Project Alliancing

1
Project Alliancing
Matthew W. Sakal, Captain, USAF Relational
Contracting Conference Atlanta, GA 18-19 November
2004
2
OVERVIEW
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING

• My Background
• Project Alliancing Definition
• Risk Sharing vs Risk Transfer
• History of Project Alliancing
• Essential Features of Project Alliancing
• Core Alliance Principles
• Development of Alliance
• Compensation Structure
• Managing Change
• Issues / Downsides
• Reasons for Success
• Making Sure Your Alliance Works

3
MY BACKGROUND
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING

• Bachelors of Architectural Engineering (Penn
  State Univ.)
• Air Force Health Facilities Division
• Regional Health Facilities Project Officer
• Represents AF/SG in all matters concerning
  planning, programming, design and construction of
  medical and dental treatment facilities
• Masters of Engineering (Univ. of California
  Berkeley)
• Independent Research Constructing Projects in a
  DynamicEnvironment A Focus on Relational
  Contracting
• Air Force Health Facilities Division
• Deputy, Chief of Health Facilities Strategic
  Planning
• Oversee Annual Construction Budget 50-60
  Million

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SOURCE OF THIS MATERIAL
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING

• Special thanks to Jim Ross and his April 2003
  paper Introduction to Project Alliancing which
  is the major source of the information contained
  within this presentation.

5
PROJECT ALLIANCING DEFINITION
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING

• Project Alliancing Definition
• A project alliance is where an owner (or owners
  and one or more service providers (designer,
  constructor, supplier, etc.) work as an
  integrated team to deliver a specific project
  under a contractual framework where their
  commercial interests are aligned with actual
  project outcomes.
• Under a Pure Alliance the Alliance
  Participants
• Assume collective responsibility
• Take collective ownership of all risks
• Share in the pain or gain

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RISK SHARING vs RISK TRANSFER
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING

• Traditional Approach to Contracting
• Transfer as much risk as possible
• Can be successful for slow, certain, stodgy
  projects
• When is Traditional Approach Not Suitable?
• Complex, unpredictable risks
• Tight timeframes
• High likelihood of scope changes
• Complex interfaces
• Difficult stakeholder issues
• Complex external threats
• When Faced with These Factors, Project Outcomes
  are More Likely to be Achieved with Collective
  Responsibility

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PROJECT ALLIANCING IS NOT PARTNERING
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING

• Partnering Band-aid solution
• Does not address the contract
• Partnering Partners tell each other that they
  will act reasonably and fairly, but when things
  go sour, they regress to traditional litigious
  ways.
• Project Alliancing Partners work together
  because compensation (financial success) is tied
  to overall success of project outcomes.
• Does not address the work
• Partnering While Partnering might be effective
  at getting people to work together in difficult
  situations, it does not address the actual issues
  (i.e. uncertainty, complexity of the work) that
  are making the situations difficult in the first
  place.

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HISTORY OF PROJECT ALLIANCING
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING

• British Petroleum (BP) in the Early 90s
• Andrews Field (offshore oil / gas project in
  North Sea)
• Previously uneconomical due to extremely high
  development costs (450M)
• Realization a new contracting mechanism was
  needed involving a step change in behavior-- away
  from competitive bidding, traditional risk
  allocation contracts, and antagonistic
  relationships.
• Through collaboration, an Alliance between BP and
  seven contractors developed a target outturn cost
  (TOC) of 373M
• The final project was delivered 6 months early at
  a final outturn cost of only 290M!

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HISTORY OF PROJECT ALLIANCING
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING

• Within Australia Most of the Best Known Project
  Alliances Have Been Significant Government Civil
  Works and Building Projects.
• Some Well-known Australian Alliance Projects
  Include
• National Museum of Australia (A155M)
• Norman River Bridge, QLD (A5M)
• Diesel Tilt Train Service, QLD (A138M)
• Port of Brisbane Motorway, QLD (A105M)
• Sydenham Electrification Project, VIC (A34M)
• Best for Projects gt 5M

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ESSENTIAL FEATURES OF P.A.
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING

• Collective Ownership of All Uninsurable Risks
• 3 Limb, 100 Open-book Compensation Model
• Limb 1 Actual project costs project overhead
• Limb 2 Fee profit corporate overhead
• Limb 3 Gain/pain sharing arrangement
• Governed by Joint Body (PAB Project Alliance
  Board or ALT Alliance Leadership Team) Where
  Decisions Must be Unanimous
• Day-to-Day Management by Seamless Integrated
  Project Team (Best for Project)
• Resolve Issues within Alliance with No Recourse
  to Litigation

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CORE ALLIANCE PRINCIPLES
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING

• Core Principles Common to Most Alliances
• Business outcomes whereby all parties either win
  or all parties lose
• Equitable sharing of risk and reward
• All participants have an equal say
• All decisions must be best-for-project
• No-blame culture
• All transactions are fully open-book
• Encouragement of innovative thinking with a
  commitment to achieve outstanding outcomes
• Open and honest communication (no hidden agendas)
• Visible / unconditional support from top levels
  of each participant.

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DEVELOPMENT OF ALLIANCE
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING
Selection
Interim
Full Alliance
Selection Of Preferred Proponent
Commercial Discussions
Are Key Issues Agreed?
No
Yes
iPAA Period
Is The TOC Agreed?
No
Walk Away
Yes
All parties have the right to walk away up to
this point
Only owner has the right to terminate For
convenience from this point
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DEVELOPMENT OF ALLIANCE
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING
Selection
Interim
Full Alliance

• Overview
• Most important step for the owner to achieve a
  successful alliance is to choose the right
  participant!
• Selection Criteria
• Technical, financial, and management capacity.
• Understanding of and commitment to the alliance
  way of doing business.
• Preliminary ideas on innovations and execution
  strategies and the potential to deliver
  outstanding design and construction outcomes.
• Willingness to commit to the project objectives
  and pursue breakthrough outcomes.
• Affinity for working together and with the
  owners personnel as a high-performance team.

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DEVELOPMENT OF ALLIANCE
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING
Selection
Interim
Full Alliance

• Selection Timetable

15
DEVELOPMENT OF ALLIANCE
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING
Selection
Interim
Full Alliance

• Commercial Discussions
• Reach alignment on the primary commercial
  arrangements
• No fundamental roadblocks are left to emerge
  during iPAA
• Alliance Auditor investigates financial records
  and costing structures of each of the prospective
  non-owner participants which allows for locking
  in Fee (Limb 2 corporate overhead profit)
• Overhead corporate overhead can usually be
  established with relative clarity and certainty
  based on the investigations by the Alliance
  Auditor.
• Profit much harder to determine, but should take
  into account
• Actual past profit performance
• Current corporate expectations and actual trend
• Difference in context and / or anomalies between
  the audited figures and the prospective alliance
  such as risk profiles, nature of work, etc.

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DEVELOPMENT OF ALLIANCE
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING
Selection
Interim
Full Alliance

• Interim Project Alliance Agreement (iPAA)
• Goal
• Develop Target Cost and Schedule
• Value management / value engineering
• Risk opportunity workshops
• Planning / design
• Systems and procedures development
• Alliance / team development
• Compensation
• At first, participants reimbursement is limited
  to recovery of actual costs only
• If participants enter into PAA, they receive a
  margin on iPAA work
• If they dont enter a PAA, then recovery of
  margin is based on reasons they didnt enter into
  PAA

17
DEVELOPMENT OF ALLIANCE
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING
Selection
Interim
Full Alliance

• Target Outturn Cost (TOC)
• Jointly developed during the iPAA by Alliance
  participants
• First real test of the new Alliance
• TOC lies at the heart of the compensation model
• Used to determine the Limb 2 fee payable to each
  non-owner participant.
• Used as the target against which the actual cost
  will be compared to determine the extent of under
  / overrun that is to be shared amongst the
  Alliance participants.
• TOC is not an estimate of the full cost of the
  project to the owner.
• The TOC does not include any Limb 2 fees
• The TOC does not make any allowance for gainshare
  under Limb 3

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DEVELOPMENT OF ALLIANCE
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING
Selection
Interim
Full Alliance

• Target Outturn Cost (TOC)
• Apparent conflict between owner pushing to set a
  low TOC and non-owner participants pushing for a
  high TOC.
• Several factors counteract this conflict
• Transparency TOC is developed jointly on a full
  open book collaborative basis. Nothing can be
  hidden.
• If TOC is too high, the project may not proceed
  (not in the best interest of any party).
• If TOC can not be agreed upon, non-owner
  participants may lose their ability to recover
  margin for iPAA work accomplished.
• Potential for damage to reputation and future
  business relationships if owner feels non-owner
  participants conspired to inflate TOC.

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COMPENSATION STRUCTURE (PAA)
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING
Selection
Interim
Full Alliance
Profit
Limb 2 (Fee)
Limb 2 is 100 at risk under the Limb
3 riskreward arrangements
Corp. oheads
Project-specific overheads
Direct Project Costs
Limb 1 (Costs)
Recovery of costs under Limb 1 is
guaranteed irrespective of the outcome under the
Limb 3 riskreward arrangements
Illustration Not to Scale
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COMPENSATION STRUCTURE (PAA)
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING
Selection
Interim
Full Alliance

• Limb 1 (Reimbursement of project costs)
• Guiding principles
• Each participant is reimbursed its actual costs
  incurred on the project, including costs
  associated with rework.
• Reimbursement under limb 1 must not include any
  hidden contributions to corporate overhead or
  profit.
• All project transactions and costs are 100 open
  book and subject to audit.
• Non-owner participants (NOPs) are guaranteed to
  at least receive Limb 1 costs

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COMPENSATION STRUCTURE (PAA)
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING
Selection
Interim
Full Alliance

• Limb 2 (Fee corporate overhead
  business-as-usual profit)
• Fee is set before entering into the iPAA
• Generally preferred to be a fixed lump sum as a
  of TOC
• Fee is not subject to adjustment regardless of
  the actual costs expended
• Fee is only adjusted in case of a Scope
  Variation (usually very few under an alliance)
• Fee will be paid progressively, in proportion to
  physical complete of participants work

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COMPENSATION STRUCTURE (PAA)
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING
Selection
Interim
Full Alliance

• Limb 3 (Sharing of pain and gain)
• Intended to ensure that the NOPs assume an
  equitable share of the pain / gain along with the
  owner where the actual performance is better /
  worse than pre-agreed targets (target cost and
  other key result areas)
• Guiding principles
• Paingain should be linked to outcomes that add
  to (or detract from) the value to the owner.
• All possible project outcomes must result in
  winwin or loselose (i.e. everyone wins or
  everyone loses together)
• Performance by the alliance that is better than
  the agreed targets should lead to superior
  returns for NOPs and vice-versa.
• All Limb 1 costs are guaranteed.
• All Limb 2 Fee s are at risk.

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COMPENSATION STRUCTURE (PAA)
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING
Selection
Interim
Full Alliance

• Limb 3 (Sharing of pain and gain)

Overrun
Target Outturn Cost
Underrun
50 /- ?
50 /- ?
Owner
NOPs
50 /- ?
50 /- ?
NOPs
Owner
50 Example of of overrun/ underrun to be
shared between owner and NOPs
/- ? Depends on Key Performance Indicators
(KPI) for each non-cost Key Result Area
(KRA) (see next slide)
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COMPENSATION STRUCTURE (PAA)
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING
Selection
Interim
Full Alliance

• Limb 3 (Sharing of pain and gain)
• Along with comparing the Actual Outturn Cost
  (AOC) with the Target Outturn Cost (TOC), the
  paingain model also compares performance of
  non-cost areas.
• A MaxOPS of the TOC is chosen during the iPAA
  that can be received / lost due to exceptional /
  inferior performance in these Key Result Areas
  (KRA).
• A measurable Key Performance Indicator (KPI) is
  established for each non-cost KRA.
• Each KRA is weighted (out of 100) and the final
  score in each KRA is consolidated into an overall
  weighted score for the non-cost areas called the
  Overall Performance Score (OPS).
• The OPS (0 failure 50 neutral 100
  outstanding) determines the amount of the MaxOPS
  that the NOPs receive / lose.

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COMPENSATION STRUCTURE (PAA)
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING
Selection
Interim
Full Alliance

• Limb 3 (Sharing of pain and gain)

Non-cost KRAs
Scores
Weights
80
15
KRA 1
OPS 61.2
30
65
KRA 2
1) If the TOC is 100M and the MaxOPS is 2 of
TOC, the total MaxOPS is 2M. 2) With an OPS of
61.2 which is 11.2 higher than the basis (50),
the NOPs would share 224K (11.2 of 2M)
45
30
KRA 3
65
25
KRA 4
100
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MANAGING CHANGE
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING
Selection
Interim
Full Alliance

• Managing Change
• As a general principle, under a pure project
  alliance the alliance participants collectively
  assume all risks associated with the delivery of
  the project, regardless of
• Whether or not those risks are within the control
  of the alliance
• Whether or not they have considered them in
  advance or
• Whether they could reasonably have been foreseen
  or not.
• Therefore, situations that would be treated as
  variations under a traditional contract are not
  variations under the alliance rather they are
  just part and parcel of the delivery of the
  project.

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ISSUES / DOWNSIDES?
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING

• Value for Money?
• Potential Downsides
• Perception of lack of certainty in cost outcome
  for the owner
• Requires significant involvement and commitment
  of owner personnel and senior management to
  support process
• Requires significant cultural shift away from
  traditional adversarial approach to one of
  integration, collaboration and high performance
  teamwork.
• Substantial costs to establish the alliance and
  develop and maintain the alliance culture
• For government projects it raises probity issues
  that need to be managed carefully
• Parties need to waive legal rights that they
  would normally pursue in the event that things go
  wrong

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REASONS FOR SUCCESS
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING
Structural features of the alliance model
Create the high performance environment that is
the hallmark of an alliance
Outstanding project outcomes
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REASONS FOR SUCCESS
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING

• Characteristics of high performance alliances
• A single cohesive team without any us and them
  attitudes
• High performance culture amongst the team
  characterized by
• Clear understanding of purpose/ mission of
  alliance
• Unequivocal commitment to meet or exceed
  demanding objectives
• Willingness to commit to targets w/o knowing how
  they can be achieved
• People who mean what they say, and do what they
  say they will do
• Individuals who are willing to accept
  responsibility for their actions
• Open and effective communication
• Successes are acknowledged and celebrated
• Very close collaboration between designers and
  constructors collaboration that never stops,
  right up to final completion
• All energy focused on optimizing project outcomes
  no time at all wasted on position protecting or
  case building
• Very fast integrated decision-making

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BENEFITS TO NON-OWNER PARTICIPANTS
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING

• Alliancing is attractive to the non-owner
  participants for the following reasons
• Potential for very good returns within acceptable
  limits of risk
• Enhancement of reputation leading to increased
  prospects of repeat and referred work
• Strengthening of relationship with owner and the
  other participants (forming the basis for
  possible future alliances)
• Greater insights into project delivery from an
  owner perspective, enabling constructors and
  designers to better understand and service their
  clients
• Increased job satisfaction for staff with
  associated benefits to overall organizational
  culture
• Significant increase in communication and general
  project management skills

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MAKING SURE YOUR ALLIANCE WORKS
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING

• Track record clearly demonstrates that Project
  Alliancing can consistently deliver superior
  outcomes when used properly in the right
  circumstances.
• Only one of a number of instruments in the
  toolbox of relational contracting.
• Key steps to insure success
• Owner must have a good understanding of the
  principles underlying alliancing and why it
  succeeds on other projects.
• Select the right partners using appropriate
  criteria.
• Ensure that all key stakeholders are enrolled
  into and committed to achieving or exceeding the
  project objectives.

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QUESTIONS?
Relational Contracting Conference Atlanta, GA
18-19 Nov 2004
PROJECT ALLIANCING