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Alliance Contracting—Evolving Alternative Project Delivery (2015)

Chapter: Chapter Four - Alliance Contract Administration Procedures

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Suggested Citation:"Chapter Four - Alliance Contract Administration Procedures ." 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 Four - Alliance Contract Administration Procedures ." 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 Four - Alliance Contract Administration Procedures ." 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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Page 51
Page 52
Suggested Citation:"Chapter Four - Alliance Contract Administration Procedures ." National Academies of Sciences, Engineering, and Medicine. 2015. Alliance Contracting—Evolving Alternative Project Delivery. Washington, DC: The National Academies Press. doi: 10.17226/22202.
×
Page 52
Page 53
Suggested Citation:"Chapter Four - Alliance Contract Administration Procedures ." 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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Page 53

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50 chapter four ALLIANCE CONTRACT ADMINISTRATION PROCEDURES INTRODUCTION This chapter will synthesize the data obtained from the litera- ture, the survey, and the case studies regarding the alliance project. It will combine information collected through the literature search, the document content analysis, and the case example interviews with agency personnel and design and construction industry professionals. ALLIANCE DESIGN ADMINISTRATION PROCEDURES Design administration in an alliance is no different than it is in other project delivery methods. The objective is still to deliver a high quality set of construction documents that minimizes the need for changes after construction has begun. The major shift is in the level of direct involvement the agency and the contractor have during the design process. As a result, procedures must be developed for establishing pre- construction milestones that support the construction sched- ule. The alliance team must also document its procedures to control the preconstruction flow of design information and, lastly, procedures for agency review of ready-for-construction design products needs to be set to permit the early start of construction if desired. Preconstruction Schedule and Milestone Development One of the core values of alliancing is early contractor involve- ment (ECI). This idea is virtually the same as preconstruc- tion services in a U.S. CMGC contract (West et al. 2012). Preconstruction milestones and schedules are created with early contractor input to decrease the risk that the design will develop in a manner that fully supports the construction. The development of the TOC requires the alliance parties to jointly develop milestones that support the time-related ele- ments of cost such as job site overheads. As a result, precon- struction milestones are typically developed in parallel with the TOC before the signing of the project alliance agreement. When the project alliance agreement takes effect, the pre- construction milestones are validated and incorporated into the project’s schedule. The main difference here between a relational alliance contract and nonrelational contracts such as DBB and DB is in the level of assurance that the design will enable the TOC to include informed risks as opposed to unknown risks that if realized lead to cost overruns. Procedures for Controlling the Flow of Design Information to and from the Agency The design in an alliance is fully integrated, with both the contractor and the agency providing input to the design con- sultant. The governing rules for most alliance agreements stipulate that any major decisions taken by the alliance lead- ership team must be unanimous. This process ensures that proper risk registers are made, the design is constructible, and there are “no surprises” during execution. The SCIRT case example reported that there are fewer design changes after construction commences if the ECI has been executed properly for each project of the program. An alliance relies on the principle of early contractor input. An ECI is a model that is used in alliancing similar to the U.S. CMGC preconstruction services phase. The pro- curement model is named after the process of involving the general contractor early in the project life cycle, notably dur- ing the initial planning and design stages. However, where an alliance is based on a formal cooperation between all parties, the ECI works on the basis of the client hiring the main con- tractor who then takes responsibility for the design process to a point where a reliable target price for construction can be made (NZTA 2012). In terms of the control of informa- tion and other activities that occur before construction the models are very much alike. Both the SCIRT and Northern Gateway Toll Road cases are good examples of this. Mosey (2009) for instance relates the following series of benefits derived from using the ECI model in the building procure- ment process: • Designs—designs can be developed with the main con- tractor and specialist subcontractor to establish their constructability and affordability at an early stage. • Costs—the cost plan developed by the cost consultant can be tested for affordability with the general contrac- tor and with subcontractor bidders at each stage of design development. • Risks—risk management actions can be agreed to and implemented without delaying the start on site. • Joint activities—time and processes can be created for joint agency/consultant/contractor activities such as value engineering and joint risk management activities, and for the agreement of outputs from such activities, without delaying the start on site. • Program—the construction phase program can be agreed to prior to the start on site, including key dates for

51 Payment Provisions and Incentive/Disincentive Provisions Related to Performance Payment is done through the 3-Limb system; however, agencies have sometimes used an extra bonus account. For instance, the Northern Gateway had set apart approximately 1% of TOC for additional KPI performance. Contractors con- sistently make these targets because they are seen as “easy money” and they are perceived to be an effective method for the client to reach certain social or environmental goals as observed in the Northern Gateway and SCIRT cases. The earlier discussion leads to the conclusion that alliancing does not alter post-award design administration procedures in a significant manner. Its impact is primarily on enhanced infor- mation flow between all members during the design process. ALLIANCE CONSTRUCTION ADMINISTRATION PROCEDURES Again, once construction starts, the administration process is very similar to the traditional construction administration procedures in effect at a typical public agency. The major difference is the amount of attention that is paid to non-cost KRAs and KPIs, since the NOPs are able to increase their overall margin by delivering a product that is better than the one shown in the documents. Design and Construction Quality Assurance Method Differences in Alliance Projects Quality assurance within the SCIRT alliance is based on self- reporting of noncompliance and joint resolution by the alli- ance management team of all noncompliance reports. The project direction, deliverables, and quality are set out in the project commercial framework and the NOPs verify and assure their work. There are usually standard assurance prin- ciples; however, they are measured in-house. Quality is one of the strong points of an alliance. In the Northern Gateway case example, the project team opted to increase the pavement quality at the project team’s expense. It was observed that the original design was not sufficient. Because that design was used in the TOC, no extra money was available and hence the cost was carried by the alliance itself. Other examples include increasing the quality of items to lower the whole life costing, as was found in the SCIRT and MHX case example projects. Reporting Value for Money An alliance does not generally know the estimated cost before it is formed. The Hooggelegen case is an exception in that it had a cost ceiling. Traditionally, procured projects have a well- defined scope and a fixed cost. In an alliance, the project means and methods, deliverables, and TOC are established after the participants have set up an alliance and signed the project activities such as the release of remaining consultants, contractor design details, and the pricing and approval of provisional sum items. • Subcontractor appointments—subcontractor appoint- ments can be finalized by the general contractor prior to the start on site, creating greater cost certainty and greater subcontractor commitment. Figure 19 shows the early contractor involvement in a typical SCIRT project. The purpose of the ECI in the SCIRT alliance is to reduce the risk to the client organizations through constructability input from the delivery team’s dedicated ECI teams. An objective for the ECI in the SCIRT alliance is to provide means, methods, and risk input to the TOC development for each project. As soon as a project is defined and allocated to a design team, an ECI team will be assigned. During the design there is continuous communication between these teams to ensure both are fully informed on the potential impact of alternatives under review on the TOC and the schedule. In addition, the project receives constructability input. The ECI team is then required to provide the esti- mating team with deliverables to ensure the TOC is based on a price that reflects the correct methodology, and safe management of traffic and all risks have been identified and evaluated. Procedures for Controlling the Design Review Process by Agency Designers Personnel from the agency are seconded to the alliance; they are therefore involved in the entire process, which makes review easier and available earlier. Ross (2003) provides a summation of the scope variation alignment process. Scope changes are possible for instance if the owner wants to include an extra facility that was not previously part of the project and therefore is not included in the TOC. A notable exception here is the case for the Northern Gateway, where the alliance opted for a more durable pavement that was not agreed on before- hand. In this instance the alliance chose to carry the cost. The rationale for this was to enhance the alliance’s public image. The alliance did not want to be associated with expected pave- ment failure in the medium to long term on a tolled facility. It is the responsibility of the alliance leadership team to determine if potential changes constitute a variation in project plan or a scope change. During the initial project agreement, before the agency’s notice to proceed is issued, a variation guidelines document will be created that contains scenarios that may arise during the design and execution. This document does not become part of the alliance agree- ment; rather, it is meant as an informal reference document (Ross 2003). According to the alliance contracting guidelines (2011), any scope variations that occur during the construc- tion will generally involve a change to which the owner must give approval.

FIGURE 19 Project stages in SCIRT.

53 tracts, failure to act in good faith is treated as a willful default. However, identifying what is not good faith can be difficult. The development of the project alliance agreement would assist in creating more objective standards of conduct for the alliance participants (ADIT 2011). Partnering Documents The alliance arrangements are sometimes used as an adjunct to a separate principle agreement, and the alliance arrange- ments may be binding or nonbinding. An agreement may range from a statement of general principle to a more contractually specific document. In comparison, the UK construction sector has moved toward incorporation of the partnering and allianc- ing principles into the underlying contractual documentation. A number of standard form partnering and alliancing agree- ments have been developed such as the Joint Contract Tribunal Framework Agreement, the New Engineering Contract Part- nering Option, the PPC2000 Association of Consulting Archi- tects Standard Form of Contract for Project Partnering, and the Be Collaborative Contract, all of which are UK forms. Equally, alliancing agreements have been drafted as stand-alone docu- ments specifically for a particular project. Agreements drafted for specific projects or where the partnering and alliancing principles are an integral part of the contract are often drafted to share risk more or less equally between the parties with a cost reimbursement mechanism and incentive payments. Further, some of these contracts, particularly those developed outside the United Kingdom, purport to contain “no dispute” provi- sions (Hall 2009). Alliance agreements often contain “agree to agree” clauses (all cases except the Hooggelegen case where this clause was purely voluntary). The Australian Government recognizes that agree to agree agreements are not legally enforceable (ADIT 2011). Participants need to uphold the ideals of an alliance and act in agreement with the alliance principles. If there is no clear documentation of measurable behavior, will- ful default is hard to prove. It advises that alliance agreements need to include as many of the terms between participants as possible, while not impeding the flexibility of the alliance. This will strengthen the case of the argument that the partici- pants intended to be bound by the agreement. However, if a party is unable to come to an agreement, it may be held that agreement between the parties is (partly) unenforceable. All of this discussion leads to the conclusion that allianc- ing does not alter post-award construction administration procedures in a significant manner. Its impact is primarily on open books accounting and internal dispute resolution with- out resort to litigation during the construction process. APPLYING ALLIANCING WITHIN EXISTING U.S. AGENCY CONSTRAINTS The U.S. construction industry has been characterized as adversarial (Johnson et al. 2013); however, so are construc- tion industries in Australia, New Zealand, and the Netherlands alliance agreement. This means that the alliance “self-approves” deliverables. It is therefore important to show that public fund- ing has been well spent. Sometimes a competitive alliance or a collaborative alliance (MHX and SCIRT cases, respectively) can assist in making the VfM money business cases based on the competition that occurs prior to alliance execution or after the Project Alliance Agreement (PAA). A definition of VfM is “a measure where the required benefits (including quality levels, performance standards, and other policy objectives such as social and environmental impacts) are balanced and judged against the cost (price and risk exposure) of achiev- ing those benefits” (ADIT 2011). The assessing of VfM in an alliance is needed for the alliance to demonstrate to the client and, conversely, the client to the government that the selection of the NOPs, the project solution, the TOC, and the legal and commercial framework were demonstrably best-in-market. It should show where the alliance has succeeded or failed to achieve the project goals as set out in the PAA (ADIT 2011). Procedures to Modify the Alliance Agreement When Changes Are Encountered With increasing complexity, the project costs will be less certain and the bids will incur increasing risk premiums and/ or the projects will have significant variations as the work progresses. This can lead to significant time and effort spent negotiating variations to the original agreement, which can be time-consuming and costly. Alliance contracting provides an alternative approach where the buyer and seller collabo- rate to develop the requirements and the proposal, combining their knowledge and experience to address the complexities and unknowns. They share exposure to the project outcome, which forms the basis of the commercial framework. The buyer and seller are aligned as minimizing actual cost to the buyer and increasing profit to the seller. Time otherwise spent negotiating variations under a traditional contract becomes time spent finding the best solution to resolve issues and prob- lems through the life of the project. The time and energy of the leadership team is spent on value-adding activities rather than contractual disputes; solving the overall project outcome is the objective and this aligns to each party’s individual com- mercial objectives. Changes in alliance contracts are rare; however, in the Netherlands case it was deemed necessary, as alliance contract close-out procedures were necessary, includ- ing the determination of each party’s share of the gain or loss. Contract Termination and Default Issues Even if the participants meet their obligation to act in good faith this does not change the outcome or financial implications of their performance. That is, whether or not the participants have exercised good faith in the decision-making process the cost and time objectives of the project will still need to be achieved, and the actual outcomes of the project will be dealt with under the commercial framework. Ultimately, the owner will bear the consequences of the project’s outcomes regardless of the exercise of good faith by the other participants. Also, the good faith bargain can be hard to enforce. Under most alliance con-

54 comparative analysis of project delivery methods in use in the United States in the context of alliancing’s operational features leads one to infer that CMGC is the U.S. delivery method that best embodies the operational features of alliance contracting. While IPD may embody most of the alliancing philosophy, it was developed for architectural projects and as such is ill-suited for use on infrastructure projects where the number of participants is much smaller and the scale of the work is much greater. Thus, it can be concluded that CMGC with its early contractor involvement in the preconstruc- tion phase appears to bring the most alliance-like benefits in terms of the ability to collaborate in a meaningful manner before the project’s target cost is established. Agencies with CMGC statutory authority that are inter- ested in implementing alliancing could gain some of allianc- ing’s benefits by selecting the CMGC contractor as early as practical in the project development process. Thus, the CMGC contractor could assist in planning and preliminary engineering rather than typically waiting until final design as is the current practice (West et al. 2012). If the agency outsources design services, the same timing could be used to retain the engineering design consultant, which would bring the three primary stakeholders together at the earliest pos- sible opportunity and permit the preferred alternative to be developed jointly during the NEPA process. A second option for smaller repetitive projects would be to award indefinite delivery/indefinite quantity (IDIQ) con- tracts for planning and design services and for CMGC deliv- ery of the resulting construction work orders (Scheepbouwer and Gransberg 2014). In this scenario, the three stakeholders would collaborate on a series of similar projects over a period of years, and if the arrangement worked well it could poten- tially create the gainshare/painshare environment found in alliance contracts. CONCLUSIONS The analysis conducted in this chapter arrived at the follow- ing three conclusions: 1. Alliancing does not alter post-award design adminis- tration procedures in a substantial manner. Its impact is primarily on enhanced information flow between all members during the design process. 2. Alliancing does not alter post-award construction administration procedures in a substantial manner. Its impact is primarily on open books accounting and internal dispute resolution without resort to litigation during the construction process. 3. CMGC may bring the most alliance-like benefits to an infrastructure project in terms of the ability to collabo- rate in a meaningful manner before the project’s target cost is established. (van den Berg et al. 2006; Raisbeck et al. 2010). For example, in 2001 there was an investigation in the Netherlands followed by a Parliamentary Hearing of the major construction compa- nies. The contractors were found guilty of price-fixing govern- ment projects for which they were fined. Still, despite the bad publicity generated by that incident, within five years the Dutch Ministry of Transport had started its first alliance project. Developing the U.S. Business Case From the cases and the literature search, it appears that alli- ances are most appropriate for large, complex projects with high-risk profiles and ill-defined scopes at the time the alli- ance is formed. However, alliancing is a model that is not best suited for all projects. If a project has few unknowns and a predictable outcome, the agency can award a contract to a low bidder by utilizing traditional procurement models such as DBB. Both parties, the agency, and the contractors build their own risk assessment into their price and stand to win or lose if the risk outcome is higher or lower than predicted for each (ADIT 2011). The resulting contract encompasses both the project requirements and the tender documents, allowing variations to be made to the scope as the work progresses. Where projects are more complex, with more unknowns, and the parties have less ability to confidently predict the outcome using traditional contracting, the parties will allow for higher levels of risk which will mean a higher tendered price, and/or they will have significant variations as the work progresses. This can lead to highly complex risk-allocation models and commercial frameworks with significant time and effort spent negotiating variations to the original agreement. Resolving these variations can be time consuming and costly. (ADIT 2011) The alliance approach provides an alternate route. The cli- ent and NOPs collaborate to develop the project requirements and the TOC. Their combined knowledge, experience, and resources are used to address complexities and unknowns. In this way the TOC, schedule, and other deliverables are fully integrated giving an increased confidence in the out- come. The parties of an alliance share exposure to the project outcome, which forms the basis of the commercial frame- work. Both the agency and the NOPs are therefore aligned in decreasing the life-cycle cost to the owner and maximizing profit to the NOPs (ADIT 2011). Comparing Alliancing with Current Project Delivery Methods Although conducting a direct comparison of currently autho- rized project delivery methods requires some conjecture as well as a few far-reaching assumptions, the comparison can be made in a very broad sense. One such assumption is that U.S. public agencies would be opposed to unanimous deci- sion making with its consultants and contractors. Table 1 in chapter one contained a number of operational features of the alliance concept. Using that list as the basis for a broad

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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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