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Optimising Project Outcomes

Australian Constructors Association

Relationship Contracting

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1999

1.0 Executive Summary

2.0 Need for Change

2.1 Client Survey

2.1.1 Feedback on Issues Raised2.1.2 Feedback on the Way Forward

3.0 Management of Risks

3.1 Traditional Risk Transfer

3.2 Risk Embrace Approach

4.0 Relationship Contracting: Defined

4.1 Core Values/Guiding Principles

4.2 Key Features

4.3 Suitability Matrix - Project DeliverySystems

5.0 Relationship Contracting: The Benefits

6.0 Relationship Contracting:The Fundamentals

6.1 Alignment of Goals

6.2 Risk Allocation

6.3 Clearly Defined Project Scope

6.4 Form of Contract

6.5 Integrated Project Team

6.6 Gainshare/Painshare

6.7 Open Honest Communications/Behaviour/Change of Attitude

6.8 Public Sector Issues

6.9 Facilitators

6.10 Legal Advisers

6.11 Third Party Advisers

7.0 Relationship Contracting: Practices and Techniques

7.1 Contractor Actions

7.1.1 Trust and Openness in Dealings7.1.2 Appropriate Behaviour7.1.3 Sub-Contractors and Suppliers7.1.4 Techniques:- Planning/The Project Plan- Controls Engineering- Design Coordination/Integration- Value Engineering/Workshopping- Completion Engineering- Project Alignment Group- Monthly Reports- Innovation- Project Review/Audit- Key Success Factors and Performance

Indicators- Stretch Targets

7.2 Client Actions

7.2.1 Pre-qualification of Contractors7.2.2 Improved Project Scope Definition7.2.3 Terms Sheet of Fundamental

Issues in the Contract7.2.4 Risk Allocation7.2.5 Forms of Contract7.2.6 Acceptable Contract Rewards7.2.7 Contract Documentation7.2.8 Trust and Openness in Dealings7.2.9 Appropriate Behaviour 7.2.10 Summary Table

8.0 Case Studies

8.1 Wandoo B Development, WA

8.2 East Spar Development, WA

8.3 Boyne Smelter Expansion, Qld


Contents

Copyright © 1999 Australian Constructors Association

“The Australian Constructors Association through its member companies has endorsed theprinciples and practices detailed in this publication. ACA believes that relationship contractingoffers clients and contractors a framework through which project outcomes can be improved tothe benefit of all stakeholders. We look forward to working with the industry’s major clients togive effect to these principles and practices”.

Wal King AMPresident, Australian Constructors Association (ACA)


“The principles underlyingrelationship contracting aregenerally consistent withthose underpinning the wayDefence does business,both now and into thefuture. Our contract documentationis presently being refined tomore clearly reflect this. I strongly support the ACAinitiative”.

R W CoreyHead Defence EstateDepartment of Defence

“Today there are manydifferent approaches thatare applied to projectstructures andorganisations; from thetraditional lump sum to“partnering” arrangementsbetween the constructorand client.No matter which structure isadopted, fundamentalissues such as project scopeand deliverables must beagreed. However for aproject to be trulysuccessful, the quality of thepeople and strength of therelationship is the key tosuccess. Developing mutualrespect and trust, thatenables transparency andinformation sharing is thefoundation for a successfuloutcome”.

H M MorganManaging DirectorWMC Resources Ltd

“For truly successfulcompanies, the traditionalmaster-servant relationshipof project owner and projectcontractor is becomingobsolete. We have learntthat by sharing the risks, weshare the rewards. Bygetting the fundamentalsright, and the client-contractor relationship is themost fundamental of all, wetap the combinedknowledge, expertise, andinventiveness of the whole:but this has to be anchoredin the highest levels ofprofessionalism. The ACA’sinitiative is a commendablestep towards betterbusiness outcomes”.

J AkehurstManaging DirectorWoodside Petroleum Ltd

Relationship contracting is a flexible approach to establish and manage relationships between clients and contractors and to implement proven practices and techniques to optimiseproject outcomes.

“The quality of themanagement ofrelationships betweenclients and contractors isparamount to projectoutcomes that are worldclass and that enhancevalue for all thestakeholders. I endorse thisvery significant initiative bythe Australian ConstructorsAssociation”.

R J McNeillyExecutive Director andPresident, BHP Minerals

The Australian Constructors Association (ACA) isa national organisation formed in 1994 torepresent major contractors. The ACA Boardmembers are the chief executives of each of itseighteen member companies. ACA membercompanies have a combined annual turnover of $15 billion, employ 49,000 people andaccount for around 30% of construction activityin Australia.

ACA is dedicated to making the constructionindustry more efficient, competitive and better able to contribute to the development of Australia, through positive leadership, open communication, and a commitment to infrastructure.

Industry Survey ConductedA key objective of ACA is to improve theindustry’s commercial and contractual practiceswith the goal of optimising project outcomes forclients and contractors.

In 1998, the ACA undertook a survey of theindustry’s major private and public sector clientsthrough a programme of interviews with theirchief/senior executives to understand their:

• experience of contractors;

• expectations of contractors; and

• views on how project outcomes could be improved.

The ACA survey findings, with respect to clients’ experience and expectations ofcontractors, included:

• project outcomes were sub-optimum on toomany projects;

• clients continue to utilise traditional deliverysystems which they acknowledge haveshortcomings and that often lead toadversarial relationships and overruns in costand time; and

• clients believe the following factors contributeto successful project outcomes:- clear project goals,- clear definition and understanding of the

project scope,- clear understanding and appropriate

allocation of risks,- agreed risk/reward arrangement,- appropriately skilled project staff, and- well defined communications through all

levels of the contracting parties with properempowerment for decision making.

The ACA survey also sought clients’ views on the way forward, towards the development of what we have termed relationshipcontracting, utilising delivery strategies based on closer alignment of client and contractorgoals and a better understanding of risk sharing- a win-win outcome.

Relationship ContractingRelationship contracting is based on achievingsuccessful project outcomes, which include:

• completion within cost;

• completion on time;

• strong people relationships between theparties resulting from mutual trust and co-operation, open and honest communicationand free sharing of information;

• optimum project life cycle cost;

• achieving optimum standards, duringexecution and in service for safety, quality,industrial relations, environment, andcommunity relations.

We have defined relationship contracting as a process to establish and manage therelationships between the parties that aims to: remove barriers; encourage maximum contribution; and allow all parties to achieve success.


ACA believes that successfulrelationshipcontracting is based on common sense, open mindedness,adaptability,inventiveness,prudent risk-taking,fairness andcommitment.

1.0 Executive SummaryACA believes that relationship contracting is the way forward for theAustralian construction industry. This publication discusses the needfor change and outlines proven practices and techniques to optimiseproject outcomes.

ACA believes that:

• successful relationship contracting is based oncommonsense, open mindedness,adaptability, inventiveness, prudent risk-taking,fairness, commitment, and the reflection ofthese values in behaviour by the contractingparties; and

• proven delivery strategies and techniquesexist which optimise project outcomes anddeliver optimum commercial benefits to allparties involved.

It is important to note that these proposalsapply principally to major projects and are based on the views of clients associated withmajor projects.

Key Messages IdentifiedA number of key messages emerge from our work.

• Clients and contractors are best served when the delivery strategy utilised suits theproject requirements.

• Many clients still utilise project deliverysystems structured to alter the allocation ofrisk and neglect the opportunities to be gainedthrough improving the relationship betweenthe contracting parties.

• For larger projects, where there are manyunknowns and uncertainties, the client canbetter manage its risks through a morecooperative approach where the risk isembraced rather than transferred.

• Where an examination of the risk allocationindicates that a risk embrace approach will bemore suitable, relationship contracting offersthe parties a variety of techniques to ensurethat the goals of the client and contractor areclosely aligned within a gainsharing/painsharing framework that balances risk andreward and focuses both parties on anoptimum project outcome.

• Relationship contracting requires the parties tobecome result focused and willing tochallenge conventional standards. The focus ison a cooperative endeavour to improve projectoutcomes rather than establishing a legalregime to penalise non-conformance.

In the latter parts of this publication, we haveset out some of the fundamentals ofrelationship contracting and discuss thepractices, processes and techniques to guideclients and contractors.

We have included case studies of projectswhere the contracting parties utilised thepractices and techniques of relationshipcontracting, resulting in very successful project outcomes.

It is ACA’s view that a commitment by clientsand contractors to work towards relationshipcontracting will result in a more efficient andeffective Australian construction industry, and that the factors that result in a successfulproject should be understood and adopted as a benchmark.

The Way ForwardACA’s key objectives are to promote anddevelop with their clients contractualrelationships and project delivery systems which will:

• raise the standard of contract arrangementstowards the development of a more efficient,equitable and globally competitive industry;and

• foster the development of relationshipcontracting within a competitively robustindustry;

thereby delivering projects with significant priceadvantages and efficiencies, both in capital andoperating cost terms, and other successfulproject outcomes for clients and contractors.

1.0 Executive Summary

The contractor andclient must be resultfocused and willing to challengeconventionalstandards.

Relationshipcontractingincorporates provendelivery strategiesand techniques whichoptimise projectoutcomes and deliver optimumcommercial benefits to all parties involved.

2.1 The Client SurveyACA appointed Flagstaff Consulting Group PtyLtd to undertake a survey of the industry’smajor clients through a programme of face-to-face interviews with chief/senior executives.

Sector No. Interviewed

Mining & Resources 8

Building Owners & Developers 3

Government Organisations 8

Industrials 4

Utilities Groups 4

Major Retailers 2

Airports/Airlines 3

Banks 2

Total 34

2.1.1 Feedback on Issues Raised The following comments are consideredrepresentative of the input from clients.

• All parties agreed that shortcomings, someserious, existed in contractual relationshipsbetween clients and contractors and thesehad a negative effect on project outcomes.

• Many existing contractual relationships,particularly traditional forms, lead to adversarialbehaviour between parties which has anegative effect on project outcomes.

• The majority of interviewees agreed with thepoint that the keys to a successful project are:- clarity of definition and understanding of the

project scope;- a clear understanding of the risks in the

project and an appropriate allocation of theresponsibility for managing those risks;

- a gain/pain sharing arrangement wherebythe contractor risks his profit and headoffice overheads in return for an increase inhis project return for achieving a superiorproject outcome for the client; and

- clear and well defined communicationsthrough all levels of the contracting parties,with proper empowerment for decisionmaking at all levels of the organisations.

There was a wide range of views as to thedegree of risk that the contracting party shouldbe asked to manage, even though clientsgenerally understand the excessive costs ofinappropriate risk allocation.

• Most clients are prepared to consider forms ofrisk sharing/gain (loss) sharing if it can bedemonstrated that such a system will benefitthe project outcomes. However, in someinstances, there is a degree of cynicism thatneeds to be overcome before “alliancing” orother forms of “relationship contracting” willbe entertained by certain clients.

• Many of the interviewees expressed the viewthat, if there is to be a progression towards“relationship contracting”, there are a numberof shortcomings that the contractors need toaddress. These include:- the contractor’s project staff being required

to be fully responsible for all aspects oftheir project and, in particular, for theperformance of their many subcontractors;

- the contractor’s project staff, particularly theproject manager, be appropriate for“relationship contracting” as distinct from“hard dollar contracting”; and

- the contracting company needs to acceptresponsibility for the selection, training andperformance monitoring of its staff.

Most clients also acknowledge that these sameshortcomings apply to the client’s project staffand need to be addressed similarly.


Many existingcontractualrelationships,particularlytraditional forms lead to adversarialbehaviour betweenparties and this has a negative effect onproject outcomes.

2.0 Need for ChangeThe Australian construction industry has a history of adversarialbehaviour, that has delivered sub-optimum results to clients andcontractors. ACA is committed to improving commercial and contract relationships to deliver maximum benefits to all parties.

2.1.2 Feedback on the Way ForwardThe comments below apply principally to majorprojects and come from clients associated withmajor projects.

• The majority of clients are supportive of theconcept that, prior to detailed documentation,clients and their short-listed tenderers meetand, as a result of these meetings, thefollowing documents would be prepared bythe clients:- a Terms Sheet which sets out in plain

English the respective obligations of eachparty to the fundamental issues in thecontract. (The issues are listed in Section7.2.3); and

- a Risk Allocation Matrix in which all risksenvisaged in the contract are identified andthe responsibility for managing these risksis allocated.

It was generally agreed that this approachshould add an additional degree ofcommercialisation to the project outcomes, adegree missing when documents areprepared by clients and their advisers withoutreference to the construction industry.

In the interviews, there were a number ofvarying approaches taken but the abovecomments are representative of thediscussions.

• Clients generally agreed that they shoulddevote more resources to improving theirdefinition of the Scope of the Contract.

• With the outcomes of the Terms Sheet andRisk Allocation Matrix, the contractdocumentation can be produced which resultsin superior project outcomes and a reductionin adversarial behaviour of the parties.

• Clients were, generally, open minded as to the form the contract could take, such astraditional, some form of relationshipcontracting or another form. They do see that prior to entering into some form ofrelationship contracting both parties will needto commit resources to ensure the chemistryof the contracting parties is compatible andappropriate for the contract form and scope.

• Clients, in general, are supportive of sharingrisks and rewards/losses. However, someremain cynical about the contractors’willingness to share in any losses.Contractors tend to become adversarial insuch circumstances.

Relationship contracting focuses on findingsolutions to problems, rather than adversityand litigation.

2.0 Need for Change

Relationshipcontracting focuseson finding solutionsto problems, ratherthan adversity andlitigation.

Most clients areprepared to consider forms of risk sharing/gain(loss) sharing if this can be seen and demonstrated to benefit the project outcomes.

3.1 Traditional Risk TransferAll major projects involve inherent risks. At theonset of the project these risks are “owned”and managed by the client.

The traditional risk management strategyadopted by clients has been to transfer as muchof this risk as possible to others. This approachis typically evidenced by lump sum, schedule ofrates and turnkey projects. It is a strategy thathas served clients well for many years, althoughit is not always the most appropriate strategy.

Clients often try to transfer risks to designersand contractors that are more within the controlof the client. This strategy is often pursued onthe assumption that the extremely competitivenature of the Australian construction market willallow these risks to be transferred withoutpaying any premium. However, this strategyoften fails, creating an adversarial climate, a highlevel of commercial disputation, time and costoverruns and overall poor performance.

Poorly defined objectives, inadequatedocumentation, inadequate time and costplanning, unreasonable risk allocation andinadequate project staff contribute to the failureof these strategies.

Faced with a risk transfer strategy, it is often notin the contractor’s interest to be flexible.However, given the adversarial nature ofrelationships, it may be in the contractor’sinterest to allow a problem to unfold rather thanto deal with it positively. At its worst, thecontractor’s interests may be best served bypursuing strategies aimed at increasing theoverall cost to the client.

Contracts fail if clients attempt to transfer allproject risk to the contractor, or if the contractorseeks higher returns without accepting a greaterproportion of project risk.


Poorly definedobjectives,inadequate time andcost planning,unreasonable riskallocation andinadequate projectpersonnel contributeto the failure oftraditional risktransfer strategies.

3.0 Management of RisksTraditional risk transfer strategies often fail, due to poor riskallocation. Relationship contracting provides the approach whereby the various project risks are allocated to the party best suited to manage them.

3.0 Management of Risks

In certaincircumstances theowner can bettermanage its risks byembracing them,(rather than trying to transfer them) and then managingthem within a flexible projectdelivery environment.

3.2 Risk Embrace ApproachThe fundamental rationale for the client to utiliserelationship contracting is that, in certaincircumstances, the owner can better manage itsrisks by embracing them (rather than trying totransfer them) and then managing them within aflexible project delivery environment.

This requires a clear understanding of theprinciples of risk management within a projectenvironment. A properly informed client will beable to recognise whether the circumstancessuit a risk transfer or a risk embrace approach.

Diagram 1: Risk Embrace Strategy

Very suitable

Diagram 1

Hard $ Strategy

Risk EmbraceStrategy

Risk Embrace Strategy

Not suitable

Fixed scopefully documented

Fast-trackmany unknowns

Suitability

Project Scope/Particulars

4.1 Core Values/Guiding PrinciplesThe relationship between client and contractorcannot be taken for granted. Even where theparties have established a close businessrelationship on previous projects, it is stillimportant to build the relationship for eachspecific project.

The relationship must be founded on a set of strong, mutually held core values and guiding principles.

Core Values Guiding Principles

Commitment Total commitment to achievement of the project goals - actively promoted by the chief executives of all parties

Trust To work together in a spirit of good faith, openness, cooperation and no blame

Respect The interests of the project take priority over the interests of any of the parties

Innovation To couple breakthrough thinking with intelligent risk taking to achieve exceptionally good project outcomes

Fairness To integrate staff from all parties on a ‘best for job’ basis

Enthusiasm To engender enthusiasm for professional duties and the project’s social activities

The relationship is supported by a contractualarrangement formalising the risk-sharingarrangements. This relationship is founded onthe principle that there is a mutual benefit to theclient and the contractor to deliver the project atthe lowest cost - when costs increase both thecontractor and the client are worse off.

Ahead of all other considerations, successfulrelationship contracting is driven by strongpeople relationships.

4.2 Key FeaturesThis publication contains three case studies ofsuccessful projects utilising some of thefundamentals, practices and techniques ofrelationship contracting.

In some of these cases the delivery strategywas formalised as a project alliance. The keyfeatures of this arrangement were:

• a focus on project results founded on successful business outcomes for all parties including rewards for exceptionalperformance;

• innovative contractual arrangements;

• access to and contribution by the bestresources of each participant with anemphasis on working together efficiently;

• a clear understanding of individual andcollective responsibilities;

• the success of the project was measuredagainst key performance indicators;

• an emphasis on openness and cooperationbetween the parties; and

• an equitable risk/reward balance that alignedthe commercial interests of the parties.

A number of models have been used to supportrelationship contracting, using either a single ormultiple contract arrangement.

Each of these models has at its core anagreement for relationship contracting. Thisestablishes the delivery vehicle, sets out theobjectives of the parties, establishes thecommercial arrangements between the parties,and the organisation structure and decision-making processes.

The agreement should be flexible enough toaccommodate the entry of additional participantswhere it benefits the project to do so.

The commercial risk/reward arrangements canbe established in a variety of ways to suit the


Relationshipcontracting isfounded on theprinciple that there is a mutual benefit to the client and the contractor todeliver the project atthe lowest cost -when costs increaseboth the contractorand the client are worse off.

4.0 Relationship Contracting:Defined

Relationship contracting is not based on altruism - it is established as a business relationship designed to deliver optimum commercialbenefits to all parties involved.

needs of the project. Typically the commercialoutcome for the various parties will be linked tothe achievement (or non-achievement) of keyobjectives such as:

• capital cost;

• delivery schedule;

• operating costs;

• life cycle costs;

• environmental performance; and

• occupational health and safety.

The commercial risks should be commensuratewith the potential rewards, the degree ofinfluence which a party exerts over the

outcome and the extent to which the party has taken ownership of the agreed target. The primary driver of these type of relationshipsis the appropriate sharing of cost under-runs or over-runs.

4.3 Suitability Matrix - ProjectDelivery SystemsClients and contractors are best served whenthe project delivery system best suits theproject requirements.

An example of a suitability matrix for evaluatingand selecting the appropriate project deliverysystem is illustrated in Diagrams 2 and 3.


Diagram 2: Suitability Matrix - Project Delivery Systems (Worked Example)

1 Is early delivery of project of valueto owner?

2 Nature of work - green field versus brown field?

3 Technology - proven or radical?

4 Risk culture of owner?

5 Tight guaranteed maximum price (GMP)essential for project sanction?

6 Industrial relations environment?

7 Proven relationship contracting recordwith potential engineering contractors?

8 Sensitivity to disruption fromaboriginal/heritage/environmental issues?

9 Owner’s understanding/experienceof project delivery process?

10 Will construction require single(multi-discipline) or many contractors?

Weight

20%

15%

10%

10%

10%

10%

8%

7%

5%

5%

No value at all

Total green field site

Well proven stable technology(will not evolve during project)

Totally risk averse - risktransfer culture

Tight GMP essential

Very low risk

No track record or bad trackrecord

Very low risk

Little experience

Will require many differentcontractors

1 2 3 4 5 6 7 8 9 10

0.20

0.25

0.49

0.70

0.70

1.20

0.80

0.64

0.90

1.80 Of great value

Many critical interfaces withexisting operating facilities

New and/or evolvingtechnology

Strategic management of risk -sophisticated view of risk

Owner flexible within range

Very high risk

Good track record

Very high risk

Very experienced

Could be constructed by onecontractor

Drop-down totals - - - 0.20 0.25 - 1.89 2.702.64 = 7.68 (Refer Diagram 3)

Suitability Matrix - Project Delivery Systems Diagram 2

Low rating High rating

100% -

Diagram 3: Selection - Project Delivery Systems


Clients andcontractors are best served when the project deliverysystem best suits the projectrequirements.

Selection – Project Delivery System

Relationship ContractingFundamental practices and techniques areapplicable on all delivery systems

3-7 Select - Project Management - Engineer Procure and Construct - Novated Design and Construct - Design and Construct - Document and Construct - Construction Management

< 3 Select Hard $ Strategy - Traditional Lump Sum

* Note: These project delivery systems are described in more detail in diagram 4.

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Use

>7 Select - Build Own Operate - Build Own Operate Transfer - Alliancing - Managing Contractor - Partnering

Example from Diagram 2

Diagram 3

7

3

0

10

9

8

6

5

4

2

1

Total from

Diagram 2 Suitability Matrix Project Delivery Systems*


Involving the keyparties very early inthe project’s life willmaximise the veryhigh potential foreffecting optimumproject outcomes.

Selection – Project Delivery System

Relationship ContractingFundamental practices and techniques areapplicable on all delivery systems

3-7 Select - Project Management - Engineer Procure and Construct - Novated Design and Construct - Design and Construct - Document and Construct - Construction Management

< 3 Select Hard $ Strategy - Traditional Lump Sum

* Note: These project delivery systems are described in more detail in diagram 4.

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Use

>7 Select - Build Own Operate - Build Own Operate Transfer - Alliancing - Managing Contractor - Partnering

Example from Diagram 2

Diagram 3

7

3

0

10

9

8

6

5

4

2

1

Total from

Diagram 2 Suitability Matrix Project Delivery Systems*

Diagram 4: Alternative Project Delivery Systems

Inception,Feasibility andQualification

ProjectDefinition

ConceptDevelopment

DesignDevelopment Documentation Procurement Construction Commissioning Operation

AlternativeDeliverySystems

ProjectManagement

Design &Construction

ManagingContractor

Document &Construction

ConstructionManagement

TraditionalContract

Alliance Contracting

ProjectPhases

Build, Own,Operatre, Transfer

Key Client Activities With/WithoutD&C Adviser or Consultants

SubmissionPhases

Tender, Negotiationand Award

Contract Design/Construction Phases

Alternative Project Delivery Systems

Diagram 5 illustrates the benefit of involving allkey parties at the initiating stage of the project,because it is during this stage that the ability toinfluence the final cost of the project is thegreatest. Diagram 4 shows the project deliverysystems (eg Alliancing, Project Management,Design and Construction) which facilitate theearly appointment of the key parties.

The ‘ability to influence performance/results’ (ie to reduce the overall project cost, or build inadditional value, or similar) is highest at the veryearly conceptual stage of the project. It is stillvery significant in the design stages of projects,but by the time construction gets under way,the ability to influence cost has becomecomparatively low.

At the same time, the “cost to change” anyaspect of the project is low at the early stages,but increases rapidly in the final stages.Therefore, it pays to fully examine allalternatives and factors which may be subject tochange early in a project process.

Relationship contracting allows the cost ofchange curve to be flattened by aligning boththe client and contractor to the objective ofminimising cost. The curve is many timessteeper in a traditional adversarial type contract.


Relationshipcontracting facilitates the ‘ability to influenceperformance/results’(ie to reduce theoverall project cost,or build in additionalvalue is greatest atthe conceptual andearly design stages of the project).

Initiation & Concept

Design

Construction

Completion

Project Cost Reduction Opportunity

Ability to InfluencePerformance/Results

Cost to Change

Time

Diagram 5Diagram 5: Project Cost Reduction Opportunity

(Traditional contract delivery system)

The benefits offered by relationship contractingto clients and contractors include:

• Time- certainty of project time- reduced project delivery time

• Cost- optimum project life cycle cost- reduced capital expenditure costs- acceptable financial results for both

clients and contractors commensurate with their inputs and the risks undertaken by each party

- improved operating performance

• Risks

- better management of inherent risks- clearly defined risk allocation/sharing

at outset

• Relationships- enhanced business relationships- establishment and achievement of

common/aligned goals- improved behaviour of the parties to

the contract, especially where the contract experiences practical and/orfinancial difficulties

- a greater personal satisfaction for all project parties

- avenue for repeat business with resultingbenefits to clients and contractors

• Flexibility- increased flexibility to match changing

project requirements- “cost of change” curve will be

significantly flatter

• Technology/Innovation- greater incentive and encouragement to

innovate in design, technology, systems,processes and techniques

- greater incentive and encouragement toapply the latest technology

• Optimum Standards- optimum standards of quality, safety,

industrial relations, community relations and environmental performance during theproject execution and in operation

- development of the industry’s professionalsand workforce

- increased industry research anddevelopment as a result of improvedfinancial certainty

- world best standards of project delivery.

5.0 Relationship Contracting: The Benefits

There is a no blameapproach - success or failure is a jointresponsibility. This is a significantdeparture fromtraditional projectpractice.

Key benefits ofrelationshipcontracting include,enhanced businessrelationships andimproved behaviourof the parties to the contract,especially where thecontract experiences practical and/orfinancial difficulties.

Commitment to a common goal and a clearly defined project scopeenables clients and contractors to deliver optimum project outcomesthat go beyond time, cost and quality.

5.0 Relationship Contracting:The Benefits

6.1 Alignment of GoalsRelationship contracting requires that all partiesto the contract agree to align their individualgoals, thereby establishing common or alignedgoals for the project.

Agreement to these project aligned goals andthe establishment of an effective IntegratedProject Team will facilitate achieving totalcommitment from the parties and their staff tosuccessfully complete the project. The proventechnique of workshopping is critical toachieving agreement between the parties.

Parties work in a cooperative environment withcommon goals as opposed to the traditional“conflict” environment.

Alignment of goals is best achieved by the client taking a share of the project’s risk. Eventaking a 10% share of the project’s riskproduces a complete change to the attitude ofthe client at all levels. They cooperate to reducecosts rather than to increase costs. Contractsbecome enjoyable and productive rather thanadversarial and negative. Under an adversarialcontract, inspectors often insist on thecontractor spending $100,000 to give the clienta $1,000 benefit.

Under relationship contracting, if the client is carrying 10% of the risk, the inspector will only insist on the contractor spending$10,000 for a $1,000 benefit for the client - a massive improvement.

One of the common project goals will be theagreed Project Target Cost. The gainshare/painshare mechanism is structured so that theparties (client, designer and contractor) willeither win or lose together. There can be noblame - success or failure is a jointresponsibility. This is a significant departurefrom traditional project practice.

6.2 Risk AllocationAs highlighted in Section 3.0, equitable riskallocation is at the core of successfulrelationship contracting, with the various projectrisks assumed by the party best suited tomanage them. To ensure appropriate riskallocation, a risk management analysis should becarried out.

The nature and scope of the project risks mustbe evaluated. Requests for tender documentsshould include either a risk allocation scheduleor require tenderers to complete their own riskallocation schedule as part of the tender. Therelationship contracting agreement is thenstructured to reflect the agreed risk allocation.

The relationship contracting agreement relies onrealistic and sensible expectations on bothsides. The agreement will fail if clients attemptto transfer all project risk to the contractor, or ifthe contractor seeks higher returns withoutaccepting a greater proportion of project risk.

6.3 Clearly Defined Project ScopeThe importance of complete and unambiguousproject goals and a project scope cannot be overemphasised - it sets the direction for allsubsequent work.

When the outcomes of a project are less than satisfactory, it is often due more to unclear goals and scope, rather than poor design or management.

The work required to achieve the goals andscope of the project is carried out by a number of parties. It is critical to define completely and unambiguously the extent of the work to be carried out. This serves as a basis for theagreement/contract carried out by each party to identify all interfaces.


The success of relationship contracting depends on the willingness of both clients and contractors to commit to change at an individualand project level.

6.0 Relationship Contracting:The Fundamentals

Fundamentals

1 Alignment of Goals

2 Risk Allocation

3 Clearly Defined Project Scope

4 Form of Contract

5 Integrated Project Team

6 Gainshare/Painshare

7 Open Honest Communications/Behaviour/Change of Attitude

8 Public Sector Issues

9 Facilitators

10 Legal Advisers

11 Third Party Advisers

6.4 Form of ContractAustralian PracticeCurrently, Australian construction clients useunamended or modified versions of thetraditional Standard Forms of Contract, eg.AS4000 - 1997, or forms of contract developedby the clients’ legal advisers. These latter formsand modified versions of Standard Forms ofContract tend to be adversarial in nature and, assuch, do not facilitate optimum projectoutcomes. Whilst the tendency is recognised inAustralia, little has been done to improve thecontract form.

International Practice - “Improved”Construction ContractsThis is in contrast to the UK where theInstitution of Civil Engineers has produced analternative form of contract, the NewEngineering Contract, a contract form that isgaining industry support. This contract formincorporates a number of recommendationsrelevant to the development of relationshipcontracting. These recommendations include:

• fair dealings between all stakeholders to the project;

• firm duties of teamwork, shared financialmotivation to achieve goals and win-winsolutions to projects;

• clear roles and duties definitions for theparties. Defined project manager, contractadministrator and arbiter roles and clearlynominated client’s representative;

• appropriate risk allocation amongst the parties;

• minimal changes to pre-planned works and a mechanism to evaluate such changes,including an independent adjudication whererequired;

• agreed methods and times for progresspayments. Not solely by monthly valuations,ie upon achieving milestones;

• providing for speedy dispute resolution if anyconflict arises; and

• incentives for exceptional performance.

The underlying philosophy of the NewEngineering Contract is to encourage efficientand effective project management onconstruction contracts, and it particularlyencourages trust and effective communicationbetween the parties. The style is plain Englishand it is markedly different to the standardAustralian forms.

6.5 Integrated Project Team The Integrated Project Team is comprised ofsenior member(s) from each of the partiesinvolved in a project. The client is a member of this team.

This Integrated Project Team approacheliminates the traditional client/clientrepresentative/ designer/contractor hierarchies.

The team has the responsibility andaccountability to make all key decisions and todrive the project to achieve the aligned goals. It is therefore important that there is a clearunderstanding of the individual and collectiveresponsibilities and accountabilities.

The selection of parties to relationshipcontracting is crucial to achieving successfulproject outcomes. The selection needs to bebased on criteria including, but not limited to,commercial and technical competence.

6.0 Relationship Contracting: The Fundamentals

Equitable riskallocation is at thecore of successfulrelationshipcontracting, with thevarious project risksassumed by the partyin the best positionto manage them.

The criteria must include less tangible factorsassociated with attitudes and receptiveness toco-operation, such as:

• appropriate behaviour as members of a team;

• establishing relationships with suppliers andsubcontractors;

• making available key personnel and theirpersonal commitment to achieving projectgoals;

• integrating staff from one party into anotherwhere it best suits project needs;

• continuous performance improvementprogramme; and

• eliminating inefficiencies at all interfaces.

The Integrated Project Team must becommitted to achieving the project goals. It must operate on mutual trust that puts thebest interests of the project ahead of purely self - centred gains, achieving a single andunified team.

Training and guidance by an experiencedconsultant “facilitator” is essential to achieve and maintain an effective IntegratedProject Team.

6.6 Gainshare/PainshareThe parties (client, designer and contractor) toan agreement should be aligned not onlythrough common goals, but also through sharedbusiness interests in the project’s success,firmly linking profitability to performance. Thisapproach, to be successful, must operate at alllevels of the project, not just at the top.

By aligning parties to the project’s goals, theycan be motivated to question costs, pursue bestvalue and to innovate. It is possible to providean environment that both effects behaviouralchange and fosters technical excellence.

This behavioural change requires the parties tooperate with “open books” and the mutualreview of all parties’ costings.

This methodology is used to establish theProject Target Cost and continues throughoutthe life of the project.

Under a reward and risk approach - againshare/painshare mechanism - the profit ofthe parties would be reduced in the case thatthe Project Target Cost is exceeded andincreased in the case where the actual costs areless than Project Target Cost, in accordancewith agreed formulae.

The gainshare/painshare split between theparties is generally based on a 50% allocation to the client and 50% divided in proportion tothe other parties’ contribution in the ProjectTarget Cost.

The gainshare/painshare mechanism isstructured so that the parties will either win orlose together.

This mechanism can also:

• incorporate other key performance indicatorsand a performance guarantee for thecompleted project/facility; and

• provide a key motivator and opportunity forthe relationship contracting parties to achieveexceptional performance.


The IntegratedProject Team must be committed toachieving the projectgoals. It mustoperate on mutualtrust that puts thebest interests of the project ahead of purely self -centred gains,achieving a singleand unified team.


The gainshare/painshare mechanismis a key motivator forboth the client andcontractor to achieveexceptionalperformance.

Diagram 6: Gainshare/Painshare Mechanism

If project completed at less than target cost then additional profits

flow to the parties.(lower final project cost to the Client)

If project over-runs target cost, parties including Client,

are liable for the over-run.

Contractor’s Reward

Contractor’s Risk

Under-run

Additional Costs to Client

Savings toClient

Target Cost

Loss

Gain

Over-run

Incr

easi

ng L

oss

Incr

easi

ng G

ain

6.7 Open HonestCommunications/Behaviour/Change of AttitudeFor relationship contracting to be successful, allparties need a positive change in habits,behaviour and attitudes towards projectoutcomes and towards one another.

This is achieved by formulation and agreementof project aligned goals, establishment of theIntegrated Project Team and implementation oftraining techniques and skills development tosustain a team building environment andperformance. This includes:

• comprehensive induction of all new membersjoining the team;

• external coaching and guidance to assist andreinforce the team approach; and

• workshop sessions to identify concerns andpinpoint key issues which need resolution,and setting stretch targets.

Open, honest communication between allindividuals is effected by their belief that theyare members of the team and that the entireteam is focused on achieving the project aligned goals.

6.8 Public Sector IssuesThe issue of “value for money” is central to theprobity concerns of government. For examplewhere a project is assessed against a number ofcriteria which provide benefits when assessedagainst cost, represents value for money.

This outcome is relevant to project deliverysystems, such as project management,managing contractor and project alliancing, due to the fact that assessment of tenders on these delivery systems is not based on“hard dollar” tendering.

These delivery systems do provide a significantassurance of value for money. They are basedon a cooperative approach, a philosophy of nodisputes and no blame, and a containment ofcosts within Guaranteed Maximum Price orestimated Target Cost of the project.

This can provide a more effective guarantee ofvalue for money than “traditional” projects witha propensity for conflict, claims and generalprice blowouts.

In government contracts, a probity auditor canbe appointed as an independent observer of thedecision making process in the evaluation ofexpressions of interest or tenders.

The public sector should ensure that theselection criteria and selection process is clearlycommunicated and transparent to all involvedparties and monitored by a probity auditor.

6.9 FacilitatorsRelationship contracting requires a substantialchange in behaviour by the client, designers,suppliers and contractors.

Facilitators have been valuable contributors tothe successful establishment and ongoingperformance of the Integrated Project Team.

The facilitator should assist and work with theIntegrated Project Team to:

• build best practice behaviours;

• develop an environment of trust, co-operationand open communication;

• develop the goal of achieving excellent results;and

• maintain a focus on common project goals andthe team.


Open, honestcommunicationbetween allindividuals is effectedby their belief thatthey are members ofthe team and thatthe entire team isfocused on achievingthe project aligned/common goals.

6.10 Legal AdvisersThe traditional role of lawyers in draftingconstruction contracts has been to advise theclient (whether it be owner or contractor) as tothe relevant allocation of risks in any givenproject, and to ensure that the client’s objectivesare reflected properly in the contractdocumentation. The very nature of that role hasoften led to a one sided perspective in thedrafting and negotiation of contractdocumentation. Client’s and contractor’sattitudes in the contracting process have alsodriven this approach.

The challenge to legal advisers to clients andcontractors in the implementation of relationshipcontracting will be to fully embrace the newapproach to the relationships betweencontractors and clients.

Lawyers must recognise that the type ofdocumentation and language used can assist in the development of open and honest relationships between clients andcontractors and optimise project outcomes.This will involve a substantial shift in perspective in advising clients and contractors.Lawyers have an important role to play ineducating their clients as to the benefits ofrelationship contracting.

With the commitment of their clients to theobjectives of relationship contracting, lawyerswill then be able to assist the process bydrafting more appropriate documentation toreflect the common goals of the client andcontractor with an equitable risk allocation.

The key to successful relationship contractingwill be to ensure that the form of contractdocumentation is appropriate to the businessrelationship between the clients and thecontractors and which assists in administrationof the contract and achievement of projectoutcomes.

Those documents will also need to provideadequate forums for discussion, teamwork andopen and honest communications which lie atthe core of a successful project.

Clients and contractors must direct lawyers toprepare contract documentation which operatesas a management tool designed to facilitate thebusiness relationship.

6.11 Third Party AdvisersThe most valuable input from third partyadvisers typically occurs at the outset ofdiscussions between the parties about aproposed relationship contracting projectdelivery strategy, during project formation anddefinition, and during the development of formalcontractual and commercial arrangements.

There is also a useful role for independentreporting on performance and progress.

The specific role of third party advisers typically includes:

• reviewing the operation of proposedcommercial arrangements between parties to the relationship contracting project delivery strategy;

• advising on suitable contractual andcommercial arrangements including allocationof responsibilities and the structure of risk/reward sharing mechanisms;

• implementing workshop approaches fordeveloping a group approach to identificationof goals and objectives, stakeholder interests,functional performance requirements, and riskand constraints; and

• reviewing and reporting on progress andachievement of outputs during the project.

Third party advisers must be able to effectivelycommunicate suggestions and opinions to allparties and to achieve a high level of confidenceby the group in the result of its activities.


Relationshipcontracting can assist in developingcontracts where both clients andcontractors have acommon incentive to minimise the costof the project.

Facilitators have beenvaluable contributorsto the successfulestablishment andongoing performanceof the IntegratedProject Team.

7.1 Contractor ActionsThe achievement and maintenance of therelationship utilises the following practices and techniques.

7.1.1 Trust and Openness in DealingsFor relationship contracting to be successful,both clients and contractors need to be openand trusting in their dealings with each otherand to resolve all issues as they occur. This isnot currently the position, but the project casestudies included in this publication illustrate thatthese relationships can be developed and theydo result in far superior outcomes than usingadversarial attitudes.

7.1.2 Appropriate BehaviourThe majority of both contractors’ and clients’staff have gained their professional experienceon construction projects with traditional forms ofcontract. As such, they have been involved incontracts fundamentally adversarial in nature.As the industry progresses to relationshipcontracting, behaviour appropriate for traditionalcontracting is not totally appropriate forrelationship contracting. Behavioural modificationwill be required to maximise the benefits of thisnew contracting form.

Companies will need to train and educate theirstaff and the staff of their sub-contractors andsuppliers in the particular requirements forsuccessful relationship contracting. In thistraining, particular emphasis will be placed oncriteria in addition to bottom line profit at theexpense of all else. These additional criteriawould include client relationships, client attitudeto repeat business, community attitudes,environmental performance and occupationalhealth and safety performance.

7.1.3 Sub-contractors and SuppliersContractors must manage and work with sub-contractors and suppliers to create a teamenvironment which will achieve the optimumproject outcomes, without compromising safetyand quality and which will not erode the sub-contractors’ and suppliers’ profit.

Greater emphasis on “best value” strategyrather than “lowest price” strategy is required.

The implementation of progressive inspectionsof sub-contractors’ work off site and on site,rather than final inspections, is also required toenable more cost effective, earlier solutions toproblems which invariably arise and the earlierrectification of defective work to the benefit of all parties.

7.1.4 TechniquesSet out below are brief descriptions ofsuccessful relationship contracting techniquesand Diagram 7 shows the implementation of thetechniques over the life of the project.

Planning/The Project PlanSound planning to provide a structured,documented and monitorable approach tomanage the design, procurement, constructionand completion of project/facility to meetdefined operational, time, cost, quality, safety,industrial and environmental requirements.

Controls EngineeringThe tools and systems developed andimplemented to monitor, review and report onproject/facility performance to achieveimprovements, based on agreed deliverablesand key performance indicators.

Design Co-ordination/IntegrationCo-ordination/Integration of all design activitiesfor the project/facility to meet definedoperational, time, cost, quality, safety andenvironmental requirements.


Companies will need to train andeducate their staff and the staff of theirsub-contractors andsuppliers in theparticularrequirements forsuccessful relationshipcontracting. In thistraining, particularemphasis will beplaced on criteria inaddition to bottomline profit at theexpense of all else.

7.0 Relationship Contracting:Practices and Techniques

Depending on the procurement and delivery system adopted, thepractices and techniques of relationship contracting can beimplemented at the initiation and concept stage of the project -through to design, construction, completion, handover andoperations.

Value Engineering/WorkshoppingAn Integrated Team workshop that identifies/defines and provides value solutions for projectelements or addresses significant issues arisingduring any stage of the project.

Completion EngineeringA planned, structured, documented andmonitorable approach to manage all outstandingconstruction works, design consultants’ andstatutory authority’s approvals, interfaces with allparties, maintenance and operation manuals,and inspections and commissioning tasks tomeet the requirements agreed with the clientand to other defined contract requirements.

Project Alignment Group -Client/Contractor/Designer/CommercialInterests PartiesRegular meeting of all parties to the project agreement. “Empowered” senior management forum for technical andcommercial interaction to ensure leadership and timely decision making.

Monthly ReportsReports specifically developed for eachproject/facility to provide concise and accurate reporting to the Project AlignmentGroup, focusing on critical issues, priorities for action and performance against keyperformances indicators.

InnovationProvision of incentive forums and adequate timefor all the parties to be innovative in theirorganisation and management of people,markets, monies, materials and technology.This can result in new or improved design,practices, processes, products, systems andtechniques which will provide improvedproject/facility outcomes.

Project Review/AuditProject Review/Audit provides an independent,structured review of project/facility performance.The Review/Audit is carried out by anindependent party to review operational, cost,time, quality, safety, environmental and reporting performance against agreed/contractrequirements.

Key Success Factors and PerformanceIndicatorsKey success factors and performance indicators,would include performance operating standards,environmental, health and safety, cost, time,quality, industrial relations and otherfactors/indicators.

Stretch TargetsStretch Targets are defined as very ambitioustargets that are committed to without theparties quite knowing how they can beachieved. Achieving a stretch target requires a change in the previous ways of doing things,high levels of performance and problem solving, and being innovative and using thelatest technology.


Achieving a stretch targetrequires a change in the previous ways of doing things, high levels of performance andproblem solving,being innovative and using the latest technology.

Sound planning is undertaken toprovide a structured,documented andmonitorableapproach to managethe design andconstruction of aproject/facility tomeet definedoperational, time,cost, quality, safety,industrial andenvironmentalrequirements.


Nearly all relationshipcontractingtechniques can be implementedirrespective of the project delivery system.

Inception,Prequalification,Tender andAward

FeasibilityandProjectDefinition

Techniques

Design Coordination/Integration

Value Engineering/Workshopping

ControlsEngineering

CompletionEngineering

Project AlignmentGroup

Monthly Report

Phases

Planning/The Project Plan

Relationship Contracting Techniques

ConceptDevelopment

DesignDevelopment

Construction andCommissioning

OperationandMaintenance

Innovation

Project Review/Audit

Key Success Factorsand PerformanceIndicators

Stretch Targets

Design Regular Independent Reviews

Establish Controls Implement Controls

Coordination and Integration Certification

Initial Study Detailed Studies

Establish

Meet at Monthly Intervals

Reviewed at Project Alignment Group Meetings

Initial Workshop Ongoing Workshops

Client Decisionto Proceed toConstruction

Client Decisionto Proceed toProve Up Project

Implement

Diagram 7: Relationship Contracting Techniques

7.2 Client ActionsThe ACA client survey identified a number ofclient-initiated practices that can also contributeto improved project outcomes and which areconsistent with relationship contracting. Thesepractices are described below and summarisedin a table included in Section 7.2.10.

7.2.1 Pre-qualification of ContractorsThe parties agree that the most efficient projectdelivery will be achieved when bids are soughtfrom a short list of tenderers who arecompetent and equipped for the project. Theselection criteria will be determined by clientsbut the contractors could provide input to theserequired criteria, such as comments on theproposed criteria to be adopted.

Adopting a pre-qualification process and a shortlisting of tenderers would ensure that theselected tenderers would dedicate moreappropriate resources to their tender as theywould assess their chances of success ashigher than in an open tender. Further, thetender evaluation process by the client shouldbe more efficient than in a larger and moredisparate field of tenderers.

From an industry viewpoint, short listing ofcontractors will benefit the industry by reducingthe costs of preparation/submission of abortivetenders. The cost of tender preparation is amajor component in any contractor’s head officecost and reducing this cost can only benefit theclients in the medium to long term.

7.2.2 Improved Project Scope DefinitionThe more detailed the definition of the scope ofthe project and the better the degree of preplanning and investigation, the more accuratewill be the tender price. In addition, thecontingency allowance that the contractor mustinclude in their tender for unknown/ill-defined

aspects of the project will be reduced. This should result in a reduced and moreappropriate tender price with improved certainty of outcome.

7.2.3 Terms Sheet of FundamentalIssues in the ContractIn any contractual relationship, there are a smallnumber of issues that are fundamental to theestablishment of the relationship. Below is alist of issues that could be discussed andagreed between the clients and the pre-qualifiedcontractors and included in the Terms Sheet.

Agreement to these issues would bring anadditional degree of commercialisation to theproject outcome - a degree which could bemissing if the contract is documented withoutcontractor input. Contractors would agree to beopen and frank in their input to thesediscussions - a result of relationship contractingwhere trust and openness is an essentialingredient. The issues include:

• form and scope of contract - refer to Section 7.2.5;

• warranties to be provided;

• securities, retentions and performancerequirements;

• client representative/powers and duties;

• management regimes/forums/reportingrequirements/project communication;

• insurance requirements;

• time aspects - risks, extensions of time, costand responsibilities;

• payment terms, certainty of payment;

• variations - cost responsibilities;

• default, suspension, termination;

• force majeure;

• existing conditions/latent conditions;


In any contractualrelationship, there are a small numberof issues that arefundamental to theestablishment of the relationship.

• risk identification/allocation - capping ofcontractor’s risk acceptance/reward/loss ifappropriate as in alliance contract;

• dispute resolution procedures;

• quality requirements; and

• environmental standards.

7.2.4 Risk AllocationAs a part of the development of the TermsSheet in Section 7.2.3, it is important that all therisks that are likely to be encountered in thecontract and that will require management areidentified. Following identification, discussionbetween client and contractor will allocate theresponsibility for the management of each ofthese risks to the party best equipped tomanage them.

Further details are included in Section 6.2.

7.2.5 Forms of ContractThere are a number of possible Forms ofContract and in each circumstance the mostappropriate form should be adopted.

Further details are included in Section 6.4.

7.2.6 Acceptable Contract RewardsIn discussions on any form of relationshipcontracting, it is critical that both partiesunderstand and accept that the contractor isentitled to an industry acceptable level ofreward for an industry standard project, anincreased reward for a superior projectperformance and an inferior or nil reward for aninferior performance.

It is also fundamental that the client benefitsfrom the relationship arrangement by sharing inthe project performance results. Therefore,before any contract is entered into, formulaewould be established providing appropriatecompensation for actual performance.

This generally requires that the contract is performed in an “open book” manner, with the contractor risking his total margin (profit plus head office overheads) in exchangefor an increase in his margin for superior project outcome.

7.2.7 Contract DocumentationHaving progressed all of the above matters to agreed conclusions, the point by pointagreements could then be provided to the contract drafters for forming into contractdocuments which will be accepted and“owned” by all parties. This will result in a much less adversarial approach to the contract, and a superior commercial outcome for the client.

7.2.8 Trust and Openness in DealingsRefer to Section 7.1.1.

7.2.9 Appropriate BehaviourRefer to Section 7.1.2.


The point by pointagreements throughthe Terms Sheet are provided to thecontract drafters forforming into contractdocuments which will be accepted and “owned” by all parties.

7.2.10 Summary TableThe following table summarises the practices required for successful relationship contracting, as setout in 7.2.1 to 7.2.9.

Requirements for Improving Project Outcomes Client Actions

1. Pre-qualification of contractors Clients to develop criteria using contractor input as required and pre-qualify contractors at earliest appropriate time based on nominated client criteria.

2. Improved project scope definition Clients to improve detail of scope definition, increasing up-front resources to ensure scope definition is appropriate.

3. Terms Sheet of fundamental issues in the contract Clients to initiate and develop, in conjunction with the short listed contractors, as considered necessary either separately or collectively.

4. Risk Allocation Matrix Clients to initiate and develop in discussion with contractors - either separately or collectively.

5. Forms of Contract eg. lump sum, schedule of rates, Clients to select form of contract, following input from contractors asalliancing, gain/loss sharing, partnering etc. necessary to optimise project.

6. Acceptable contract rewards Clients to nominate, following discussions with contractors:• Base level return for industry standard result• Gain/loss sharing for superior/inferior project result.

7. Contract documentation Clients to document based on previously agreed Terms Sheet and other criteria. Standard documentation to be used wherever feasible.

8. Trust and openness in dealings Clients to work to develop improved openness and trust in contract dealings.

9. Appropriate behaviour Clients to educate and train their staff and third parties in appropriate behaviour in relationship contracting. Third parties would include lawyers, EPCM contractors or project managers.


Clients andcontractors need to commit to worktogether to fosterrelationshipcontracting to effecta more efficient andeffective Australianconstruction industry.


8.1 Wandoo B Offshore OilPlatformClientAmpolex Limited

Project Delivery MethodAlliance

Principal Project ParticipantsAmpolex, Brown & Root, Keppel Fels, LeightonContractors, Ove Arup & Partners

Project DescriptionThe project required the development of an oil field, located offshore Western Australia, 75 kms north west of Dampier in relatively shallow water depth of 55 metres. Targetproduction rates were set at 40,000 barrels ofoil per day, extracted from a total throughput of120,000 barrels of liquid per day.

The physical nature of the deposit createdreservoir engineering problems which had to be resolved, meaning that the field was always a commercially marginal and high-riskdeposit. The engineering solutions adopted torecover and process the oil had to be delivered within tight time and budget constraints toensure that the returns satisfied Ampolex’s acceptance criteria.

Project PeriodThe project was designed, constructed andcommissioned in 26.5 months from December1994 to March 1997. This compares with an industry norm for a similar project of 34 months based on a study of 300 projectsfrom 26 operators.

Project CostA$364 million for design and construction froma total budget of A$480 million.

Project Process - Contract ImplementationThe Wandoo B project’s success was largelydue to the style of contract chosen – alliancing.The term ‘alliance’ as used in this context, is a unique method of bringing companiestogether in a working relationship based on trust and cooperation to produce results tobenefit all participants. The key feature is the focus of all the parties on a common goalfor the project. An alliance should be thought of as a virtual corporation – a separate bodywith its own identity and culture, supported bythe participants.

A contract is set up to provide that each party’sprofit and corporation overhead is at risk, basedon the OVERALL project result, not just thatparty’s portion – hence rewards flow from JOINT,rather than individual effort.

To achieve this style of contract requires atrusting relationship between all parties, with a clear understanding of each other’sexpectations and values. A successful outcomefrom alliancing requires ongoing learning andalignment of management, staff and individuals, so that the process becomes theevolution of a culture of collaboration, mutualrespect, integrity, innovation and ‘no blame’, with the focus on results.

At the core of alliancing is the courage toembrace a new way of doing business – ofbreaking with past methods when appropriate,of shedding corporate and individual baggageand of generating new possibilities. It’s aboutchanging the mind-set.

Why an Alliance?The concept of alliancing came to the attentionof Ampolex senior management as anarrangement where owners, both large andsmall, could deliver large projects with only asmall management team. Furthermore,overseas research proved that alliance teams

8.0 Case StudiesRelationship contracting has been successfully implemented by leading Australian construction companies in a diverse range of projects - setting new benchmarks and deliveringexceptional outcomes.

8.0 Case Studies

could be ‘super’ enthusiastic; organisationsusing alliancing were forecasting extraordinarysavings in time and cost; and seamlessintegration is achievable between clients andcontractors with efficiencies flowing from thebreaking down of traditional barriers.

The Alliance team was selected on the basis ofassessment against criteria established byAmpolex which included technical competence,acceptance of a business assessment,acceptance by the CEO of each participant to atotal commitment to the Alliancing concepts andagreement to put 100% of gross margin (ieprofit & corporate overhead) at risk in return forgain sharing arrangements.

After selecting the Alliance team, a technicalstudy period of three months wascommissioned to analyse numerous alternativesolutions, identify the optimum platformconfiguration and determine whether thatsolution was able to meet the Ampolex criteriafor project sanction.

A project office was established in Perth and anAlliance Board was also established withrepresentatives of each party entitled toexercise one vote, with all decisions requiringthe consent of all parties. The client andcontractors were therefore equal in decisionmaking and influence on the Alliance.

The Board appointed a Project Director to mould the various groups into an Allianceoperation. In this instance the person chosen was a representative of LeightonContractors Pty Ltd.

Ampolex formed a special purpose company,Wandoo Alliance Pty Ltd, with the same boardas the Wandoo Alliance, as the vehicle for majorprocurement of services and materials as wellas provision of offices and general support andadministrative services.

Direct procurement in the name of Ampolexwas particularly useful as it preserved allwarranties for the end user and achievedsignificant cost savings.

Developing the ‘Alliance’ CultureThe Alliance sought to develop its own uniqueculture, requiring individuals to become resultfocused and willing to challenge conventionalstandards. The main principles underlying thisculture were to:

• Work together in a spirit of openness,cooperation and ‘no blame’;

• Use innovative methods to bring the Wandoofield on stream at the lowest possible costwhilst meeting the design basis, operatingstandards and schedule;

• Disclose to each other cost and technicalinformation;

• Bring full commitment to effective interfacingbetween the parties;

• Strive for continuous improvement; and;

• Integrate staff from one party into anotherwhere it best suited project needs.

An external consultant, JMW Consultants Inc.was appointed for the duration of the project tofacilitate the Alliance objectives and coach theteam members in developing and maintainingthe culture.

Client SatisfactionThe Wandoo Full Field Development was anoutstanding success. Ampolex was able tobring a significant asset into production in a time that is at least seven months faster thanbenchmarked world performance for similarplatforms, and at a cost where savings of $13 million against the sanctioned projectbudget were realised.

The Alliance performed in an environment ofmutual trust and respect, with open access toall project costs of the parties, and the ownerand the participants departed confident of theirability to work together again.

Ampolex is on record as saying that “…aproperly formed alliance will deliver exceptionalsavings in project time and project cost to theclient, resulting in exceptional profits for allparticipants, and exceptional satisfaction to eachindividual employed within the alliance.”

8.2 East Spar DevelopmentClientWestern Mining Corporation

Project Delivery MethodAlliance

Principal Project ParticipantsWestern Mining Corporation, Kvaerner R J,Brown Pty Limited, and Clough Limited

Project DescriptionTo develop a gas condensate field locatedoffshore Western Australia, 40kms west ofBarrow Island in 95 metres of water. Proven, plus provable reserves, estimated at 443 billion cubic feet of gas and 28 millionbarrels of condensate.

Project PeriodProject designed and constructed betweenFebruary 1995 and November 1996.

Project CostA$270 million

Project Process - Contract ImplementationThe Clough/Kvaerner joint venture was selectedby the client, Western Mining Corporation(WMC), after submitting an expression ofinterest along with other potential consortia.

Three contracting parties, including theOwners/Operators, formed an “alliance” whichcontracted with the “Owner”.

A project office was established and staffed bypersonnel from WMC, Clough and Kvaerner. AnAlliance Board was selected with tworepresentatives from each of the three partiesto the Alliance with the chair being taken in turnby each party.

The Alliance Board selected the ProjectManager and Section Managers on the basis ofskill appropriate for the roles. In the event, eachparty provided managers to the project team.

The next step was the development of a designand budget. This was done in an open mannerwith the three parties being full partners to allnegotiations over design options and price. Withthe concept design and budget price developed,an Alliance contract was agreed and a profit andloss sharing formula determined.

The best technical, project control, safety,quality and procedures available from threeparties were adopted by the integrated project team.

A rigorous reporting system was adopted andregular detailed progress review meetings,between the project team, the Alliance Boardand, at less regular times, with the Owner’sstakeholders, ensured all the issues were aired.

In addition, target performance criteria wereestablished for all the issues mentioned and apersonal performance Incentive System wasinstituted to allow all project team members toshare the Contract Incentive Payment if all theperformance targets were met.

Selection of people for the integrated team wason a ‘best qualified for the job’ basis, as wasthe need for a ‘team player’ track record. Thisensured a very high quality team. Risks weremanaged by those best qualified/experienced to


do so, and this helped address the majorproblems effectively.

The thrust of an alliance is to align the goals of the client and the contractor – to get them on the same side. This is done by structuring the contract so that the contractor’sreward increases as the total cost reduces and his reward reduces as the total contractcosts increase.

A difficulty which can arise is in agreeing thetarget cost. The contractor would like a highertarget cost, the client a lower target cost. At East Spar the difference was 10%. Thesolution was to accept both figures with areduced bonus/penalty sharing of 1:6 betweenthe two figures.

The diagram below shows the agreed risk andreward arrangement. Point 1 on the graph wasthe client’s estimate, point 2 was thecontractor’s estimate. For costs below point 2earnings were shared equally. For costs abovepoint 1 losses were shared equally.

In fact the final actual direct costs after anumber of major changes were very close tothe client’s target.

Why an Alliance?The preferred option in contract style was anopen cost, risk/reward sharing alliance – withtarget cost, schedule and operating costs andavailability targets agreed at the outset.

This style was chosen primarily due to theinability to define the project’s scope at theoutset, the very tight window of opportunity tomeet the delivery date of gas to the Goldfieldspipeline, and thus a necessity for FLEXIBILITY inthe contract to address expected significantchanges – an expectation which was realised,with the open, risk sharing format ensuring asuccessful, minimum conflict result.

8.0 Case Studies

East Spar Alliance Risk/Reward- As Spent Dollars

1 : 2

1 : 6

1 : 2Incr

easin

g Co

ntra

ctor

’s M

argi

n

Increasing Direct Costs

Point 1

As Spent Dollars

Point 2

Diagram 8: East Spar Alliance Risk/Reward - As Spent Dollars

Major Benefits of the Alliance Contracting Style• Saved time and met schedule.

• Flexibility allowed critical path work to proceedwhile offshore problem areas were addressed.

• Client/contractor relationship was veryamicable and technical problems and issueswere addressed without the normalcommercial problems preventing the bestsolution being found quickly.

• Working relations between team memberswere focused on doing the job without lettingcontractual problems interfere – a ‘whole oflife’ approach to the job was thus possible.

• Overall cost was minimised since allstakeholders had an incentive to improve in order to share in the outcome.

• The traditional inertia on technical issues was removed and significant innovation was achieved due to the incentive to improve outcome.

• A ‘fair’ margin was negotiated in the originalcontract and then some additional margin was achieved.

• The ability to develop long-term relations hasbeen beneficial to negotiating future workbetween the parties.

• There was no owner’s representative teamwhich resulted in costs savings and removalof a source of conflict.

• Project decisions were taken by mutualagreement between all parties and thusimplementation was able to proceed far more quickly.

• A ‘whole of life’ cycle approach to jobdecisions, equipment selection etc. wassuccessfully implemented due to the co-operative team approach and the contractprovisions to adjust the target if an issuejustified it. An example was a $1 millionincrease in target to use common equipmentto the existing gas treatment compressors.

Factors Critical to the Project SuccessOpenness, cooperation and the sharing ofrisk/reward were all critical factors to thesuccess of this project.

The commercial structure on East Spar was thekey to providing the ‘natural incentive’ to ensurethat openness and cooperation actuallyoccurred. The attractive risk/reward regime wasthe core of this natural incentive since it wasthe driver of the aligned commercial interests.

The East Spar project presented very significantrisks to each party, but also presented theopportunity for extra reward and a fair basedmargin as well.

Selection of project personnel, a strongfacilitated training program for people to work inthe new environment of openness, and a majoreffort by the Alliance Board and senior projectteam members to develop good personalrelations, allowed problems to be addressedwith the ‘Best Interest of the Project’ always atthe centre of decision making.

A distinguishing feature of the project was thegreat satisfaction experienced by all participants.A general expression was how refreshing andstimulating it was to work in an atmospherewhere everyone was constructive and trying tosolve problems.

Unexpected latent soil conditions required acomplete change in concept which wasaccommodated smoothly with innovativeengineering. Under a conventional contract therewould have been long delays and cost overruns.

The stark difference between the constructive,cooperative atmosphere of an alliance with allparties having a common goal and the legalistic,adversarial atmosphere of a conventionalcontract was very apparent.


8.3 Boyne Smelter ExpansionAlumina & Bath HandlingSystemsClientComalco

Project Delivery MethodPerformance Incentive Cost ReimbursableContract

Principal Project ParticipantsComalco, Barclay Mowlem Construction Limited(BMCL), Bechtel Minenco Joint Venture

Project DescriptionBarclay Mowlem was selected to part design,manufacture, part supply, install, test andcommission the Alumina and Bath HandlingSystem for the Boyne Smelter Expansion. The major elements of Barclay Mowlem’s $19 million contract were the construction of civil foundations, 14 large steel storage bins and associated steelworks, two Air LiftTowers and associated galleries, installation ofspecialist equipment supplied by AlesaAlusuisse and Aluminium Pechiney andassociated electrical works.

This was recognised as one of the more difficultand complex portions of Comalco’s new thirdPotline at their Boyne Island Smelter.

The project achieved world’s best practice forconstruction of this kind of smelter, not only inthe time taken to complete, but also in theinnovative management techniques appliedduring construction.

Barclay Mowlem embraced the implementation of the following behaviourdrivers, instigated by the Client’s Agents –Bechtel Minenco Joint Venture:

• Performance Incentive Contracting;

• Partnering;

• Gainsharing;

• Leadership Model; and

• Project Development Partnership SiteAgreement.

Performance Incentive Delivery SystemThis delivery system was chosen for itssuitability to this particular style of contract.

• Design not fully developed (fast trackingrequired).

• Early delivery very important to the owner.

• Some brownfield work.

• Flexibility of owner on price and deliverymethod.

• All stakeholders had a sophisticated view of risk management.

Major Benefits of Delivery MethodThe success of this project was outstanding. By completing the project on time and withinbudget Barclay Mowlem ensured that the firsthot metal milestone on the project wasachieved well ahead of schedule.

The major benefits to stakeholders were as follows:

• The project was completed in a ‘world’s best’construction time for this type of facility;

• Costs were well within budget;

• The contractor was encouraged to strive forcontinuous improvement;

• The contractor had less risk of losing money;

• The client had the flexibility to change thescope of work; and

• Two thirds of the people working on theproject thought it was an above-average workenvironment, and 75% of the people workingon the project thought there was a goodfeeling of teamwork, cooperation and trust.

8.0 Case Studies

Project Process - Contract ImplementationTo achieve optimum levels of project deliverysuccess, the following performance incentiveswere set up:

• A ‘fee modifier’, based on monthly agreedscores on key performance indicators, wasapplied to the monthly claimed base fee, witha range of plus or minus 30%;

• The contractor shared 50% of the ‘cost under-run’ on the Target Estimate set up early in theproject; and

• A ‘gainsharing’ scheme was established toshare the financial rewards for goodperformance. In BMCL’s case it wasdistributed 50% to the workforce, 25% tostaff and 25% to the company.

Apart from the revenue performance incentivesnoted above, several other managementsystems were established as ‘behaviour drivers’to ensure that the project was successful.

• A Partnering Charter was established at a two-day workshop held in the early stages of theproject and then followed up by monthlyreviews of the partnership’s performance onthe selected objectives, ie safety, achieving orbettering of target milestone dates,maximising profit for all, continuousimprovement, effective management, goodcommunication, achievement of a qualityproduct, and encouragement of a culture ofbelonging and achievement. This helped tobuild the level of trust, teamwork andcommitment of all the participants.

• All staff undertook leadership training.

• The site agreement, the “ProjectDevelopment Partnership Agreement”, whichdrove the project, encouraged a culture ofleadership responsibility, employeeresponsibility and gainsharing – which wasendorsed by the unions.

Developing the Alliance CultureAn equitable risk/reward balance flowed throughto the various stakeholders on the project. Theclient obtained a new plant at the lowest costpossible, and much earlier than expected, andthe contractors on the project had the leastpossible risk of losing money.

The continuous monitoring of the achievements or failures of the partnershipbetween the client (CSD), the client’s agent(BMJV) and the contractor (BMCL) on a monthly basis brought any resultant issues outinto the open so that they could be successfullydealt with at the time.

It was an interesting dynamic of the ratingprocess that Barclay Mowlem’s own scoring of “contractor’s performance” at the regularreview sessions were always lower than the client’s.

It was significant that the partnering scoresassociated with each of the establishedobjectives were communicated frommanagement through to the workforce on aregular basis enabling all of the peoplecontributing to see how they could improve theoverall success of the project.


AcknowledgementsThanks are expressed to the following fortheir contribution to the development anddocumentation of “Relationship Contracting”.

ACA Commercial and Contract Task ForceD. Hudson (Task Force Leader)H. CloughG. BeisselR. GusseyP. DempseyR. RyanJ. Barrett (ACA Secretary)

Technical Resources Pty LtdN. Sallustio

Flagstaff Consulting Group Pty LtdR. CresswellProject Control International Pty LtdJ. RossBlake Dawson WaldronMcCullough RobertsonEvans & Peck ManagementNSW Dept of Public Works & ServicesDeborah Burke Public Relations“No Business As Usual” by T. KnottAustralian Construction Newsletter

Woodside Petroleum LtdJ. Akehurst

BHP MineralsR. J. McNeilly

Department of DefenceR. W. Corey

WMC Resources LtdH. M. Morgan

Thanks are expressed to the followingorganisations that participated in the client survey.

AGL Pipelines Pty LtdAustralian Pacific AirportsAWT Construction & MaintenanceBankers Trust Australia LimitedBoral LimitedBrisbane Airport CorporationColes MyerCommonwealth BankDepartment of Administration &Information Services - SADepartment of Contracts & ManagementServices (CAMS) of WADepartment of DefenceDepartment of Infrastructure, Government of VictoriaDepartment of Public Works & Services, NSW GovernmentDepartment of Transport & Works, NT GovernmentDepartment of Urban Services, ACT GovernmentEdison Mission EnergyFosters Brewing Group LimitedMIM LimitedNational Australia Bank LtdNational Mutual PropertyNormandy Mining LimitedPacific Dunlop LimitedPasminco Century ProjectQantas Airways LtdResource Management Framework Group,Department of Finance & AdministrationRio Tinto LimitedSchroders Australia Property Management LimitedSt John of God HospitalState Supply Commission - Government of WATelstra Corporation LimitedToyota AustraliaWMC Resources LtdWoodside Petroleum LtdWoolworths Ltd

ACAMembership

Australian Constructors AssociationLevel Four51 Walker StreetNorth Sydney NSW 2060Telephone: (02) 9466 5566Facsimile: (02) 9466 5599

Australian Constructors Association

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