Construction and infrastructure sectors see uptick in alliance contracting

Alliance contracting – akin to the integrated project delivery or progressive design-build infrastructure delivery models – involves a single contract between the project owner/financier/commissioner and an alliance of parties who deliver the project or service.

Lawyers who practise in the construction and infrastructure sectors say they have seen an uptick in alliance contracting, which is best suited to projects with considerable and ascertainable risks, and where multiple owners may be involved.

In this model, the alliance of parties who deliver the project assume less of the risk, and the contracts can include provisions intended to ensure there are no disputes.

Alliance contracting has been used in the United Kingdom and in particular in Australia, though it is still “very new to the Canadian marketplace,” says Doug Younger, chair of the Infrastructure Group at Aird & Berlis LLP in Toronto, adding that Union Station is currently the only project in Canada using it.

“Union Station is an old building; it's been there for many decades” and is owned by the city of Toronto and province of Ontario, Younger says. “You’ve got a complex ownership structure, and it would be very difficult to do a P3 [public-private partnership] bid and ask proponents to shoulder a whole lot of permitting risk, environmental risk, geotechnical risk, and so on. That's why I think that project wound up using an alliance.”

There is much overlap between integrated project delivery (IPD), progressive design-build, the construction manager/general contractor (CMGC) model in the U.S. and alliance contracting, Younger says, but “the essence of them is that they involve greater collaboration between the owner of the project – typically a government agency – and the design-builder in the early phases of the project; and, a greater amount of risk-sharing than you would see on a P3 project.”

A project such as Union Station’s restoration lends itself less well to a traditional P3 model, he notes, because in that model governments typically establish value for money, or price, and attach it to the various elements of risk.

In the early stages of a P3 project “you can sit in a room, as a lawyer or financial adviser or a technical adviser, … and work on what's called a risk register, [which] will itemize potentially hundreds of different risks and try and put a rough dollar value to those risks. Then you can refine that as the procurement moves forward, and at the end of the day the financial advisors will do their value-for-money analysis. If the project is a good one, they'll determine that the value for money using a P3 model rather than a [conventional] design-bid-build model is less.”

This is because the private-sector party is being asked to shoulder “a huge amount of the project risk” in the P3 model, he says.

But for a project such as the Union Station restoration, “it's not easy during the procurement phase to ask proponents to go in and do their own due diligence; with an existing structure that's been around for a long time they can't open up the walls [or] floors.” So, if proponents are asked to bid a fixed price on such a project “they would likely build a massive contingency fee in to cover the risks of all of the unknowns,” including environmental and geotech issues, which would likely make the price unpalatable to the owner, says Younger.

“That in turn leads to the owner saying, ‘Okay, how else can I do this procurement so I'm sharing the risk?’ And that's how Union Station came up with the alliance [model].”

The alliance contract “is a trend,” says Sharon Vogel of Singleton Urquhart Reynolds Vogel LLP in Toronto. In the late ‘90s P3 contracts were the flavour of the month, she says, but in the past couple of years parties have considered where the P3 model is working and whether it needs adjustments, including in relation to dispute resolution, she says.

“Parties have looked to the alliance model as a potential alternative for larger infrastructure projects.”

However, Vogel notes, “in Australia the experience hasn’t been entirely positive.” There have been some projects that have not gone well, she says, including for a briquette factory that suffered “a huge loss” on the project.

“No model is a panacea.”