Alliancing is popular in Australia as it allows procurers to take advantage of the efficiencies gained from a non-adversarial relationship whilst working towards jointly-held project aims in a spirit of mutual trust and cooperation.
The transfer of risk in alliancing can be problematic and effectively can result in a cost-plus arrangement with the contractor. Such an arrangement undermines the efficiencies mentioned above. In addition, where project accounts are subject to third party audit, it can be difficult to justify payment levels and the contractor's share of the outturn cost.
The New Engineering Contract suite (written by the Institution of Civil Engineers in the UK) has been drafted with the aim of maintaining the project-focused approach. In addition, it requires the parties to the contract to work and report in a manner which results in an auditable outturn cost whilst maintaining the ability to incentivise the contractor to work efficiently.
The main contract form is called the Engineering and Construction Contract (ECC) and exists in six primary forms, the most interesting of which are based on delivery of the project against a target price which is built up from a priced high level program known as the activity schedule. Use of the activity schedule approach allows earlier contractor involvement because the contractor is taking a risk on pricing high level activities rather than a complete bill of quantities which also fits with a design and build approach. There are also options for a fixed price along with the use of a traditional bill of quantities.
Programming under the ECC is a key requirement. The contractor is required to maintain an updated plan to completion which is issued to the employer each month. This allows the employer a higher level of information as to the plan to completion and the current status of the works than would be available under a standard lump sum turn key contract.
Risk sharing is agreed in relation to a series of bands of overspend and underspend. In the ECC Target Contract risk share arrangements can be amended such that it effectively becomes a capped maximum price contract with incentives for the contractor to deliver at a lower figure. This may be attractive to government authorities who have authority for expenditure of up to a maximum sum on a project, and are keen to ensure that the contractor is driven towards efficient working throughout.
The contractor is required to adopt a rigorous, open-book administration process which results in cost-clarity and an audit trail which can be used to justify outturn cost and efficiency-related payments to the contractor. Record keeping requirements on the contractor can be structured under the ECC to conform to the audit requirements of the procuring body. Regular reporting of costs, status of program and trends can also be written into the contract in accordance with higher authority reporting requirements. Cost, programming and all other information prepared by the contractor is freely available for review by the employer under the ECC which aims to engender a joint approach to project risk management as well as providing the required audit trail to the employer.
In relation to risk management, the ECC requires the maintenance of a risk register and also early reporting of events which may mature into cost or time effective problems. Once an event has been identified, the parties work together to mitigate the cost and time effect.
The ECC is used for the majority of public infrastructure procurement in the UK and is becoming widely used in the Middle East, South Africa and in New Zealand. Its objectives are consistent with the relationship-based approach now popular in Australian contracting.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
