Australia: Optimising infrastructure delivery with the delivery partner model

Last Updated: 3 April 2017
Article by Owen Hayford

Most Read Contributor in Australia, March 2017

The delivery partner model is in its early years in Australia, but it seems well suited to major infrastructure projects where the client wishes to achieve time and cost outcomes that can't be achieved via traditional procurement models and is prepared to embrace and manage integration risks, with the assistance of capable delivery partners.

The delivery partner procurement model is a recent emanation of relationship contracting that combines elements of the managing contractor, alliancing and engineering, procurement, and construction management (EPCM) models. The delivery partner model enables a client to supplement its internal project management capabilities by engaging one or more delivery partners to assist the client with project planning, programming, design management and construction management services.

By engaging this expertise, the client is able, with the assistance of its delivery partners, to adopt a "sophisticated client" procurement strategy involving direct engagement of suppliers and subcontractors, as opposed to engaging a major contractor to manage this process. This can result in significant cost savings and other benefits for the client.

Remuneration in the delivery partner model

The remuneration regime for the delivery partner(s) is similar to alliance contracting, essentially comprising three limbs:

  • limb 1: the reimbursement of the delivery partner's actual costs (salaries and overheads) on an open book basis;
  • limb 2: a fixed fee to cover profit for business-as-usual outcomes; and
  • limb 3: a gainshare or painshare payment.

The gainshare or painshare payment is built around project outcomes that will deliver value to the client. Typically these will include a target cost, a target completion date and quality measures. Other KPIs such as environmental or safety outcomes and satisfaction of community expectations may also be included, depending on what creates value for the client.

If the project achieves better than business-as-usual outcomes against a KPI, this will result in a gainshare payment from the client to the delivery partners. Conversely, if the outcome against a KPI is worse than business-as-usual, it will result in a painshare payment by the delivery partners to the client. If the actual outturn cost of the project is less than the target outturn cost, a share of the cost savings is typically added to the maximum potential gainshare payment. The maximum potential painshare payment is usually capped at the amount of the limb 2 fee, or a significant portion of it.

Who does design and construction?

Unlike alliancing, but similar to the managing contractor model, the delivery partners are precluded from performing design and construction services, which must be competitively tendered (unless the client specifically agrees otherwise). The client retains control or significant input over the appointment of suppliers and subcontractors, and engages them directly (or the delivery partner, acting as the agent of the client, engages them). In the event a supplier or subcontractor fails to perform its contractual obligations, the client's remedy is against the relevant supplier/subcontractor. If the performance of the supplier/subcontractor affects the project's performance against the KPIs, the gainshare/painshare payment will also be affected.

Who's using the delivery partner model?

The model has been employed successfully in the context of publicly funded infrastructure projects and was first used by the UK government in the construction of infrastructure for the London Olympic Games, where the complexity of the project and time-critical date for completion meant a more traditional delivery model was considered unsuitable. A delivery partner enabled the Olympic Delivery Authority to acquire the necessary expertise where the ODA did not have the time to find and engage personnel of the required calibre to meet the time requirements. A wide range of infrastructure was required: key Olympic venues like the velodrome, aquatics centre, media centre and Olympic village, as well as 2km of new sewers and 265 km of ducts for new utilities. The project was ultimately a success, being delivered three months early and under budget.

Since then, the delivery partner model has received attention in Australia as a potential delivery method for government infrastructure projects and is currently being used to deliver the Woolgoolga to Ballina Pacific Highway Upgrade - currently Australia's largest regional infrastructure project. Like the London Olympic venues, the W2B project is a time-critical major project involving the duplication of approximately 155 kilometres of the Pacific Highway to a four-lane divided road at an estimated construction cost of $4.36 billion.

The delivery partner model was chosen for the W2B project because it avoided the need for Roads and Maritime Services (RMS) to procure and deliver five separate packages of works sequentially. RMS' business-as-usual procurement models and internal resources would have necessitated the works being divided into five packages, which could be procured and delivered sequentially. It was considered that aggregating the works in to a smaller number of larger packages would have resulted in a small field of potential tenderers and sub-optimal competition.

By adopting the delivery partner model, RMS expects, with the assistance of its delivery partners (Laing O'Rourke and WSP Parsons Brinkerhoff), to achieve significant time and cost savings through repackaging the works and tendering packages on a trade/activity basis, responding to a logical sequencing of work across the entire project, unconstrained by package boundaries. Essentially, with the assistance of its delivery partners, RMS has been able to implement the sort of "sophisticated client" procurement strategy that a major tier-1 contractor would implement, without having to first engage such a contractor under a traditional D&C contract and pay the associated risk premium which such a contractor would build into its fixed contract price for the management of the procurement and integration risks.

The associated downside of this model, of course, is less cost and time certainty at the time the client contractually commits to the project. The client ultimately bears these risks without the protection that a traditional D&C contract with a tier one contractor would provide. This risk is mitigated, however, by the model's alliance style gainshare/painshare regime, which financially motivates the delivery partners to help the client manage these risks effectively. The margin paid to the delivery partners for their services is also less than what would have been charged by a tier-1 contractor for wrapping the delivery risks, on account of the lower level of risk borne by the delivery partners.

The future for the delivery partner model

The delivery partner model is in its early years and it remains to be seen whether the model will gain broad acceptance in Australia. A more extensive and defensible analysis of the model and its potential uses and shortfalls will only be possible after the model has been more widely used.

That said, it seems well suited to major infrastructure projects where the client wishes to achieve time and cost outcomes that can't be achieved via traditional procurement models and is prepared to embrace and manage integration and other risks in order to achieve such outcomes, with the assistance of capable delivery partners.

RELATED KNOWLEDGE

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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