Is it time to move partnership a stage further this year?
“Re-thinking” the industry is a common topic of debate in construction at the minute, with “innovation” and “collaboration” being popular buzzwords. Following the Hackitt Review, there is an increasing call to overhaul the way the construction industry works and introduce a “clear model of risk ownership”.
Whilst many may accept that current procurement models can result in a group of individuals focusing on their own profits and risks rather than focusing on the project in hand, finding a solution to this issue and its impact on the progress and success of a project is no easy feat.
In June 2018, NEC4, after a period of detailed consultation, released their NEC4 Alliance Contract (the “ALC”). NEC have described the ALC as the “next step” in collaboration where “all members of the alliance have an equal voice and share in the performance of the alliance as a whole as opposed to their own individual performance”.
NEC have expressed the need for mutual trust and collaboration within their contracts for some time. The ALC goes beyond that and is much closer to a joint venture scenario with a “no blame, no claim” ethos. NEC4 have recommended that this contract model is only appropriate for major projects or where there are a number of low value projects which, cumulatively, result in a high value programme. This is because there needs to be a sufficient level of risk and complexity to make the level of investment worthwhile. After all, in essence, this is a contract model where the risk is ultimately underwritten by the client.
What’s in the NEC4 Alliance Contract?
The ALC structure involves a single contract between all key members of the supply chain and the client. The main contractors, consultants and suppliers are not only in contract with the client but with each other. Together, the parties are called “Partners” (together the “Members”) and, from the outset, their objectives are aligned. This includes profit/turnover, shared incentives and shared risks. The Members have equal voting rights and unanimous decisions are required (save for termination, where the Partner facing termination does not have a vote).
The client has its own role alongside the alliance which involves it setting up the alliance, providing the initial scope and making payments. The client also has reserved powers which allow for the start/stop of works and changes to be made to the Client Requirements. NEC has said the Client Requirements are to be very limited and specific, for example health & safety requirements relevant to the particular project. However, it will come to be seen how much detail clients attempt to retain within the Client Requirements as anything that sits within the main scope can only be varied with unanimous agreement of the alliance board.
The contract then provides for:
- An alliance board; the ultimate decision maker. The board consists of one representative per Member and resolves disputes.
- An alliance manager; this role is a combination of a project manager and a contractor, e.g. the alliance manager certifies payment and produces the programme. The alliance manager is selected by the board and not by the client.
- The delivery team; delivers the work and is assembled on a project by project basis.
The contract further provides for:
- An Implementation Plan; describes how the alliance works and sets out roles and responsibilities.
- A Programme; used as a management tool and produced by the alliance manager.
- A Performance Table; contains objectives and targets. Achievement of those goals impacts whether money is paid or retained.
- Payment; the Partners are reimbursed actual cost in additional to a fee (the additional fees of each Partner can be weighted depending on role). Note, there is a pain/gain principle so the Partners can suffer loss if performance is below target.
- Compensation Events; these are limited and only apply if a prevention event or client reserved matter arises. The alliance manager decides whether an event is a compensation event and any challenge is resolved by unanimous decision of the board.
As with all NEC contracts, there are a range of optional clauses. This includes X22 which allows for a two stage model where the Members have a break provision should the model not be working after early alliance involvement.
However, some familiar options are missing, including delay damages and bonuses for early completion. They are not missing in their entirety though: Instead, these can be found in the performance table which is used to calculate how much pain/gain each Partner is entitled to. It is important to note, under this model, issues such as delay would result in a shared loss for all Members and so the incentive is there for everyone to work as a true team and avoid such losses.
The only contractual risks which sit with individual members are:
- An intentional act or omission in default of the contract.
- A breach of another Partner’s intellectual property rights.
- Causing death or personal injury to a Member’s own employee (note beyond this the risk is shared).
In light of the above, it is clear that the ALC is very much focused on a one team ethos, with termination only possible if a Partner is at fault. The only way to end the alliance if there is no fault is to break the entire alliance.
The unanimous requirements on the board mean that “real” collaboration is needed. There is very little point in acting only in the “spirit”, it’s an all in or all out relationship. There a provisions allowing the alliance manager to seek advice from an independent expert but adjudication provisions are not standard (albeit, in English law, adjudication cannot be excluded). There is also no requirement for PI and there are no exit provisions in the standard form. Presumably, here, NEC is thinking that including exit provisions expressly goes against the notion of alliancing in the first place. If the unfortunate scenario of ending the alliance before completion of the project arises, it is up to the Members to negotiate themselves out.
Will it take off in practice?
Although this contract may appear to make sense in theory, it may take more than collaboration to make it work in practice. The key issues with moving this contract to the forefront seem to be, firstly, procuring such a contract could prove problematic. With many contracts needing to go through stringent tender procedures and the requirements of competition law, it is not going to be simple for a group of developers, contractors and designers to sit around a table without going through a formal bid process. However, if a client tenders for an alliance and then, in an X-factor style creation, constructs its own “dream team”, there seems to be an increasing risk that such a collaboration could become a forced collaboration which, eventually, breaks down.
Secondly, funding such contracts could prove difficult. It is not clear whether NEC envisages the funder become part of the alliance. In any event, if the client is, in effect, underwriting the risk, it may take time for the market to feel comfortable in funding these contracts, particularly when the value of such contracts is high.
Lastly, as with all standard forms, we need to consider the contract amendments made by / between the Partners. Whereas the more familiar traditional and design & build models envisage differing levels of risk and so negotiating and trading risks is more suitable for those models, amending the alliance contract appears to go against the very nature of the contract. However, whether a professional team can come together without seeking to shift the risks (even slightly) remains to be seen.