The highways sector faces significant challenges in delivering the next generation of roads, many of which are common across the wider construction sector. These include a perceived lack of innovation, contractors toiling against low margins and poor cashflow, and a skills shortage which may become more acute following Brexit.
Against this backdrop, Highways England (HE) announced this summer that it intends to procure its smart motorways programme over the next decade via an alliance contracting (or 'alliancing') model. HE aims to stimulate a ‘different level of thinking' than it is currently seeing using more traditional contracting models. While this has been described as a dramatic shift, it is arguably precisely what is needed to address the challenges outlined above.
Our recent report, Perspectives on infrastructure: Delivering the Industrial Strategy, found that 51% of industry respondents disagreed or strongly disagreed with the statement that supply chains collaborate effectively to deliver infrastructure projects on time. NEC has also recently published its own form of alliancing contract for the first time, presumably in response to market demand. Therefore, the time appears ripe for exploring whether the collaborative arrangements promoted by alliancing contracts are worthy of more widespread adoption in the highways sector.
What is alliance contracting?
Alliance contracting is an alternative approach to contracting, sometimes misleadingly referred to as ‘partnering’ or ‘collaborative contracting’. Alliance contracting places a greater emphasis on collaboration and risk / reward sharing than traditional contracting models. There are broadly three main contrasts between alliancing contracts and 'traditional' contracts:
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Issue
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‘Traditional’ contracts
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Alliance contracting
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Duration
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Traditional contracting focuses on individual schemes and will feature distinct contracts between the employer and each contractor / consultant for each project.
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Alliancing more typically focuses on long-term programmes where there is scope for improving performance, with each key ‘alliance member’ signed-up to 'the deal'.
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Allocation of risk
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Each party has its own obligations and (on the contractor / consultant side) limited interest in the overall success of the project being delivered.
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The parties to an alliancing contract will share the risk and reward for the success of the project as a whole.
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Claims
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If either party to a traditional contract makes a loss, they may look to recover that through a claim against the other party.
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Under true alliancing, no party to the alliancing contract is liable to another, save in exceptional circumstances (e.g. fraud and wilful default).
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What are the benefits of alliance contracting?
So how might these contrasts help address the challenges facing the highways sector? Below we have selected two examples where alliancing offers up potential solutions.
Prohibition on claims and long-term collaboration to stimulate innovation?
The prohibition on inter-party claims in true alliancing contracts in all but the most egregious of situations potentially provides significant upside by affording the parties the flexibility to innovate and respond to evolving challenges. There is, for example, no incentive for ‘alliance members’ to act defensively to mitigate the looming prospect of a future claim and, when one party faces an issue, all ‘alliance members’ are motivated to find a solution. This, coupled with the opportunity for alliance parties to deliver continuous improvement over a long-term programme, appears ideal given that the precise nature of road use in the coming decades is uncertain and may well need to be significantly different to today’s transport landscape (e.g. given the expected growth of electric and autonomous vehicles).
However, this perceived benefit has to be balanced against the potential drawbacks to this approach. For example, careful thought will likely need to be given to what insurance products may be available to ensure that an employer has the means to recover or offset losses it may incur in the event that there is a failure of one or more party to deliver the desired results.
Remuneration model to alleviate cashflow concerns?
Interim payments to suppliers under alliancing contracts are typically paid at regular intervals on a cost reimbursable basis against a pre-agreed cashflow (often with a partial allowance for overheads and profit). This gives suppliers a greater degree of certainty as to what and when they will be paid compared to many ‘traditional’ contracts and should enable them to pay their supply chain promptly. Such interim payments would likely be subject to adjustments, upwards or downwards, to reflect the success or otherwise of each project or series of projects being delivered under the contract. However, the impact of any potential "pain share" that may be applied to such payments will be alleviated by the fact that this is being shared across all ‘alliance members’ and not just falling onto one party. In addition, suppliers are likely to have input into what the metrics for determining allocation of “pain / gain share" are, so should know from the outset what is required from them (and other partners) to ensure the returns they require.
While this is undoubtedly a benefit to alliancing, particularly in a post-Carillion environment, it requires significant upfront work from the employer and their advisers to ensure that the success measures and payment mechanism are properly established at the outset in such a way as to truly incentivise suppliers. Another potential drawback is that alliancing does not deliver the level of 'day one' cost certainty that centrally funded highways projects will often require, even if they may still deliver better value for money overall.
Can alliance contracting benefit the highways sector?
The highways sector sits at a crossroads when considering how to develop future infrastructure. The UK has a pressing need to update its road infrastructure, but this must be done in a manner which obtains best value for money. PF2 has been proposed as one solution, but questions about it persist. Therefore, a radical departure from traditional contracting methods may be merited. This is certainly something which alliance contracting is capable of providing so it will be interesting to see whether its use on schemes such as HE's smart motorways programme paves the way for more widespread adoption within the highways sector and perhaps on major infrastructure projects more generally.