Project alliances deliver during property booms

Bruce Linke, senior legal consultant at DLA Piper, takes a look at project alliancing as an option for delivering projects in pressured markets.

Bruce Linke
Bruce Linke

Bruce Linke, senior legal consultant at DLA Piper, takes a look at project alliancing as an option for delivering projects in pressured markets.

The Gulf's high liquidity has helped protect the region's economies from the effects of the global credit crunch experienced elsewhere, but in a booming construction industry, developers and contractors alike are feeling the effects of rising inflation, escalating resource costs and the shortage of both professional and skilled labour.

Project delivery teams are also faced with tightening deadlines as developers seek to gain an advantage over their competitors by delivering quality projects sooner.

In this environment of uncertainty, developers are increasingly becoming dissatisfied with 'traditional' forms of procurement and project delivery, which are frequently shown to be inadequate in dealing with the pressures facing developers in the Middle East.

As a result, developers are looking to alternative strategies such as joint venture arrangements, partnering and alliancing to successfully deliver complex fast-tracked projects.

The selection of the most appropriate project delivery method is critical to the success of any project and requires careful thought and consideration of many commercial, technical and legal factors.

Project alliancing began in the construction industry in North Sea oil and gas projects in the early 1980s as a result of dissatisfaction with traditional project delivery methods.

Currently, alliancing is one of the most commonly used alternatives in jurisdictions such as Australia to the traditional project delivery methods, such as 'contract only' and 'design and build' contracts.

Traditional forms of project delivery are often the preferred approach of developers for many projects because they provide a level of certainty regarding contract price.

In contrast, a project alliance is a co-operative form of contracting where the parties agree to share risk, and to pool resources and strengths to deliver a project.

This agreement is underpinned by a project alliance agreement (PAA), which is designed to align the commercial interests of all the alliance participants and to ensure that allocation of risk is managed pursuant to a structure which makes it in the financial interests of all parties to cooperate to complete the project in a mutually beneficial way.

PAAs generally fall into two categories, 'pure' alliance agreements where the parties share all risks, and strategic or 'non-pure' alliance agreements where the parties share some of the risk and one or more of the participants retain discrete liability for performance of parts of the project.

Pure alliances are typically used where the risks in delivering the project are largely unknown and it is difficult to quantify and price.

Non-pure alliances are generally used where there are less unknowns but the parties acknowledge the benefit of sharing key risks and aligning the parties' commercial interests.

Both forms embrace the idea of improving relationships and risk sharing concepts to successfully deliver projects.

Like any contract, the probability of disputes which can delay the project increases dramatically if there is a high degree of uncertainty as to the parties' obligations under the alliance contract.

Therefore it is critical to the success of the alliance to have a concise and well-drafted agreement, which governs the alliance and accurately reflects the parties' intentions.

Some key elements of PAAs, which differ from the traditional forms of contract include: a clear statement of aligned objectives, a fair and equitable sharing of risk structured to avoid any 'win-lose' outcomes, and a performance or incentive-based remuneration mechanism taking into account performance levels measured against clearly-defined key performance indicators.

All participants are responsible for delivering the project, including the project owner, the contractor and relevant consultants.

Other elements include an express commitment to a ‘best for project' approach, open and honest communications, trust, integrity and respect, approaching obligations on a 'good faith' basis and a mechanism for resolving disputes when they arise at the lowest possible level and, depending on the type of alliance, a 'no blame' and 'no dispute' culture.

Some of the key drivers for establishing an alliance to deliver a project include an uncertain fast-track contracting environment where traditional risk transfer strategies are inappropriate, the ability to efficiently pool together knowledge, skills and resources from a number of parties with differing skill sets, the ability to select the 'best team' for delivery of the work and services, the alignment of objectives, and the increased possibility of exceeding required performance levels and obtaining a greater reward.

A critical factor when considering using an alliance is that all parties are willing and capable of co-operating.

Obviously an alliance would not be appropriate when the above drivers are absent and if there is doubt as to whether the parties involved will be able to work in the co-operative manner necessary for a successful alliance.

However in other jurisdictions that have experienced similar booming and project delivery pressures, alliancing has proven to be a successful alternative project delivery method.

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