Collaborative Contracting & The Project Alliance

Teamwork is the reason collaborative contracting is important on capex projects.  However, most “traditional” approaches to project contracting do not fully enable this kind of team-working.   Instinctively we all understand what makes teams work well, things like mutual trust, shared goals, shared risk and reward, supportive behaviours, and collective problem solving and decision making.

So why then, on most capex projects, do we put in place contracts that seem to drive behaviours in the opposite direction?  For example

  • When things go wrong (as they will!), the contracts usually require someone to blame.  This inhibits good risk taking, and shared responsibility.
  • Construction contractors are usually selected and involved after the key design and planning decisions are made, meaning the company building a project has little involvement in these key activities.
  • Fixed-price competitive bidding on the more complex work packages adds significant tension to relationships, to the extent that many project contractors are discouraged from being open and honest with their clients and their advisers.

There is significant evidence that shows collaborative teams perform better than those with internal tension and members with different goals.  In business, collaborative supply chains have been responsible for the vast majority of break-through improvements in performance and cost that we have been able to identify.  For example:

  • The University of Tennessee’s Vested Outsourcing research cites examples from Microsoft, Proctor and Gamble and McDonald’s as companies that have claimed dramatic improvements from collaboration
  • Also in the US, Arizona State University’s Performance Based Studies Research Group has shown on over 1500 construction projects of almost $6 billion in value, that buying on low-price leads to poorer project performance and higher project costs.  Their process which efficiently assesses performance, capabilities and value, encourages the early establishment of a collaborative project team that is incentivised to improve the achievement of the client’s project goals.
  • In the 1990′s a project for the US chemical company Rohm & Haas delivered an $18M plant modification project that they believe would not have been achievable using traditional contracting approaches.  The collaborative approach they took – which was part of the UK’s government-sponsored ACTIVE initiative – gave them a faster, high quality and lower cost project than they believed possible, and their two main suppliers made higher profits than they would normally expect.

There is no single agreed upon definition of what “collaborative contracting” is, so our working definition is…

Contracting arrangements that minimise the contractual barriers to collaboration across the different companies involved in a project or contract, and in consequence allow all the participants to the contract to work together as an integrated project team, in the best interests of the overall project, without compromising their own commercial position.

With major construction projects, there is a wide variation of how the idea of collaboration has been applied.  From “Project Team Charters” added to a traditionally negotiated contract, through to longer-term multi-project partnering agreements.  There has also been a wide variation in the success of these arrangements.  In researching those attempts that didn’t work we found two main groups of problems

  1. They were not truly collaborative.  They missed some key criteria for success
  2. They did not know what to do!  The projects didn’t exploit the collaborative project environment by thoroughly applying value-improving project management practices

Our Breakthrough Project Management methodology addresses both these issues – we ensure the project team is selected and contracted following collaborative best practice, and through the application of CCPM, we give the project a framework to both improve performance, and embed the collaboration into day-day activities.

In Breakthrough Project Management we recommend using a collaborative contracting technique known as Project Alliance, and in the book, we list 5 critical success factors for Project Alliancing:

  1. An integrated team, with members selected based on competence and “best person for the role”
  2. Collective sharing of risks and opportunities across the team
  3. Contract terms that exclude the idea of “fault” and “blame”, with minimal legal recourse for dispute resolution
  4. A payment scheme that fully reimburses variable costs, and aligns margin to the overall project success, rather than the success of individual work packages
  5. Unanimous, principle-based, decision making

A Project Alliance is formed by a client and one or more contractors/suppliers (“supply members”).  Each supply member should have a large enough role to influence the overall project outcome, meaning not all contractors/suppliers would be members of the alliance.  An alliance would typically have between two and seven members, including the client.  Supply members would typically include an architect or technology licencor, design and engineering specialists, construction contractors, and planning/project management consultants.

Project Alliancing as a contracting approach, came to prominence in the UK, as part of the Oil and Gas industry’s CRINE initiative during the early 1990’s. Alliancing was a key part of the improvement programme that resulted in projects being delivered in half the time, and for two thirds of the cost of a more traditional project.  Ian, one of the authors of The Executive Guide to Breakthrough Project Management, was involved in one of the first Project Alliances to be used outside of the oil and gas industry in the UK in the mid 1990’s.

Project Alliancing has many similarities to IPD (Integrated Project Delivery), and Project Partnering, terms that have been used by the Lean Construction movement and the CII (Construction Industry Institute) respectively, although “Project Partnering” is often used to refer to long-term arrangements covering many projects, whereas a Project Alliance would usually deliver a single project.

The alliance supply members are usually rewarded using a payment method that we call CFV (cost-fixed-variable).  We describe the CFV method in this paper.

Project Alliancing brings a number of improvement opportunities on projects, but its most significant contribution to Breakthrough Project Management is the establishment of a collaborative project team, which in turn allows the project to use CCPM – opening the door to significant reductions in risk, duration and the resources needed to deliver the project.

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