Headline Arial Black 32pt white - Society of Construction Law

Headline Arial Black 32pt white - Society of Construction Law

Society of Construction Law Alliance Contracting Reshaping Australian Infrastructure 2 September 2008 National Liberal Club, London, England John Gallagher, Partner +61 3 9274 5357 +61 407 894 089 [email protected] 117548504 Overview Origins, development, current context Structure and operation of alliance contracting Successful Delivery Unique interdependence Critical success factors and challenges

Australian origins of Alliance Contracting Early 1990s North Sea BP Andrew and Hyde Project Bob Scott Partnering Alliance Contracts; a Company Viewpoint (1994) - a new way forward not a nice to have but necessarily a matter of survival for BP - existing practice with contractors characterised by: short term and essentially adversarial in nature unaligned objectives accountabilities not clearly defined risks placed on those unable to influence or manage them skills not recognised and/or ineffectively utilised Mid 1990s Ampolexs Wandoo Project, WMCs East Spar Project & BHP HBI Project From 1997 concentrated in large civil infrastructure projects developed or sponsored by state government departments or public sector agencies Early Understandings 1999 - A process to establish and manage relationships between parties that aims to remove barriers, encourage maximum contribution and allow all parties to achieve success

2000 - In simple terms a project alliance is where an owner forms an alliance with one or more service providers for the purposes of delivering outstanding results on a specific project 2001 - Project alliancing turns upon the formation of a performance based contract structure, the alignment of the commercial interests of parties, and a genuine no blame culture between the parties Alliance Contracting A commercial/legal framework between an owner and one or more service providers for delivering works/services characterised by: collective assumption of all project risks; no fault, no blame and no dispute between the alliance participants (except in very limited cases of wilful default); payment under a compensation model comprising: reimbursement of all direct costs on 100% open book basis; a fee/margin as contribution to corporate overheads and profit;

a Gainshare Regime that equitably rewards the value of alliance performance; unanimous principle-based decision-making on all key project issues; and an integrated project team selected on the basis of best person for each position. Project Alliancing Practitioners Guide Victorian Department of Treasury & Finance April 2006 Australian Application 1996 to 2008 5% 3% 0% 20% Project Program Alliances by Type Service Strategic Supply Chain 72% Buildings 2%

Alliance by Sector Other 3% AAA current Inventory of alliances in Infrastructure include, at June 2008: 179 Project/Program alliances 11 Service alliances Inventory completeness: >80% Water 38% Energy 7% Defense 2% Mining 3% Oil & Gas 6% Rail 12% Road 27% Information and stats based on a record of 190 project and service alliances 1996-2008 Data as accurate as can be when obtained from public sources All care taken to make data and stats as accurate as possible Australian Application 1996 to 2008 Alliances by State + NZ

Others, 3% ACT, 3% WA, 15% NSW, 18% NZ, 4% VIC, 12% NT, 2% TAS, 1% Alliances by State and New Zealand SA, 2% QLD, 40% No of Alliance starts /Year 47 50 Number of Alliance Started Per Year 1996-2008 39 40 30

20 10 15 1 2 6 7 9 15 19 21 10 3 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Information and stats based on a record of 190 project and service alliances 1996-2008 Data as accurate as can be when obtained from public sources All care taken to make data and stats as accurate as possible Australian Application 1996 to 2008 Australia (public sector projects) Alliance by $ Cost in $m

19% 19% 19% 14% 11% 8% 6% 0-10 11-25 26-50 51-100 101-200 201-500 501-1000 1% 1% 1% 1001-2000

2001-4000 4000+ Data extracted from a presentation by Jim Ross (PCI) at the IQPC Alliance Contracting Excellence Summit, Sydney May 2008 and reformatted by DLA Phillips Fox Structure and Operation Single agreement signed by all participants typically 3-5 participants no natural maximum governance maximum Sharing all project risks typically no risk allocation and no risk exclusions allocation may evolve on value for money basis around the target outturn cost collective obligations, commitments and principles some separate entitlements e.g. payment, owner reserve powers and directions language of we, us and our Genuine No Fault, No Blame, No Dispute any act or omission which: amounts to a wilful default will give rise to enforceable obligations, entitlements, rights or remedies at law or in equity; and does not amount to a wilful default will not give rise to any enforceable obligations, entitlements, rights or remedies at law or in equity initial scepticism, caution and alarm now settled practice

Structure and Operation (continued) Unanimous decision making must achieve unanimity at leadership team genuine dispute elevation no external/third party resolution process no documented case of alliance or leadership team deadlock or frustration Integrated project team leadership team leadership and governance equal participation no voting no owner veto management team real integration colocation essential no surveillance genuine implementation Governance Framework express identification of accountabilities and responsibilities for owner leadership team alliance manager management team single uniform and consistent project systems, management plans and reporting regime collectively implemented Leadership & Governance Structure Board Accountability Program Leadership Team (PLT) MWC

Leadership Team Rep MWC Program Director Alliance Program Manager Program Management Team (PMT) Wider Program Team Projects Comms MWC Project Control Team Communication / Co-ordination Independent Senior Executive Accountability Communication / Co-ordination

Independent Validation Financial Auditor Independent Estimator Technical Reviewers Policy/Governance Melbourne Water & Other Participants, Key Stakeholders Integration Supportive Relationships MWC Project Initiation Managers Commercial Structure Direct Cost - 100% reimbursement - 100% open book subject to establishment audit, verification and accounting audit - reimbursement subject to agreed principles and exclusions -

- definitions of what is/is not Direct Cost is critical Fee/Margin Gainshare agreed after establishment audit - - value focus aligns commercial interests of participants with owners project objectives -participants equitable share of increasing/decreasing value to owner of alliance performance - alignment either through contestable/non-contested process - must deliver to owner a discount on historical performance - structured around key result areas of value to owner

- flexibility to accommodate alternative business models and sectors - - equitable not equal - liability capped at Margin Performance Spectrum Fail Poor MCOS Decreasing Value Stretch Increasing Value Performance = Value = Equitable Reward Gamebreaking Suspension and Termination Suspension by owner at convenience adjustment event by alliance for risks to safety no adjustment event by participants owner failure to pay adjustment event, no

entitlement to terminate Termination for Convenience owner discretion adjustment event no break payments or opportunity costs Exclusion/Termination for Wilful Default (including Insolvency) typically exclusion of defaulting participant remedy very broad uncapped unlimited liability typically no exclusion for consequential type losses may extend to termination owner default only remedy is indemnity no entitlement for participants to terminate Successful Delivery Analysis of 34 alliance projects completed prior to 2006 cost analysis reliable data set of 34 projects time analysis reliable data set of 18 projects pre 2006 87 alliances commenced AAA data 57% in range $50M - $500M AAA data Cost

88% on or below target out turn cost remaining - +3%, +4% and +28% (time of the essence) Time 73% delivered ahead of scheduled time 27% delivered on time 5% average improvement on alliance program Typical experience of traditionally contracted (non PPP) projects in Australia cost +10% time 90% of projects overrun on schedule Data reproduced from Mr Sean Sweeney AAA presentation on 19 May 2008 of PhD research completion and publication of analysis pending October 2008 Unique interdependence Our experience over 10 years is that each element is critical to ensure the probability of delivering what is possible Collective assumption of risk - supports No Dispute, empowers the common objectives, permits genuine

integration, converges with the Commercial Framework particularly Gainshare Regime No Dispute - relies on and supports unanimity, common objectives frame decision making, alliance principles shape decision making, Commercial Framework pre ordains outcomes Unanimity - only possible through collective assumption of risk, common objectives and genuine principled based decision making and alignment of interests Unique interdependence (continued) Common objectives - enables single focus (Best for Project) for integrated team, distils areas of value to owner, provides reality to unanimity and No Dispute Alliance Principles - behavioural compact for the alliance and shapes for unanimous decision making, guide for all performance Integration

- genuine integration possible through collective assumption of risk and No Dispute provides collective effort to deliver value and reward through Commercial Framework Alliance Contracting Critical Success Factors Strategic Fit committed senior leadership and support from within all organisations First Principles consistency in all elements e.g. objectives principles relationship value proposition no dispute commercial framework legal framework liability termination Governance responsible but not restrictive Accountability clear accountability and responsibilities with a focus on efficient and effective delivery Value must be able to identify, ensure and deliver value protection and improvement

Commercial Appetite performance = value = reward Behavioural Context recognise and establish the shift in behaviour that will be necessary for success Why an Alliance Contracting delivery strategy? Generally accepted that alliance contracting typically suited to: numerous complex and/or unpredictable risks with complex interfaces Design/technology/construction/operations Stakeholders regulators/community/environment Political governments/community opposition/need complex interactive approval and consent issues complex external threats or opportunities that can only be effectively managed collectively and collaboratively very tight timeframes driven by project risks, organisational capacity, policy directives, political need/fix output specifications which cannot be clearly defined and/or a high likelihood of scope changes during design and construction owner involvement owner has unique skill set or understanding of an asset owner has capacity and expertise to add value transformation or legacy Alliance Contracting Benefits For Owner

Deliberate alignment of owners objectives and participants commercial interests (performance = value = reward) Greater opportunity to manage risks through sharing and collaboration Broader allocation through collective assumption of all risks Integration of teams reduces resources burden More for Less Earlier participation of expertise can lead to improved decision making and project outcomes Genuine focus on enabling high performance and innovation Transparency of all governance and commercial issues No disputation but healthy creative conflict Alliance Contracting Benefits

For Participants Opportunity for greater returns for delivering improved value Greater opportunity to more effectively influence and manage the whole rather than parts Whilst broader exposure to risks including risks with no ability to influence or control liability is capped Improved staff engagement through opportunities for genuine career/skills enhancement Reputational benefits selection relying upon capability not tender and recognition for success DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity.

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