Alliancing and the NEC4 – sharing risk and reward

Background

It is well known that the New Engineering Contracts (NEC) suite of contracts produced by the Institution of Civil Engineers are traditionally a more collaborative contract, encouraging integration and active management of a construction project. This can be seen within the contract through the use of risk registers and early warning notices, utilised as prevention rather than cure to help avoid a project running into difficulties.

Opinion on the NEC contract is certainly divided, there is however, no doubt that it leads the way in integration and cooperation in construction contracting. The new NEC4 Alliance Contract goes one step further and sets out a contractual model for multi-party contracting. Multi-party contracting is becoming increasingly desirable on large and complex projects to ensure that contracts are efficiently and successfully delivered and is a further development in partnering.

How does it work?

The publication of the NEC4 Alliance Contract in 2018 follows the NEC’s traditional theme of collaboration and provides a single contract under which all parties to a construction contract might be engaged. The basis of the Alliance Contract is that all contractors work together to deliver the client’s objectives and share risk and reward equally. The contract incorporates the “pain/gain” share by reference to the project budget. Importantly, this includes the employer’s costs and not just those of the supply chain.

The alliancing contract is likely to be used increasingly on major infrastructure and transport projects and will follow a design and build model. The contract allows the employer to engage its supply chain under a single set of contractual terms, with the project delivered by a panel representing each of the contracting parties (including the client), with decisions taken jointly by those representatives. Collectively they will be known as the “Alliance Delivery Team”.

The spirit and ethos of the Alliance Contract are key

The most significant benefit of an Alliance Contract is the potential to reduce disputes between parties, through collaboration. The contract aims to achieve this through setting goals and outcomes, integrated party communication systems and ensuring that the main aim is successful completion of the project in terms of cost, time and delivery.

The intention is to move away from an overly contractual interaction between the parties, such that project delivery is the primary focus. Whilst this non-adversarial approach is positive in theory, it is dependent on co-operation by all parties and should a party fail to act in the spirit intended by the Alliance Contract, there is a mechanism enabling the other partners to vote it out, which may in due course lead to termination of that party. This does somewhat detract from the promotion of cooperation and collaboration, but arguably is a necessary fall-back provision, although it remains to be seen as to how this mechanism will operate in practice.

Comment

NEC contracts need to be actively administered, such that they cannot be placed in the drawer to gather dust. In addition, all parties will need to subscribe to the alliancing ethos. It is likely therefore that significant training, particularly for smaller and less sophisticated contracting parties, will be required to ensure the intention of the contract and how it operates is understood.

Whilst the Alliance Delivery Team is a positive step towards collaboration, it is likely to present some challenges in administering the Alliance Contract, with agreement having to be reached between the members of the team on most matters, save for on a small number of items. This could potentially result in disputes or a deadlock of opinion.

Fewer risks are borne by the individual alliancing members under the Alliance Contract, which in theory should lead to a more productive relationship. However, it will also be necessary to retain control over the financial stability of the contracting parties, via bank bonds or other securities, to actively manage the risk of insolvency. Note however, that alliancing should lead to better cash flow to the supply chain, and therefore improved financial stability.

The consequences of the new NEC4 Alliance Contract remain to be seen, however, they will be heavily dependent on each party actively subscribing to the alliancing philosophy. This in turn should result in fewer disputes resulting in adjudication, arbitration and litigation, more disputes being resolved, and increased dispute resolution at an early stage. Alliancing is certainly here to stay, so contractors will need to ensure they are prepared to be engaged on this basis.

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