01 May 2013

The standardisation of project alliance agreements: alliancing contracts, past and present

by Sergio Capelli, Chris Slocombe

Project owners now have a choice between two considered and well-drafted forms of project alliance agreement to use as the starting point for their alliance projects.

Alliancing, as a project delivery model, has come a long way since its beginnings in the North Sea Oil & Gas industry, and its subsequent uptake in Australia in the mid-1990s. Now, almost 20 years after the Wandoo Alliance – Australia's first alliance project – alliancing has created for itself a place in the project delivery model armoury of most procurers of significant works, both public and (to a lesser extent) private. Between 2004 and 2009, the total value of alliance projects in the road, rail and water sectors in New South Wales, Victoria, Queensland and Western Australia was $32 billion.[1] This represented 29% of the total infrastructure spend of $110 billion in the same sectors across the whole of Australia.[2]

Historically, most project alliance agreements (PAAs) have been bespoke instruments, or have at least (in later years) been based upon documents which were originally bespoke instruments. In his 2007 article, [3] Ian Briggs spoke of the possibility of an Australian Standard form PAA, and that a number of government agencies were moving to standardise their own PAAs.

In its 2009 research study, [4] an Inter-Jurisdictional Alliancing Steering Committee (IJASC)[5] made a rallying call for the production of a standard PAA:

"The range of the PAAs in use in Australia is neither efficient nor effective for government or industry. An alliance is a complex commercial transaction. Now that alliancing is a mature delivery method, there is a need for government to establish a standard form of contract that is robust, tested and clearly understood by all parties. This would improve legal certainty and transaction efficiency for government and NOPs."

No form of alliance agreement has yet been produced by Standards Australia, but interestingly the call of the IJASC for standardisation was answered in 2010… twice, with the release of two standard form PAAs:

  • the Project Alliance Agreement published by the Victorian Department of Treasury & Finance (the Victorian Model PAA); and
  • the Alliance Association of Australasia Reference Model PAA (the AAA Model PAA).

The Victorian Model PAA was subsequently adopted by the Commonwealth Department of Infrastructure and Transport as the "National Alliance Contracting Guidelines Template PAA" (referred to herein as the NACG PAA).

Key differences between the forms

While the two PAAs look and feel in many respects like PAAs of the past, a more detailed examination of the two forms reveals significant differences in their approach to certain key principles of alliance contracting.

Probably the most significant difference between the two PAAs is the role that the "Project Owner" plays in each PAA. While both PAAs create the customary distinction between the Project Owner in its capacity as "client", and its capacity as participant in the alliance, the NACG PAA empowers the Project Owner to unilaterally determine:

  • the impact of its exercise of so-called "reserved powers" on the target outturn cost (TOC), key result areas (KRAs) and date for practical completion, when these impacts cannot be agreed at Alliance Leadership Team (ALT) level; and
  • the adjustments to be made to the TOC, KRAs and date for practical completion following the occurrence of an adjustment event.

In contrast the AAA PAA adopts a more traditional alliance approach – empowering the ALT to determine the commercial consequences of the exercise of reserved powers and the occurrence of adjustment events.

A further, perhaps less obvious (but equally significant) difference, is the ability of the Project Owner to act in its own interests, without reference to the participants' commitments set out in the alliance charter and the alliance objectives, and the general obligation of good faith imposed upon participants (together referred to as the Alliance Commitments). The AAA PAA makes the customary exclusion to the operation of the Alliance Commitments when the Project Owner is exercising one of a limited number of reserved powers. The NACG PAA goes much further, allowing the Project Owner to ignore the Alliance Commitments wherever it exercises a right or undertakes an obligation in this capacity (as opposed to its other capacity as "Owner Participant" – being a participant in the alliance).

Additionally the NACG PAA contains the following provisions which might be considered unusual in a PAA:

  • an entitlement of the Project Owner to suspend the works indefinitely if it considers it likely that the project will be too late or too costly;
  • a requirement for the provision of bank guarantees and parent company guarantees by the NOPs; and
  • an entitlement of the Project Owner to treat losses incurred with respect to delays in the work reaching practical completion as reimbursable costs for the purpose of calculating the actual outturn cost (with a corresponding reduction in the NOPs' entitlement to gainshare, or an increase in the NOPs' liability to painshare).

Context

While these differences are significant, they may be explained by the context in which each PAA was produced.

The publication of the National Alliance Contracting Guidelines followed the 2009 research study commissioned by the State treasuries of Victoria, New South Wales, Queensland and Western Australia, [6] and the findings of that study may not have been well-received by the State treasuries. One of the key findings was that, on average, alliance projects experienced an increase from business case cost estimate to actual outturn cost in the order of 45-55%.[7] While many factors may have contributed to this statistic, perhaps in response to this finding the National Alliance Contracting Policy Principles Guide, and the NACG PAA, appear to be heavily influenced by a desire for the Project Owner to ultimately have greater control over the commercial outcomes of the alliance.

In contrast to the public-policy influenced NACG PAA, the AAA PAA was drafted by a committee of lawyers and alliance advisors experienced in preparing and negotiating PAAs. The cover page of the AAA PAA states that the document aims to represent "a common approach amongst AAA members to the core features and principles of a project alliance agreement".

Conclusions

It is too early to assess the degree of uptake of either of the two PAAs, and their relative levels of success (or otherwise) in delivering projects procured under this project delivery model. This is particularly the case given the current slowdown in the construction industry. Notwithstanding this, the standardisation of PAAs represents a positive step towards the continued growth in the use of project alliances as a project delivery model in Australia.

While the two PAAs differ in key aspects – most notably the level of control granted to the Project Owner under the NACG PAA – project owners now have a choice between two considered and well-drafted forms of PAA to use as the starting point for their alliance projects.

 

This article was first published in the Infrastructure Association of Queensland Yearbook 2013



[1] "In Pursuit of Additional Value – A benchmarking study into alliancing in the Australian Public Sector", Victorian Department of Treasury and Finance 2009 at 8. [back]

[2] Ibid at 9. [back]

[3] "Alliancing: Reshaping Infrastructure Delivery in Australia" [2007] AMPLA Yearbook 69. [back]

[4] n 1 at 86. [back]

[5] with membership from the Department of Treasury and Finance of Victoria, Treasury New South Wales, Treasury Queensland, the Department of Treasury and Finance, Western Australia, and the Commonwealth Department of Infrastructure and Transport. [back]

[6] n 1. [back]

[7] n 1 at xi. [back]

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.