) also reached the same con- clusion in a study that focused on the development of long- term relationships in the construction industry. Similar results were found in several other studies (Weston and Gibson 1993; Larson 1995; Gransberg et al. 1999). In Australia, a specific partnering contract called “PPC 2000” attempts to prescribe and govern the behavior and relationships of contracting parties. Although the legal status of such express good faith clauses has been questioned, their full practical import is as yet unknown (Cornes 1996; Cox and Thompson 1996). In Australia, the Queensland Main Roads Department promoted the use of PPC 2000 contracts for a variety of project types, ranging from major infrastruc- ture projects to term services contracts. Country Sector Type of Project Type of Alliance Australia Public/private Highways, maintenance, railroad, dredging Pure, competitive Finland Public Railroad, tunnel Pure, competitive Germany Public Railroad Pure Norway Public/private North Sea oil platform Pure Netherlands Public Highway/bridge, tunnel, railroad Alliance type New Zealand Public/private Highways, bridges, earthquake reconstruction Pure, competitive, collaborative Sweden Private Road maintenance, tunnel Pure U.K. Public Water treatment, airport terminal expansion, energy; Highway maintenance and construction Pure, strategic Canada Public/private Natural gas pipeline, tunnel; sewer/water, infrastructure Pure U.S. Private Power plant, natural gas pipeline Pure, strategic TABLE 3 ALLIANCE PROJECTS FOUND IN THE SYNTHESIS LITERATURE REVIEW The term “partnering” has a different meaning in the United States than it does overseas. In the late 1980s, the U.S. Army Corps of Engineers (USACE) initiated the use of “formal part- nering” on DBB contracts “as a means to avoid disputes and, consequently, reduce the ultimate cost of delivering public facilities” (Gransberg et al. 1999). However, such use in the U.S. does not produce any binding changes in the fundamental contract as it does in the alliance contracts used in Australia and New Zealand (Weston and Gibson 1993). Partnering in the United States is merely a programmatic method to facilitate open communications between the owner and its construction contractor, and the output from U.S. partnering workshops nor- mally consists of a nonbinding agreement to work in a non- adversarial manner (Murdough et al. 2007). Ernzen et al. (2000) defines the U.S. version of partnering as “. . . an agreement “The contractual structure of Project Alliancing differs from those traditional risk-allocating contractual frameworks.” (Lahdenperä 2012)

11 whereby two parties agree to cooperate at a very high level to achieve separate but complementary objectives.” Hence, the major distinction between “partnering a contract” in the United States and a “partnering contract” elsewhere, is “whether the express good faith agreements are binding on the parties to the agreement” (Scheepbouwer and Gransberg 2014). Alliancing versus Integrated Project Delivery In 2012, Lahdenperä addressed many of the misnomers that have arisen as the U.S. and international construction mar- ket has implemented alternative contracting methods. In Lahdenperä’s study, the term project partnering is used to describe a contractual partnership and, as such, should not be confused with the nonbinding brand of partnering in use in the United States. Figure 2 is drawn from that paper and attempts to visually display the results of the analysis. It shows that project partnering, project alliancing, and inte- grated project delivery are very similar and the lines that surround the central core are Lahdenperä’s relative rating of each alternative against the others. While not a scientific analysis, if one tallies the relative rank with respective to each alternative as shown in Table 4, it shows that alliancing FIGURE 2 Synopsis of partnering, alliancing, and integrated project delivery principles (Lahdenperä 2012). Relational Parameters Relative Rank—1 Is Best Partnering Alliancing Integrated Project Delivery Early involvement of key participants 1 2 3 Approach-oriented participant selection 1.5 1.5 3 Selection as team 2 1 3 Equality of key participants 2 1 3 Joint decision making 2 1 3 Mutual liability waivers 2 1 3 Shared financial risk and reward 2 1 3 Transparent financials 2 2 2 Collaborative multi-party agreement 1 2.5 2.5 Jointly developed project goals 2 1 3 Intensified early planning 1 2 3 Advanced information and communication tools 1 2.5 2.5 Pre-agreed conflict resolution methods 2.5 1 2.5 Team building activities 2 1 3 External team building expertise 2 1 3 Continuous work shopping 2.5 1 2.5 Co-location of team 1.5 1.5 3 Advanced management principles 1 2.5 2.5 Total 31 26.5 50.5 TABLE 4 RANKING OF ALTERNATIVE METHODS WITH RESPECT TO FIGURE 2

12 appears to bring more benefits to the project than the other two relational contracts. The paper states that the differences shown in Figure 2 and Table 4 are the result of the “differ- ent degrees of integration . . . between the RPDAs [relational project delivery arrangements].” The major conclusion of the study is that alliance contracting is a project delivery method in its own right because . . . the contractual structure of PA [project alliancing] differs from those traditional risk-allocating contractual frameworks. Therefore, the differences between RPDAs are not minor details of little importance or matters of opinion—they are so defini- tive that various RPDAs are undoubtedly applicable to different types of projects guided by different constraints and objectives. (Lahdenperä 2012) The term Integrated Project Delivery (IPD) was coined by the American Institute of Architects (AIA) and focused on building construction; therefore, implementing IPD will require a large amount of retailoring to make it fit infrastruc- ture projects (Lahdenperä 2012). The National Association of State Facilities (2010) describes IPD as either a philos- ophy or a project delivery method. It is a relatively recent development and, as such, no rigorous performance data are available in the literature on the system. What is available is anecdotal information published by IPD advocates (Rais- beck et al. 2010; Lahdenperä 2012). Three studies which com- pared IPD to alliancing were completed by Raisbeck et al. (2010), Lahdenperä (2012), and Johnson et al. (2013). All three concluded that IPD will require further implementation and study before it can be determined to be equal to or better than alliancing. Table 5 illustrates a comparison of alliancing and IPD with the other common project delivery methods across the typical U.S.DOT project development process. Types of Alliance Contracts Alliancing project delivery emphasizes target outcomes and risk sharing. When the alliance contract model was first introduced in Australia it was in the form now known as the “pure” alliance. This model has been widely reported and analyzed (Green 1999; Li et al. 2000; Fisher and Green 2001; Bresnen and Marshall 2002). Essentially, the pure alli- ance, shown in Figure 3, is formed to deliver a single proj- ect and is composed of a tripartite agreement between the owner, design consultant, and construction contractor. Like all successful business practices, the base model is subject to adjustments and adaptations and now other variations are Phase Alliance IPD DBB DB CMGC ECI Planning Team formation of owner, contractor, and main consultants Cost and time performance targets set Team involvement in conceptual design, right-of- way (ROW), etc. Gainshare/painshare agreed Team formation of owner, contractor, consultants, and subcontractors Cost estimation and performance targets set Collocation Owner and consultants Early cost estimation Team formation of owner and consultants Cost and time performance targets set Team involvement in conceptual design, ROW, etc. Team formation of owner and consultants Early cost estimation Team formation of owner, contractor, and main consultants Cost and time performance targets set Team involvement in conceptual design, ROW Preliminary Engineering Team involvement in environmental studies Preliminary TOC set Cost and time performance monitored. Mandated use of BIM BIM integration with subcontractors Owner and consultants Cost estimation Team involvement in environmental studies Preliminary budget set Cost and time performance monitored Add contractor to team Team involvement in environmental studies Target GMP set Cost and time performance monitored Team involvement in environmental studies Preliminary TOC set Cost and time performance monitored Final Design Cost and time performance monitored Joint approval of designs and cost estimates Mandated use of BIM BIM integration with subcontractors Cost estimation No integration with subcontractors Done by DB contractor team after contract award Cost and time performance monitored Owner approval of designs Cost and time performance monitored Joint approval of designs and cost estimates Cost and time performance monitored Joint approval of designs and cost estimates Bidding/ Tendering Cost and time performance monitored No bidding or tendering process* —TOC developed in design No bidding or tendering process GMP developed in design Bidding costs incurred by contractors Bidding costs incurred by DB consultants and contractors Cost and time performance monitored Bidding or tendering process of subcontractors Cost and time performance monitored Bidding or tendering process of subcontractors Construction Cost and time performance monitored Alliance team governance Conflict resolved by leadership team Project team governance Conflict resolved by leadership team Contract governance Conflict resolved by negotiation Cost and time performance monitored Contract governance Conflict resolved by negotiation Cost and time performance monitored Contract governance Conflict resolved by leadership team Cost and time performance monitored Contract governance Conflict resolved by leadership team Post Construction Profit distribution based on agreed gainshare/painshare formula No recourse to litigation Profit distribution based on agreed formula No recourse to litigation Final payment per contract provision Litigation a possibility Final payment per contract provision Litigation a possibility Final payment per contract provision Litigation a possibility Final payment per contract provision Litigation a possibility Adapted from Raisbeck et al. (2010). *Only true for pure alliance. ROW = right-of-way; TOC = target outturn cost; BIM = building information model; GMP = guaranteed maximum price. TABLE 5 COMPARISON OF ALLIANCING, IPD, AND DBB

13 in use that contain significant differences from the pure alli- ance model. Two common variants are termed “competitive alliancing” and “collaborative alliancing.” In both cases, elements of the project delivery phase are much the same, including the risk allocations and the project management structures. The key operating features of a pure alliance are as follows: • Sole source QBS selection of the designer and the con- struction contractor. • Alliance leadership team led by the agency. • Alliance management team led by mutually agreed member from one of the three alliance members. • Single project. • Initial project alliance agreement written around “best for project” theory. • Final project alliance agreement centered on gain- share/painshare scheme developed around transparent financials. The key modification is that in the “competitive” alli- ance (Figure 4) multiple teams compete for the award of a single project. Collaborative alliances take that notion to the next level and require multiple alliance members to compete for work during the project. This newest form of alliancing was developed as a response to the need to quickly react to the devastation caused by the 2010 and 2011 earthquakes in Canterbury, New Zealand. The key operating features of a competitive alliance are as follows: • Competitive selection of the designer and the construc- tion contractor including financial factors, usually pro- posed profit margin and overheads. • Alliance leadership team typically led by the agency. • Alliance management team typically led by a mutually agreed upon member brought from outside the three alliance members’ organizations. • Single project. FIGURE 3 Pure alliance. Agency (as participant) Agency (as owner) Alliance Management Team Design Consultant Alliance Agreement Systems Supplier (if required) QBS Selection Construction Contractor Alliance Leadership Team Operator/ Maintainer (if required) FIGURE 4 Competitive alliance.

14 • Initial project alliance agreement written around “best value” theory. • Final project alliance agreement centered on gain- share/painshare scheme developed around transparent financials. As shown in Figure 5, collaborative alliancing has multiple equivalent project teams that compete on the basis of set rules to win sub-projects during the term of the alliance. A major dif- ference from the two other forms is that the alliance is no longer formed with a fixed amount of work for each participant. The collaborative alliance is comprised of teams that during con- struction compete for new work based on their performance on past work as measured by key result areas. In addition, because of the competitive nature of the post-award workload for mul- tiple projects, each alliance member “seconds” its personnel assigned to the alliance management team. This means that the alliance itself pays the alliance management team employees’ salaries directly, as well as a number of other standard human resources administrative activities. The purpose of temporar- ily reassigning personnel from their parent companies to the SCIRT program is to remove the issue of potential bias in the forward workload decisions, which are based on each compet- ing contractor’s performance of previous alliance projects. The key operating features of a collaborative alliance are as follows: • QBS selection of the designer and multiple construc- tion contractors. • Alliance leadership team led by mutually agreed upon member from outside the three alliance members’ organizations. • Alliance management team led by mutually agreed upon member seconded from one the three alliance members’ organizations. • Other members of the alliance management team are seconded to the alliance. • Multiple projects. • Initial project alliance agreement written around “best value” theory. • Final project alliance agreement centered on gainshare/ painshare scheme and increasing forward workload based on performance of past alliance projects. FIGURE 5 Collaborative alliance. The collaborative alliance is comprised of teams that during construction compete for new work based on their performance on past work as measured by key result areas. P3 contracts involve a concessionaire with post-construction responsibility for providing the designated transportation services. Alliance contracts typically end once the constructed facility is turned over to the owner- agency and thus are similar to CMGC contracts. In New Zealand, the New Zealand Transport Agency (NZTA) has used an increasing number of delivery options; “pure” alliance since 2001, “competitive” alliance since 2007, and “collaborative” alliance since 2012. Each of the varia- tions depends on a strong collaboration between the project partners as opposed to the more adversarial approach found in traditional DBB projects. The 2010 NZTA procurement manual indicates that project characteristics that lend them-

15 selves to project alliancing are large-scale, high-risk projects in difficult environments that have complex stakeholder issues that require flexibility during design and construction. In the United States, some have argued that public–private partnership (P3) contracts are the same as a pure alliance contract overseas (Harness 2014). While the two share many similar features, P3 contracts are in actuality design-build- finance-operate-maintain projects where the concession- aire has post-construction responsibility for providing the designated transportation services. Alliance contracts typi- cally end once the constructed facility is turned over to the owner-agency and thus are similar to CMGC contracts with a contractually guaranteed collaboration between the owner, designer, and contractor and a contractual agreement to share both the costs and benefits of the project. They would not be considered DB contracts because the designer and contractor do not have a separate agreement that does not include the owner (West et al. 2012). PROTOCOL TO DEVELOP CONCLUSIONS AND SUggESTIONS FOR FUTURE RESEARCH Subjects where two or more of the three lines of informa- tion (i.e., the literature, case example, or screening survey) intersected were considered significant and used to develop the conclusions and the candidates for the list of effective practices. Points where only one source furnishes substantive information on alliance contracts were used to identify gaps in the body of knowledge that showed potential for future research. The major factor in developing a conclusion was the inter- section of trends found in two or more research instruments. The intersection of more than two lines of converging informa- tion adds authority to the given conclusion. In addition, greater authority was ascribed to information developed from the case study projects of highway agencies. The literature review was considered to be a supporting line of information. Finally, the screening survey output was used to gauge the perceptions of North American agency members with respect to the utility of alliance contracting within their specific jurisdictions. Suggestions for future research were developed based on the common practices that were described in the literature and confirmed as effective by one of the research instruments but generally not widely used. Gaps in the body of knowl- edge found in this study were also used to define the areas where more research would be valuable. Alliance Type Owner Participants Design Consultants Construction Contractors Project Selection Type TOC Deter- mination Pure Single Single Single Single Single Single QBS Negotiated Competitive Single Multiple Single Multiple Single Single Best Value Fixed at Selection Collaborative Multiple Multiple Multiple Multiple Multiple Multiple QBS Negotiated TOC = target outturn cost. TABLE 6 COMPARISON OF ALLIANCE TYPES Given the authority, North American transportation agencies would probably use alliance contracting on the same projects that they are delivering today with P3, DB, or CMGC. CONCLUSIONS AND EFFECTIVE PRACTICES Although there were no effective practices identified in the chapter, the following conclusions were reached: • There are three separate and distinct models for alliance contracting as shown in Table 6. • Once they were granted enabling authority, North American transportation agencies would probably use alliance contracting on the same projects that they are delivering today with P3, DB, or CMGC. • Alliance project partners will in most cases be selected using a form of the U.S. QBS procurement method cur- rently used by agencies to select engineering design consultants and CMGC contractors. • Implementing alliancing will require agencies to develop an education and outreach strategy to over- come internal and construction industry resistance to change. ORgANIZATION OF THE REPORT The next chapter details the legal and contractual principles of alliance contracts through a series of case studies. The major issue in alliance projects is to influence and control the behavior of the various members of the alliance and encourage “best-for-project” decision making at all levels. Therefore, chapter two contains information to provide the reader a foundation upon which to understand chapters three and four. Chapter five provides the legal background for determining whether alliance contracts can be implemented in the United States, as well as some legal case studies from overseas that illustrate some of the pitfalls found in alliance contracting.

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TRB’s National Cooperative Highway Research Program (NCHRP) Synthesis 466: Alliance Contracting—Evolving Alternative Project Delivery synthesizes current practices related to the use of alliance contracts around the world, and explores the procurement procedures that have been used to successfully implement alliance contracting on typical transportation projects.

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