May 2010DRBA1 EXPERIENCES WITH DBS IN RELATIONSHIP CONTRACTS IN AUSTRALIA Graeme Peck 1 & Alan...

May 2010 DRBA 1

EXPERIENCES WITH DBS IN RELATIONSHIP CONTRACTS IN AUSTRALIA

Graeme Peck1 & Alan McLennan2

Presenter

Graeme Peck

May 2010 DRBA 2

Topics

• Definition of ‘Relationship Contracting’ & role of a Dispute Board .

• Growth in Relationship Contracting models

• General Conditions of Contract

• Example projects

May 2010 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

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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.

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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.

Source: Alliancing Association of Australasia, project data base

Growth in Relationship Contracting in Australia, Public & Private

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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.

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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.”

May 2010 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.Typical Criteria

Importance of project to Owner

Owner's risk culture

Scope definition

Budget constraints

Schedule constraints

Project complexity

Industry & Stakeholder risk

Community Risk

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Choice of Delivery System & Relationship Benefits

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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.

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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.

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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.

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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)

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SOME PROJECT EXAMPLES

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Example # 3: 2006-2008, value ≈ A$ 90m.

ECI Construct Only with a DB; established as fixed price

Relationship Contract, with Risk Pool & KPIs.

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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.

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Example 1: 2006-2009; value ≈ A$ 240m;

ECI, D&C , fixed price with a DB; initial “partnering” arrangement

converted to full RC at ≈ 60% stage.

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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.

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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

May 2010 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.

May 2010 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

May 2010 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

May 2010 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

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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.