Let’s do this together – Collaborative Contracting

The Canadian P3 (public private partnership) is a project delivery model that is utilised for public projects with a capital cost greater than $100 million or projects that involve complex factors and significant risk. The delivery and outcomes of P3 projects have been the subject of fairly critical articles and opinions in recent press, with notable projects being delivered late and at a cost that has been substantially beyond the initial estimates.

The critique of P3 project models, and the ultimate value to the public, is something we are more than familiar with in the UK, going as far as the government calling an end to the PFI2 scheme in late 2018. There are key similarities between the key PFI and PFI2 projects that dissuaded the UK government from continuing the schemes.

P3 Models

Whilst not an exhaustive list, the common models used for P3 construction projects are currently as follows:

• Operation & Maintenance (“O&M”) Contract: A private sector company is contracted to operate a publicly owned asset, (for example, a power generation plant) for a specified term, but the public body retains the ownership of the asset;
• Build-Finance: The private sector constructs an asset and finances the capital cost only during the construction phase of the development;
• Design-Build-Finance-Maintain: The private sector designs, builds and finances an asset and provides hard facility management or maintenance services under a long-term contract;
• Design-Build-Finance-Maintain-Operate: The private sector designs, builds, finances and provides hard facility management or maintenance services under a long-term contract. Operation of the asset is also included in projects such as toll bridges and roads, or power generation plants; and
• Concession: A private sector concessionaire invests its own funds and borrows additional funds to pay for the construction of a project, such as toll road. The concessionaire then maintains and operates the asset for a specified period and expects to be repaid for its investment in the project over the period of the concession. Once the concessionaire’s investment is repaid, the asset is handed back to the public ownership and operation.

The above models demonstrate the approaches public bodies can choose to progress the delivery of an asset on an increasing scale of privatization; the O&M model mirroring the traditional owner/employer of a project engaging a supply chain, leading down the concession arrangement which is akin to the private sector holding the asset as the trustee for the public body beneficiary.

The initial thought process was that with the increasing scale of private sector buy-in, there would be less of an immediate strain on public funds for the capital cost of a project, and the true cost to the public would not be realised until an asset is up and running. And whilst the delivery of the construction phase may be managed by a joint venture arrangement or an SPV with relevant stakeholders forming part of it, this also requires an increasing transfer of construction risk of projects from the public body to the private sector. This is frequently done through a traditional EPC/Turnkey contracting model of an employer engaging a Tier 1 entity who then passes down risk through a chain of subcontractors and suppliers.

However, amongst other things, higher risk profiles will result in higher and/or substantially restricted tender submissions at all levels of the supply chain.  This ‘risk dumping’ approach leads to disputes and this has been well reported.

So is the concept of a risk transfer in the P3 models still working in the public’s best interest, or is a more collaborative approach to the development phase of a P3 asset a better way forward?

Collaborative Contracting and Pure Alliancing

Many stakeholders within the construction sector acknowledge the need for a more collaborative approach to project delivery, and we are already seeing this reflected in the drafting, or the inclusion of progressive delivery models, within the traditional EPC/Turnkey contracts. For example, we are regularly seeing collaborative statements, such as an obligation for the parties to “act in the spirit of mutual trust and cooperation” in the NEC4 ECC contract, or the requirement for the parties to “act in good faith [and] … interact with one another on an Open Book Basis” as per a recent Canadian P3 light rail transit works contract. This could also be reflected in pain/gain share mechanisms in relation to project time and cost objectives where the benefits of achieving or beating said targets, or the costs of delay and overspend, are passed along the contractual chain. Another example would be the requirement for early contractor involvement, where the main contractor is obliged to collaborate with the employer’s design team during the FEED and feasibility stages, allowing the consultants to have qualified input on the buildability of their proposals, which would include a realistic check of their forecasted costs.

However, these mechanisms still rely on a top-down approach to operating the contracts, and on very complex projects with extensive numbers of consultants, sub-consultants, contractors and specialist sub-contractors, the employer may not always have direct access to enforce the contractual terms of the entire project delivery team.

An alliancing contract is a real shift from the two party contract we are used to seeing in the construction and infrastructure sector. The alliance model is built on the fundamentals of a no-blame culture, a waiver of litigation and a commercial structure that caps the financial exposure. The client, tier one contractors and consultants enter into one contract which governs the relationship between the contractors and consultants, and their relationship with the client. The core objectives in alliance contracts are collaborative working, minimal disputes, and the successful completion of the project. From the moment the alliance is formed, the alliance members sign up to the core objectives (i.e. acting best for project) and set aside their individual agendas in favour of a collaborative working style. The alliance members also share equally in the risks and rewards of the project, which is similar in intention to the pain/gain share mechanism noted above, but in these instances all alliance members share the pain of the delay and associated costs, rather than liquidated damages being levied against one individual party as is commonly the case in traditional contracting. There are already successful examples of alliancing delivering a completed asset.

Alliance Case Studies

In the UK, alliancing, and specifically the new model of procurement under the NEC4 Alliancing Contract (ALC), is steadily gaining momentum. National Grid, Network Rail and the UK’s water industry have all used alliancing successfully. Highways England within the past few years has moved to the alliance procurement model under the ALC for its £4.5 billion Smart Motorways Alliance. With the PFI2 scheme ended, there is clearly scope and a proven track record within the UK for project alliance models to be used for major infrastructure assets.

In Australia, the alliancing model was used in the 2000 Pacific Motorway QLD, which was a distressed project that was converted in mid-stream to a project alliance in order to overcome severe scheduling difficulties and regular scope changes. The alliance completed work to the value of AUD$62 million ahead of the target schedule and near to the target cost. The Awoonga Dam Rising Project in 2000 is an example of another pure alliance project which resulted in relatively large project savings against the traditional Target Outturn Cost (TOC) model. The large savings made on pure alliance projects have raised questions as to whether the value delivered is compromised compared to that delivered under the TOC model.

In New Zealand there has been a push to repurpose proven and established alliances to revive the construction sector by expediting procurement models through novation. For example, the Northern Gateway Alliance (NGA) that delivered a toll road north of Auckland was novated to the Newmarket Viaduct and the Memorial Park Alliance that constructed Wellington’s ANZAC Park and Arras Tunnel was novated to upgrade the Chatham Islands’ Waitangi Wharf. The reported benefit of this model is an established contractual relationship and existing contracts can be used as a starting point as opposed to starting from scratch. Project partners understand the behaviours of the project teams and such models provide greater cost certainty and known quality.

Within Canada, the Union Station Enhancement Project (USEP) in Toronto is the first major project in Canada to be procured as an alliance contract. Project Owners, Metrolinx and Infrastructure Ontario, awarded the project to ONTrack Alliance which consists of Kiewit-Alberici Union General Partnership (constructors), WSP Canada Inc. (designers) and Mass. Electric Construction Canada Co. (signalling work). The alliance model was chosen for the USEP in order to provide greater transparency and co-operative decision-making as the model tackles risk in both a constructive and collaborative manner. The project is due to complete in 2025.

An on-going alliance project in Canada is the Cowichan District Hospital Replacement, which is currently in the Design and Construction phase. The project was awarded following a competitive process in which multiple bids and designs were submitted under the Alliance project delivery model. The CDH Replacement Project Alliance participants are Island Health, EllisDon, Parkin Architects, BC Infrastructure Benefits and Infrastructure BC. The Project Owner (Island Health and the Province of British Columbia) and the private sector share both risks and opportunities to operate as a fully integrated team to complete the project.

Conclusion

Alliancing agreements and the “win together/lose together” and “no blame culture” ethos which they embody can be extremely beneficial to P3 projects. They enable the public body client to play an active role in the project and encourage parties to work in an open and collaborative manner and in a way that benefits the project and the public users’ interests, rather than the individual interests of the project delivery team. Whilst it is impossible to assume that alliancing will eliminate all the risk of projects facing delays and cost overruns, it does create the collaborative environment needed to move past blame and prioritise finding solutions to mitigate delay and cost risks, and deliver the completed asset.