Alliance and Traditional Contracting

Alliance contracting

Alliancing is a method of procuring, and sometime managing, major capital assets. Under an alliance contract, a state agency (the 'owner') works collaboratively with private sector parties ('non-owner participants') to deliver the project.

Alliance contracting is characterised by a number of key features, which generally require the parties to work together in good faith, act with integrity and make best-for-project decisions. The alliance participants work as an integrated, collaborative team to deal with key project delivery matters.

Under alliance contracts, risks of project delivery are often jointly managed by the parties.

When to use alliance contracting

An agency’s decision to use alliance contracting to deliver a project requires a strategic procurement analysis to be undertaken, and a good understanding of the delivery method that is most likely to best deliver value for money against business case objectives.

For example, the agency will need to consider the specific project characteristics, costs, risks and market conditions. Normally, alliancing is used to deliver the larger, more complex and high-risk infrastructure projects (with capital costs exceeding $50 million) and where the owner has particular capability to contribute its skills and expertise to deliver the project.

Projects suitable for delivery as alliances are generally characterised by one or more of the following factors:

1. The project has risks that cannot be adequately defined or measured in the business case or prior to tendering.
2. The cost of transferring risks is prohibitive.
3. The project needs to start as early as possible before the risks can be fully identified and/or project scope can be finalised, and the owner is prepared to take the commercial risk of a sub-optimal price outcome.
4. The owner has superior knowledge, skills, preference and capacity to influence or participate in the development and delivery of the project, including for example, in the development of the design solution and construction method.
5. A collective approach to assessing and managing risk will produce a better outcome, for example where the preservation of safety to the public / project is best served through the collaborative process of an alliance.

Alliance policy and guidance material

The policy and guidance material are aimed at departments and agencies undertaking alliancing contracts, but may also be of interest to others in the alliancing industry and general community.

Policy

The Victorian Government policy, which applies to all departments and agencies planning and progressing alliance contracting, has now been published as the National Alliance Contracting: Policy Principles (July 2011).

This document can be found on the Commonwealth Department of Infrastructure and Transport website

This Commonwealth website also provides a number guidance documents.

Guide to alliance contracting

The guide has been prepared to provide consistent guidance on alliance contracting to departments and agencies that develop and own infrastructure projects. It sets out current leading practices for delivering infrastructure projects using alliance contracting.

The National alliance contracting: Policy principles set out the minimum requirements for alliance contracting and the guide provides benchmark practices that will ensure that owners satisfy the principles set out in the policy.

Guidance notes

Guidance notes are provided on various special interest topics to assist departments and agencies in planning and reporting on their alliancing contracts.

The following guidance notes have been published on the Commonwealth website:

• Guidance note 1: Language in alliance contracting
• Guidance note 2: Insurance in alliance contracting
• Guidance note 3: Key risk areas and trade offs
• Guidance note 4: Reporting VFM Outcomes
• Guidance note 5: Developing the TOC in Alliance Contracting

Templates

The templates have been developed to be consistent with the National alliance contracting: Policy principles and the guidance material. They draw on leading practices from Western Australia, Queensland, New South Wales and Victoria.

They reflect the best practice from each state jurisdiction rather than replicate practice from any one jurisdiction. It is intended that the documents will provide project owners with a template which can then be tailored to reflect the nature and requirements of the specific project.

The following templates have been published on the Commonwealth website:

• Template no 1: Project alliance agreement
• Template no 2: Alliance development agreement
• Template no 3: Expression of interest
• Template no 4: Request for proposal

Cautionary note: DTF advises agencies undertaking project alliance contracting to exercise caution if referring to the Alliancing Association of Australasia's Reference Project Alliance Agreement.

Caution is required as a number of clauses in this agreement do not reflect the policy positions approved by the Victorian Government.

Research study

The Treasuries of Western Australia, Queensland, New South Wales and Victoria collaborated and sponsored this national benchmarking study that investigated the value for money (VFM) proposition provided to government through alliancing, and how VFM can be enhanced in the alliance delivery method. Evans & Peck and Melbourne University conducted the study.

In pursuit of additional value - A benchmarking study into alliancing in the Australian public sector (4,457kb PDF)

A presentation of the benchmarking study report was first made at the Alliancing Association of Australasia's (AAA) 2009 convention in Melbourne on 22 October 2009. It provides a useful high level summary.

AAA national conference 2009 benchmarking report presentation (955kb PDF)

Collaboration in contracting models

During 2011, Department of Treasury and Finance was engaged by the Commonwealth Department of Industry and Transport (DoIT) to undertake an extensive national research project on the Design & Construct (D&C) tender strategies used in infrastructure projects and on related issues.

As part of the research effort, over 50 meetings were held with senior practitioners in the delivery of infrastructure and building projects. These individuals came from various sections of the infrastructure industry, including construction, engineering design and legal firms, public sector agencies and a few companies in the mining and process engineering sectors.

Central government departments that are involved in developing state and national level policies and guidelines for public sector practices were also consulted. These meetings were also supplemented by five group sessions with key industry players that workshopped some of the key issues facing traditional procurement.

The results of this research was reported in two publications:

• Towards Agreed Expectations: Tender strategies to improve D&C infrastructure outcomes
• Consultation paper: Developing a national approach: Traditional contracting of infrastructure projects

Towards Agreed Expectations - Tender strategies to improve design and construct infrastructure delivery outcomes (3 MB PDF)

The investigation found three key challenges that must be satisfactorily addressed to deliver an optimal project outcome for both the client and the tenderer. These were:

• people capability: always necessary to achieve optimal outcomes;
• foundation success factors: these are matters that we should aim to get right every time, including such matters as quality tender documentation supporting the client’s requirements, project definition, the tender selection criteria and its application during evaluations, adequate timelines, enabling probity etc (see table 3, chapter 4 of Towards Agreed Expectations); and
• effective collaboration: to enable a full and mature understanding of the client’s 'request for tender' and the contractor’s 'tender response. There was a common view that the presence effective collaboration in the tendering process, irrespective of the contracting model used, would be of substantial benefit to all contracting parties.

In conducting this investigation, a number of opportunities were identified where further work would be of benefit, and which will promote improvements in the productivity of infrastructure delivery through traditional contracting.

These opportunities were the subject of the consultation paper released by DoIT in February 2012. Submissions closed in April 2012. The consultation paper outcomes resulted in the development of the National framework for traditional contracting of infrastructure.

Traditional contracting of infrastructure

The National framework for traditional contracting of infrastructure has been initiated to document best practice to promote productivity improvements in the planning and contracting phase of major projects.

In the context of the framework, traditional contracting refers to those contracts that to varying degrees allocate construction and design risk to the suppliers (but are not alliances or PPPs).

The two primary categories of traditional contracting are:

• Construct only (CO): the design has been undertaken by the client, and the supplier is responsible for constructing the works to the client’s design; and
• Design and construct (D&C): generally a limited design has been undertaken by the client who then invites potential suppliers to tender on the basis of completing the client’s design and constructing to that design.

The research undertaken in 2011 and 2012 resulting in Towards agreed expectations, and the subsequent outcomes of the Consultation Paper, supported the development of a framework with this focus:

• The guide (Good practice and commercial principles);
• Topic specific guide 1: Project definition and tendering;
• Topic specific guide 2: Developing the project budget in business cases;
• Topic specific guide 3: Governance and contract management;
• Topic specific guide 4: Performance and continuous improvement.

This is a best practices framework, providing a resource that individual jurisdictions can use to inform their own policy and guideline development for traditional contracting of infrastructure. (The framework does not address building projects).

The documentation makes explicit statements that where there is a conflict in the guidance of this framework and jurisdictional policies and guidelines, the jurisdiction’s position will take precedence.

The exposure drafts of these documents are now available for consideration and comment. Closing date for comments is 28 June 2013.

The guide: Good practice and commercial principles - Exposure draft (838 KB PDF)
Topic specific guide 1: Project definition and tendering - Exposure draft (1 MB PDF)
Topic specific guide 2: Developing the project budget in business cases - Exposure draft (1015 KB PDF)
Topic specific guide 3: Governance and contract management - Exposure draft (639 KB PDF)
Topic specific guide 4: Performance and continuous improvement - Exposure draft (651 KB PDF)

Once the documentation is finalised, by end September 2013, it will form part of the Commonwealth's Better Practice Framework.

The Inter-Jurisdictional Alliancing Steering Committee

To effectively address the emerging opportunities and issues in alliance contracting, a collaborative inter-jurisdictional approach is being undertaken.

The Inter-Jurisdictional Alliancing Steering Committee was established in 2009 to pursue a number of joint initiatives, including the development of the policies, guidance material, templates and training programs.

The Committee has representatives from the Treasury departments of Western Australia, Queensland, New South Wales, Victoria (the Chair) and the Australian Government (Department of Infrastructure and Transport).

Training

In association with Melbourne University, the Inter-Jurisdictional Alliancing Steering Committee has developed and supports a five day executive program on alliance contracting and the application of the National policy and guidelines. The Commonwealth website will provide details of the next course to be offered.

Additional resources being developed

This page and the Commonwealth website will be progressively updated and expanded as the Inter-Jurisdictional Alliancing Steering Committee works together with agencies and industry to identify and develop further initiatives.

Contacts

Email: projectalliancing@dtf.vic.gov.au

Infrastructure Alliance and Contracting team
Department of Treasury and Finance
1 Treasury Place
Melbourne VIC 3002

Telephone: 03 9651 5111

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