Alliance contracting: key ingredients to a successful alliance

By Nicole Green and Madeleine Chua

Australia is in the midst of a major infrastructure boom, a trend that is expected to continue for the next decade. During this time, where demand exceeds supply, it is likely we will see a resurgence in the use of alliance contracting. Traditionally, alliance contracting has been the preferred delivery strategy for projects requiring flexibility and innovation to overcome unpredictable challenges. But establishing successful alliances requires detailed insight and planning.

So, what is the key to success? A recent study looked at the importance of leadership in project delivery, and we see this as the critical element to success.

So, what are some characteristics of a strong leader in this context? Before answering this question, we will consider how the concept of leadership fits within the overall context of alliance contracting.

Alliancing – the basics

Alliance contracting is a form of relationship contracting characterised by a culture of collaboration and cooperation between the parties delivering a project. The parties to an alliance are normally the purchaser of services (the owner) and one or more service providers or non-owner participants (NOPs) such as head contractor and operator. The parties’ interests are aligned and risks are shared through incentives offered by the owner for how well the project is delivered, as measured against agreed objectives.

The three cornerstones of alliance contracting are:

one team: the project is delivered by one integrated team, not a contractor under the supervision of the owner or the owner’s representative
one voice: a joint governance framework of various teams comprising representatives from each party, is established
one outcome: all parties either succeed or fail together. Decisions are made on a “best-for-project” basis with a “no-blame” culture.

Ultimately, the owner retains the risk for delivering the project as payment to the NOPs, which is made on a “costs plus” basis. This payment arrangement results in the NOPs, in most cases, being fully reimbursed for their costs in delivering the project, even in the case of delay. It is very different to most other forms of contracting and positive outcomes rely heavily on a successful alliance.

An alliance is managed by governance teams made up of representatives from each party in the alliance, including the owner and each party has an equal say in decision making (except for a limited number of issues that are reserved for the owner).

The highest of the governance teams is the Alliance Leadership Team (ALT). The ALT comprises senior members of each party with the authority to bind that party to the unanimous decisions of the team. They are also responsible for the delivery of the project as a whole. The ALT provides a forum for accountability, decision making, dispute resolution and information dissemination. The team’s responsibilities include aligning the alliance’s priorities, encouraging innovative thinking, reviewing the project’s progress, sharing lessons learnt and resolving issues.

The ALT appoints an Alliance Manager (AM) to lead the alliance and deliver the project, ensuring all decisions of the ALT are properly implemented. The AM’s role in an alliance is critical to the success of the alliance. It’s clear that the soft skills that make a good leader are also critical to this success.

The other key governance teams and member of the joint governance framework in an alliance are:

AMT: the Alliance Management Team. Headed by the AM, this team is made up of representatives from each party of the alliance and is responsible for the day-to-day management of the project; and
APT: the Alliance Project Team, comprising professional and support staff from each party. This team is responsible for the delivery of individual aspects of the project including its design, construction and delivery.
The governance teams form the ‘voice’ of the alliance, and set its tone. The main factor consistently identified as key to a successful alliance is strong leadership of the ALT, which filters down to other governance teams and the alliance as a whole.

Leadership skills: the key to success

A successful alliance has a culture of collaboration, as opposed to an adversarial ‘us and them’ relationship. In their 2017 report¹, McKinsey & Company (McKinsey) concluded that soft skills, including soft leadership, organisational skills, mindsets and behaviours, are key to the successful delivery of ultra-large capital projects. McKinsey interviewed 27 practitioners with hands-on experience in successful ultra-large project delivery and found a number of key characteristics. These arguably apply equally to alliances, and are:

trust: requiring each member of the alliance to operate with integrity, say what they mean, and do what they say they will do
ownership: ensuring the owner is willing to actively facilitate a solution in the face of problems, has a clear vision of the outcome and is fully invested in decisions made¹
identity: consistency and clarity are the key. The culture and identity should be one of collaboration, allowing for prompt identification and resolution
of issues, and the ability to harness opportunities for innovation and efficiency
people: getting the right mix of people involved in the alliance with the required leadership qualities, mindset, culture, local awareness, technical skills and experience
people management: establishing an effective performance management system for the alliance as a whole to drive desired outcomes and a culture of high performance
risk management: ensuring the delivery risks in the alliance are allocated to the NOP best placed to manage that risk.

All of these leadership attributes are crucial to the success of an alliance. By ingraining these attributes through the alliance as a whole, optimum value of this type of contracting may be realised. Without it, the outcome is likely to be an unsuccessful alliance with inefficiencies and potential cost blow-outs. If well managed, the model is ideally suited to the pressures of complex, innovative and fast delivery in the booming Australian infrastructure sector.