Growth of Relationship Contracting in Australia: Experiences with DBs

1. EXPERIENCES WITH DBS IN RELATIONSHIP CONTRACTS IN AUSTRALIA Graeme Peck1 & Alan McLennan2 Presenter Graeme Peck DRBA

2. Topics • Definition of ‘Relationship Contracting’ & role of a Dispute Board . • Growth in Relationship Contracting models • General Conditions of Contract • Example projects DRBA

3. Definition of a Relationship Contract (‘RC’) • “any contract which seeks to achieve optimal outcomes for the job to be done by employing some form of management regime to manage the relationship.” • simplest form => U.S. Army Corp of Engineers ‘project partnering’ • Partnering charter obligations are contractually non-binding. • ultimate form: = > ‘pure Alliance’ with a ‘no blame’ approach • Product of the off-shore petroleum industry in the early 1990s. • Partnering and Alliancing have a similar philosophy - achieving cooperation and alignment of objectives. • Assisting the parties to achieve these objectives is an important aspect of a DB ‘Dispute Avoidance’role DRBA

4. Factors influencing Growth of Relationship Contract Models • Project trends: • increasing complexity & time pressures, • Increasing exposure to unpredictable external factors • a co-operative and non-adversarial relationship with risks shared according to party ability to manage will frequently produce a final project outcome benefiting all contract parties. DRBA

5. Growth in the use of all forms of‘RC’ in Australia: • value commenced for the past 3 years > A$17bn p.a. , majority in public sector construction. Used for ≈ 30% of total public sector capital works expenditure over the same period. Growth in Relationship Contracting in Australia, Public & Private Source: Alliancing Association of Australasia, project data base DRBA

6. Role of a DB in a Relationship Contract • Sometimes suggested a DB has no role because the more developed RC models have inbuilt mechanisms to deal with issues and disputes. • the reality: Differences still arise. The DB provides an independent and impartial means of project monitoring and review. • Cooperative framework of an RC assists the DB to facilitate resolution of issues and avoidance of disputes. • Australian examples alone represent ≈ A$2.8 bn value of RC contracts just completed or underway. • All have convinced the contract parties that a DB has an important contribution to make in the larger value & more complex RCs. DRBA

7. Early Contractor Involvement (‘ECI’) model in Relationship Contracts • The ECI process is rapidly growing in popularity as a lesser variant to ‘pure’ Alliances. • A typical ‘RC’ using an ECI process endeavours to: • capture the benefits of construction and buildability expertise at the earliest practical stage, • Identify risks & agree which party is best able to manage specific risks, • Create a contract incorporating the agreed risk allocation within the settled price structure. – which can be any variant from fixed price to cost reimbursable. • “ECI recognises the way many in the private sector of the construction industry already do business. • They negotiate planning design, risk and price prior to entering into a formal contract. • …ECI is not a new concept but rather the rethinking of previous delivery methods including, partnering and Project Alliancing.” DRBA

8. Choice of Delivery System • A common method of choice in Public sector in Australia is based on a numerical “circumstance rating” system. • Criteria specific to an organisation are weighted according to perceived importance, rated on a scale of 1to 10 for a potential project • Weighting x rating = circumstance rating contribution. • Sum of contributions = combined rating. DRBA

9. Choice of Delivery System & Relationship Benefits DRBA

10. Typical Pain-Share/Gain-Share arrangement (if used) Target Cost moves up or down for project Variations, so subject to opinion differences as with any Traditional Contract. DRBA

11. Conditions of Contract in use • Common to find purpose written contracts on major projects where DBs have been utilised. • These contracts have often used Australian Standard forms of contract with relatively minor modifications. • Experience shows that most contracts can be readily modified to incorporate effective relationship management practices and effective DB provisions. • The payment mechanism may be based on any arrangement the parties may agree, with or without painshare/gainshare. DRBA

12. FIDIC Conditions of Contract & ‘RC’ principles • FIDIC and MDB forms of contract have been little used in Australia, • none of the FIDIC standard forms incorporate any Relationship Contract principles. • The Harmonised FIDIC version (2006 Red book) indirectly introduced “avoidance” concepts into the DB Procedural Rules at subsection (2): [...and, as far as reasonably possible, to endeavour to prevent problems or claims from becoming disputes.] • Any of the FIDIC contracts would appear readily able to be modified to pick up relationship principles via the Particular Conditions, in a similar way to Aust Stds modifications, were an Owner so inclined. DRBA

13. Contract inclusions used for express relationship obligations. • Governance and Integrated Management, including a Project Leadership Team (PLT) • Formal relationship management procedures • hierarchical issue resolution process to resolve issues at the lowest possible level and in the shortest possible time. • DB is included in the Issue Resolution process for larger RCs , & has the responsibility to determine (interim binding basis) matters in dispute • (see full paper for more details) DRBA

14. SOME PROJECT EXAMPLES DRBA

15. Example # 3: 2006-2008, value ≈ A$ 90m. ECI Construct Only with a DB; established as fixed price Relationship Contract, with Risk Pool & KPIs. DRBA

16. Example 3 summary • relatively complex dam augmentation project in a monsoonal rainfall area, prone to high intensity wet season flooding; • AS 4000 (1997) conditions of Contract, slightly modified to cover Relationship Obligations, Risk Pool, and a DB. • Owner’s reasons for adopting RC principles & a DB: • “We had previous experience with litigation on similar projects, and decided there had to be a better way to go.” • dispute avoidance initiatives of the DB were very effective; all issues resolved between the parties, Owner’s time & cost objectives achieved, all parties happy with the outcome. • Owner is currently proceeding with 2 other DB contracts similarly structured. DRBA

17. Example 1: 2006-2009; value ≈ A$ 240m; ECI, D&C , fixed pricewith a DB; initial “partnering” arrangement converted to full RC at ≈ 60% stage. DRBA

18. Example 1 summary • Potential contractual & commercial issues during the design phase were not communicated to the DB. • issues and claims gradually built up & the partnering principles were not followed. • 12 major traffic switches eventually expanded to 54 subsection switches. • The DB was requested to facilitate a shift to an open-book, jointly managed contract, built on effective relationship principles. • Changed structure was successfully achieved. • The project was completed within all the negotiated parameters & with no formal disputes in the ‘new’ phase . • Pre-change issues settled by a mediation facilitated by the DB. DRBA

19. Lessons learnt from Example 1 • early appointment of the DB is highly desirable in all forms of contract • Contracts for complex projects which include positive relationship obligations will be superior to those that do not, & particularly so in conjunction with a DB. • Flexibility in the operation of the DB is an important factor in its Dispute Avoidance role. Note: This project Owner continues to use DBs & is a staunch supporter of the concept for larger projects DRBA

20. Some other examples #2: Purpose written, fixed price, DC&M contract with the D&C value in excess of A$1.5 bn, wide ranging risk allocation to the Contractor, & a DB from the outset. • contract was not set up as a Relationship Contract, but as for #1, became so as the project progressed by agreement between the parties • project is nearing completion, all intermediate SPs to date have been achieved on time and final completion of the original scope of work has a target date 5 months ahead of the original date . • One minor liability issue has been referred to & resolved by the DB. DRBA

21. Jan 2007 Feb 2010 Example 1: Contract value, A$1.5 bn, awarded late 2006. All SPs met to date; substantial compln ≈ 5 mths early. Possible small over-run on major vary to upgrade much of S section from 6 to 8 lanes DRBA

22. Some other examples #5: Contract for the 3rd stage of a multi million dollar rolling stock upgrade for the Sydney city and suburban passenger rail network. • 2 previous stages have proceeded under a traditional fixed price D&C contract; no partnering provisions, & no DB. • Both stages have resulted in major disputes leading to substantial and costly arbitration proceedings. • The Owner decided that the same philosophy could not be carried forward into Stage 3, which was modified to include formal relationship arrangements, an open book Target Cost arrangement, painshare/gainshare provisions, and a three party DB. • underway for about 6 months. To date , is working well DRBA

23. D&C Contract for new passenger trains for Sydney area system. Stage 3: 18 x 4 car trains, value ≈ A$ 300m, Relationship principles, Target Cost, painshare/gainshare & a DB DRBA

24. CONCLUSIONS • Dispute avoidance is an important role of DBs on all types of contract • Any form of Relationship Contract benefits from the involvement of a DB. • investment in a DB is another form of insurance. • Australian experience to date suggests a DB is very cheap insurance when used on correctly chosen projects. DRBA