What is Alliance Contracting?

By removing barriers to collaboration and giving financial incentives Alliance Contracting aligns project teams goals. This creates an environment where time & money are saved but more importantly, the client's requirements are clear and not lost in translation. The results are a superior building for the client and better outcomes for the whole project team.

Think of an alliance like a company where the whole team has a vested interest in the companies success. There is a single product to be built and a great bonus scheme.

What problems in construction can we solve with Alliance Contracting

By removing barriers to collaboration and giving financial incentives Alliance Contracting aligns project teams goals.

This creates an environment where time & money are saved and more importantly, the client's requirements are clear and not lost in translation. The results are a superior building for the client and better outcomes for the whole project team.

Think of an alliance like a company where the whole team has a vested interest in the companies success. There is a single product to be built and a great bonus scheme.

What you need to know if you are you considering using alliance contracting

Read on for a quick overview of alliance contracting for construction projects.

I'm aiming to answer the following questions;

  1. What are the problems we trying to solve?

  2. How does alliance contracting solves these problems?

  3. Where do you get started setting up an alliance project team? (We’ll use a hypothetical example to best explain this)

Hopefully, by answering these three questions it will give you the confidence to use alliancing on your next project and unlocking huge benefits it can offer!

What are the problems we are trying to solve?

Let's identify the problems we are trying to solve. Then later we’ll explain how alliancing can help.

Time and Cost Overruns

The main driver for looking at new methods of procurement on your construction project will likely be to reduce time and cost overruns.

It seems to be the accepted norm in the construction industry that time and cost will be greater than anticipated. The higher the level of complexity on a project the higher the likelihood of overruns is. There are lots of examples of high profile overruns but it’s all too common for regular projects as well. 

Poor productivity

In other industries, productivity has increased significantly over the past decades by leveraging technology. In construction, productivity has not increased significantly since the 1960s.

This problem isn’t just on site it is also something that needs to be addressed during the design and planning stages of a project. Indeed decisions that are taken in the early stages of design are often the cause of friction on site.

Communication channels hampered by contractual arrangements creating friction for information flow is a large part of this problem.

Undesirable project outcomes

Clients needs which are set out at the beginning of projects are to often not fully met or compromised. This is partly to do with the protracted nature of a construction project. Also, difficulties communicating the clients ‘why’ through the entire supply chain. 

There are often conflicting goals lead to a project team acting in a way that does not benefit the client. This is usually due to risk allocation and procurement methods such as fixed price tendering.

Human nature

Less often specifically identified as a problem are the human behaviours that result in working within teams where a blame culture exists. Penalties are written into most traditional forms of contract in the construction industry. This means team members are more likely to be closed off, unwilling to share and become more focused on ‘their bit’ rather than working together at interfaces which is where most problems lie.


How Construction Alliance Contracting solves problems with existing methods

This is the second post in a series about Alliancing. If you would like to read about the problems Alliancing aims to solve take a look here.

Alliancing is a method of procurement that aligns project teams goals. This is done by creating something called a Project Alliance. The Project Alliance can be thought of as a virtual company and is formed of the key members that have the most impact on the project outcome.  

The specific terms of the agreement can vary but the two main areas of focus are;

  1. Removing barriers to collaboration

  2. Creating incentives based on project goals

Removing Barriers to Collaboration

Alliances often get compared to a sports team. In a sports team collaboration is required to win. There is no point scoring loads of goals if you lose the game.

That is behaviour we are trying to foster in the Project Alliance.

The result is that the team are incentivised to work together to solve problems and find the best, most innovative solutions to meet project goals.

The client sets out the requirements, which are made into goals with measurable targets. Targets relate only to the project as a whole. There are no individual incentives or penalties.

These are agreed in negotiation with all the Project Alliance. The Project Alliance then decide the best way to meet the requirements and achieve the targets. They will earn a bonus if the targets are beaten.

We must concentrate in three areas to create the environment for team collaboration;

  1. Scope

  2. Time

  3. Cost

Collaboration around Scope

Alliance members start with roles and responsibilities which form a nominal scope.

The scopes are nominal because there is flexibility to change them between members which  might be done when someone is better placed to carry out a task.

The budget and resources can be reallocated accordingly. If the result is good for the overall project then it’s good for all the Project Alliance members.

The costs are agreed based on the nominal scope. Once agreed there is no reason for any one member to hold onto any particular part of the scope. This means the Project Alliance is able to decide who is best placed to carry out work.

It’s important to mention that there isn’t usually much deviation from the nominal scopes. For example the mechanical engineer will in reality carry out the mechanical design. It just might be some specialist area that some design input would be better from a subcontractor. Alliance gives the freedom to make let this happen easily.

Collaboration around Time

There are no penalties for lateness for the alliance team members. The risk for lateness is taken from the individual organisations and is managed at the project level. Using the sports analogy if one player misses a tackle does it really matter? More important that someone makes the tackle and the game is won.

By removing these penalties it opens the door to manage the programme using a technique called Critical Chain Project Management (CCPM).   

A great way to think about the effect of fixed price tendering with penalties for lateness, is to ask someone how long it takes them to get home from work.

They will usually start by telling you an average or normal time.

Normal time vs time plus buffer

Normal time vs time plus buffer

If you then ask, how long would you give yourself if you had an important engagement? A dinner date maybe?

They may well double the time by adding a buffer in case of bad traffic, a delayed train etc.

In fixed sum tendering using traditional critical path project management, we create a situation similar to asking how long could it take not how long does it normally take. That's because there are uncertainties which need to be accounted for.

This results in a programme like this;

Screenshot 2019-04-10 at 14.31.04 - Edited.png

In CCPM we start with the normal or average time estimate. Then the project time buffer can be shared and managed at the project level.

It looks like this;

Screenshot 2019-04-10 at 14.32.22 - Edited.png

But because we know that not everything will go wrong that could go wrong we can reduce the buffer by between 40% and 50%.

Like this;

Screenshot 2019-04-10 at 14.33.18 - Edited.png

By removing time penalties and allowing the risk on programme to be managed by the Project Alliance it lets members work together to meet and beat programme targets.

Collaboration around Cost

Jointly agreeing how money is spent on the project is fundamental to the Project Alliance. This requires an open book approach.

To start, a total project budget needs to be agreed by the Alliance. This can be done in a similar way as in traditional procurement. Using market rates for construction costs and percentages for consultants fees will give you a pretty good guide to what you would expect to pay in a traditional scenario.  

Taking that total budget we split it down further into Cost and Fees (Fixed and Variable);

Cost with a capital C is money that flows through a Project Alliance member. That means a subcontractor, supplier, etc. It also includes the costs for team members salaries including costs to the business such as insurance, pensions etc. It must not include overheads and profits.

Fee is what profit an Alliance member would expect to make on the project. Fees are broken down into Fixed and Variable.

  • Fixed Fees are paid in addition to agreed Costs incurred.

  • Variable Fees are fees that make up the reward for exceeding targets.

Because we have separated Cost from Fees the Project Alliance is able to work together to reduce Costs without reducing their Fixed Fee. The Variable Fee is the reward for reducing the Costs.

Reducing Cost is the only way the Alliance Members can increase their Fees.

Financial incentives

Continuing with the business analogy, financial incentives can be thought of as a bonus scheme. The difference is that there are no individual bonuses. Rewards are based on the project results. The size of the reward correlates with how well you do against targets.

If the team hits the targets the level of the bonus should so the team can expect to be paid as much as if they were engaged in a more traditional way.

If targets are exceeded then the team should expect to make more than they would normally expect on a similar traditionally managed project. Because there is a pain/gain this works the other way as well. If targets are missed the ‘pain’ works in the opposite way.

To fully explain financial incentives we’ll show a worked example in part three.

Results

By removing barriers to collaboration and giving incentives that support behaviours which in turn support project success the team's goals are aligned. Working together to build faster and cheaper while meeting or exceeding the client's requirements become the preferred behaviour of all because it is to the advantage of all.

Like in sports. It doesn’t matter who scores the goals it only matters that the team wins the game.