Over the last decades, construction projects have continually become much more dynamic in nature, largely due to the increasing complexity and uncertainty of these projects, along with tight budgets and time constraints.
In the face of this challenging environment, there is a continual drive to reduce project costs and design/construction time while still demanding high quality final products.
However, traditional contracts and procurement methods can be inefficient and unsuitable to meet these challenges, especially in two major respects: (1) dynamic projects require contracts designed to embrace and manage change; and (2) instead of focusing on maximising project outcomes and creating a good framework for developing a collaborative environment between the parties involved, traditional contracts are generally a series of legal swords and shields, promoting competing positions amongst the parties.
In the early 90’s in the United-Kingdom oil & gas sector, there were moves to change by British Petroleum (BP). At this time, known oil reserves in the North Sea had become uneconomical to exploit and competition began appearing from other attractive drilling locations around the world. It became apparent to BP that the only way to profitably tap into the reserves was to reduce the high project development costs. That proved not to be sufficient and so BP decided to explore a departure from its standard business strategies of competitive bidding and traditional risk allocation contracts.
To test this new approach, BP chose a notoriously problematic oil reserve named Andrew Field as its showcase trial project. It developed a new “painshare-gainshare” compensation mechanism and created an environment that necessitated commitment to teamwork, relationship development and trust.
This contracting methodology, ultimately named “Project Alliancing”, involved complete open-book accounting, sharing all uninsurable risks between all project members, and setting an initial target cost generated by the whole project team. This target cost would then be compared to the final costs and the under or over-runs would be shared by all project participants. In other words, the team would win or lose financially as a group depending on the overall project performance.
Another critical aspect of BP’s new contracting strategy involved team member selection. The seven main contractors that formed the alliance with BP were not selected competitively based on cost, but instead on their approach and attitude since project performance was now the undisputed main priority around which everything else centered.
The results of the Andrew Field project illustrated the success of this approach. Estimates for the project had originally stood at £450 million. After a rigorous contractor selection process and six months of intense collaboration with partners, the project team agreed to a target cost of £373 million. This was later reduced to £320 million within three months of the project commencement. Final costs ended up at just under £290 million and the project began producing oil six months before originally scheduled.
Alliancing agreements have since been exported to a number of jurisdictions.
There are multiple reasons why organisations pursue alliances, particularly for infrastructure projects. These include:
- development of complex technical challenges requiring innovative solutions outside of the traditional contract structure which can be unsuitable;
- scoping uncertainty due to unpredictable potential challenges;
- requirement for management of complex and competing needs;
- resource scarcity, both in terms of specialist skills and expertise, as well as material resources;
- operational constraints to ensure continuity of service on brownfield projects, requiring flexibility of project scheduling, development and implementation; and
- critical completion deadlines requiring an innovative approach to design, work scheduling and change.