Project Alliance

By Sunil Shinde

1

TATA Realty and Infrastructure Limited

• Vision

To develop best-in-class Infrastructure and Real Estate projects which contribute to national economy and enhance the quality of life

• Sectors of Interest• Real estate • Internal group assets • Available market opportunities • Urban infrastructure • SEZs (special economic zones) • Bridges • Logistics parks • Ports

2

Projects in Hand

• Multi product SEZ at Chennai- Ramanujan city (>4 million square feet) • IT SEZs for TCS at 8 locations in India – Pune, Ahmedabad, Kolkata (ongoing)• State of the art retail mall at New Amritsar City Centre for integrated development. • Participating in development of world class bridges, roads, highways etc. Its

subsidiary has won NHAI project on DBFOT model for Pune Solapur section in partnership with Atlanta S.p.a. Italy.

• Evaluating development of multi product Special Economic Zone (SEZs) in State of Orissa , Maharashtra and Andhra Pradesh

• The consortium lead by TRIL has qualified for RFP stage of development of Udaipur and Amritsar Airports.

• Value of the projects under execution is more than Rs.9000 Crore

3

TIDCO Project, Chennai

• Mixed use Development of SEZ of 4.2Mn sq ft. comprising IT space convention centre retail, premium residential apartments and 100 Service apartments.

• Concept by international Architect : M/s. Skidmore, Owings & Merrill India, LLC (SOM)

• Project duration 36 months

4

Strategic Requirement of the Project

It was necessary to have the contractor on board in early stages to work with the design team as

•Contractor can add value during initial stage when project schedule & cost can be influenced most.

•Combined knowledge, expertise, innovative ideas of both Client & contractor can be tapped

5

Alternate Project Delivery Systems

Prevailing Project delivery systems those allow early introduction of Contractor are:

a)Design & Build

b)Cost plus

c)Target contracts

d)Build Operate & Transfer

e)Partnering &

f)Project Alliance also called Relationship contracting

6

Why Project Alliance?

• Due study was done of ongoing & completed contracts in Australia on Alliance concept & it was felt that a TATA Group company can adopt Alliance project delivery system & set an example for the Construction Industry

• Alliance project delivery is adopted for more than a decade in Australia

• Traditional master- servant relationship of project owner & contractor does not align the interests of the parties

• Many existing contractual relationships between clients & contractors lead to adversarial behavior between parties & this has a negative effect on project outcomes

7

Alliance Experience

• More than 200 projects worth $67 Billion have been executed. The results were extra ordinary

• The projects were mostly through Government & Private partnerships

• Complex infrastructure projects were successfully executed by using this concept

– Roads, Bridges & Expressways– Railways– Buildings (Museum) – Water Desalination/Purification Plant– Tunnels

8

Cost Performance

9

Source: RMIT - sample of 30 alliance projects

-35.00

-30.00

-25.00

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Projects

Perc

en

t d

iffe

ren

ce f

rom

TO

C

Variance between Final project cost & TOC (target outturn cost)

9

Time Performance

10

-50.00

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

40.00

50.00

60.00

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Projects

Perc

en

t d

iffe

ren

ce f

rom

Targ

et

du

rati

on

Variance of actual program & Estimated program

Source: RMIT - sample of 30 alliance projects

10

Alliance in a Nutshell

Project

Standard Contract

Individual Interests

Project

Alliance Contract

Common Objective

11

Item rate contracting V/s Alliance contracting

12

Foreign design

architect

Municipal architect

Structural consultant

Services consultants

Local architect, PMC Introduction of contractor

Concept stage

Schematic stageDesign development stage

GFC stage

Construction stage

6-8 weeks 8-10 weeks 10-14 weeks 12-14 weeks ~32-36 months

All consultants engaged upfront

Contractor introduced upfront

Concept stage

Schematic stageDesign development stage

GFC stage

Construction

stage

6-8 weeks 8-10 weeks 10-14 weeks 4-6 weeks ~32-36 months

Concept is finalized by architect. Value engineering Limited to finalized concept. Cost is an outcome of the finalized concept i.e. Cost is derived

Concept is jointly evolved keeping Cost as a Target. Value Engineering over the entire process including constructability of the concepts

Introduction of contractor

Project Alliance

1. “Project Alliance” is where an owner & one or more service providers work as an integrated team to deliver a specific project under a contractual framework where their commercial interests are aligned with actual project interest#

2. We have a project specific alliance for the Chennai project with a contractor, Local architect, MEP consultant & Structural consultant

13

# Source: Jim Ross, Introduction to project alliancing, April 2003

The Difference

• Many companies & the client make an agreement to work together towards common goals - “we are One Team”

• Design & Construction teams working collaboratively

• The client is part of the team

• Pain/Gain sharing: When things go well all parties win. If not, we all lose

• Managing cost, being efficient & beating the schedule provides big benefits to all parties

14

"IPT"Integrated Project TeamAll roles in the IPT will be filled by personnel drawn from the resources of the alliance participants on a "best-for-project" basis.

Clearly defined responsibilities & accountabilities within an integrated team organization

Project Alliance Board (PAB)

• Provide governance• Set policy and delegations• Monitor performance of AMT• High level leadership / support• Resolve issues within alliance

• 1 or 2 from owner • 1 or 2 from each of the NOPs• ALL DECISIONS UNANIMOUS

Wider Project Team

• Deliver Project Objective • Day to day management• Provide leadership to the wider team• try to resolve all alliance issues

AMT comprises key project leaders with specific project functions, with at least one representative from each alliance participant

No person-marking No duplication of roles or systems

Alliance Management Team (AMT)headed by Alliance Project ManagerAlliance Management Team (AMT)

headed by Alliance Project Manager

15Source: Jim Ross, Introduction to project alliancing, April 2003

Core Alliance Principles

• Alignment of Objectives– Companies and client agree on desired project outcomes and

objectives

– Participants focus on meeting and exceeding project objectives

– All decisions must be “best for the project”

– Individual’s objectives aligned with project objectives

• Commercial Alignment– Reimbursement of 100% open book

– All participants win or all participants loose

– Equitable sharing of risk and reward

– Equitable sharing of Gain/Pain

16

Core Alliance Principles (Contd.)

• Collective responsibility– No “us and them”– The alliance participants (together) shall ….– A peer relationship where all participants will have an equal say– Integrated project teams– Full access to “best resources” from all participants

• No Blame– All decisions of PAB/ALT must be unanimous – Commitments to resolve issues within the alliance– No recourse to litigation– Personal accountability and no blame culture

17

Core Alliance Principles (Contd.)

• Exceeding Objectives– High performance teams– Commitments to ‘stretch targets’– Breakthrough thinking process– Innovative culture– Challenge the status quo – there is always a better way

18

Attitudes, Behaviors and Languages

• Listening openly and without judgment

• Trust and mutual respect

• Encourage positively and constructively

• Open, honest and respectful communication

• No hidden agendas

• Visible and unconditional support from senior management

• Honour commitments

• Be accountable for your actions

19

Structural features of a Project Alliance

1. Owner pays non owner participants for their services in accordance with

A. Project costs & project specific overheads reimbursed at cost based on audited actual costs

B. A fee to cover corporate overheads & normal profit

C. An equitable share of the “pain“ or “gain” depending on how actual project outcomes compare with the pre-agreed targets which the parties have jointly committed to achieve

20

Structural features of a Project Alliance (contd.)

2. Project is governed by joint body Project Alliance Board or Alliance Leadership Team where all the decisions must be unanimous.

3. Day-to-day management of the project is by a seamless integrated project team where all members are assigned to the team on a ‘best-for-project’ basis without regard to which party they are employed by.

4. Parties agree to resolve issues within the alliance with no recourse to litigation except in the case of a very limited class of prescribed ‘Events of Default’

21

Development of AllianceSelection: The owner to select the right partner

and align on the overall framework and primary commercial parameters.

iPAA: (interim Project Alliance agreement )The participants enter into a simple consultancy agreement whereby non-owners are reimbursed at cost to work in an integrated team on pre-construction activities. Incl. development of Target Outturn Cost (TOC), Target Schedule and non-cost targets.

PAA: (Project Alliance Agreement) After

agreeing on TOC and other targets and with owner’s wish to proceed with the alliance , the participants enter into a full agreement.

22Source: Jim Ross, Introduction to project alliancing, April 2003

Alliance Auditor

Owner engages an experienced financial auditor to validate that all payments under the alliance are fully open book & in accordance with the terms of compensation

The auditor can also be used to validate that the corporate overhead and profit are business as usual rates

23

Compensation under iPAA

Reimbursement is limited to recovery of actual costs( with no margin for corporate O.H. & Profit)

• If the participants proceed into PAA, then the non-owner participants recover a margin on the work they did during the iPAA

• If they do not enter into PAA then the non-owner participants may still receive a margin on the iPAA work depending on the reasons

– not agreeing Target Cost & other targets – no margin on iPAA work– other reasons- margins paid

• No pain: gain in this period though it is a period of very high innovation & value-adding

24

Compensation under PAALimb 1: 100% of what they expand directly on the work inc. project-specific overheads

Limb 2: A fee to cover corporate overheads and profit.

Limb 3: An equivalent sharing between all alliance participants of gain/pain depending on how actual outcome compare with pre-agreed targets in cost and various non-cost key result areas (KRAs)

In our case we have restricted risk up to margins & capped it to maximum % gain

Limb 2 is 100% at risk under the limb 3 risk:reward arrangements

Limb 1(Costs)

Limb 2(Fee)

Recovery of costs under limb 1 is guaranteed irrespective of the outcome under the limb 3 risk:reward arrangement

25

Performance Adjustment

Capped PainshareFor NOPs

Business as usual performance and profit

Outstanding performance & profit

Source: Jim Ross, Introduction to project alliancing, April 2003

TOC Gainshare/Painshare

NOP Share of Gainshare is capped 50% Gainshare to NOPs,

50% Gainshare to Owner

Target Outturn Cost

NOP share of Painshare is capped

50% Painshare to NOPs,50% Painshare to Owner

Owner Share of Painshare

Owner Share of Gainshare

NOP Share of Gainshare

NOP Share of Painshare26

The Target Outturn Cost

• During iPAA the participants jointly develop TOC• TOC is used to determine limb 2 fee & as target against which the

actual cost will be compared to determine the extent of under / overrun that is to be shared amongst the alliance participants

• The TOC is intended to be reasonable estimate of what it should take to deliver the agreed scope of work taking into account: delivery schedule, Quality, Performance in non cost areas such as health & safety, environment, community, innovation, etc

27

Pain : Gain

• The sharing of cost under/ overruns is usually the primary component of the pain: gain arrangements

• The cost overruns may be shared 5O-5O%. Generally there is a cap on pain share

• Under runs are also shared is the same way• For better performance in non cost areas, Non Owner Participants

gain additionally. It can be additional few % to NOP’s

28

Variations

• The situations that would be treated as “variations” under a traditional contract are not variations under the alliance-rather they are just part & parcel of the delivery of the project

• If owner changes scope or changes fundamental or design requirements, then cost & other performance targets are adjusted

29

Selection Process

Discuss/ Clarify key issuesReview/Discuss alliance modelAssess alliance understanding / affinityAssess technical & resource capabilityReview expectations

Request for ProposalRequest for Proposal

Receive / Evaluate written submissionsReceive / Evaluate written submissions

Nominate initial shortlist (3 to 6)

Nominate initial shortlist (3 to 6)

1/2 day interview / discussion with each shortlisted proponent to:

1/2 day interview / discussion with each shortlisted proponent to:

Nominate final shortlist of 2Nominate final shortlist of 2

2 day workshop with each of the final shortlisted proponents to align on:

2 day workshop with each of the final shortlisted proponents to align on:

Commitment to outstanding results Principles, mission & objectives Prospective PAB / ALTAlliance team structure / roles Compensation frameworkProcess for development of TOCAlliance management systemProject kick-off strategy

Panel recommends a preferred proponent

Panel recommends a preferred proponent Owner approves a prefered proponentOwner approves a prefered proponent

Fina

ncia

l aud

itor

cond

ucts

Est

ablis

hmen

t Au

dits

Fina

ncia

l aud

itor

cond

ucts

Est

ablis

hmen

t Au

dits

Discussions with the prefered proponent to:Discussions with the prefered proponent to:

Confirm direct cost framework Lock in on fee % (Profit + OH's) Agree risk:reward strucutre Finalise drafting of iPAA Agree kick-off Plan incl. budget for iPAA Agree on terms/strucutre for PAA

Is everything agreed?

Is everything agreed?

Owner / NOP's approval to proceedOwner / NOP's approval to proceed

Executive iPAAExecutive iPAA

Project definition, Consultation, site /material investigation, strategic procurement , initiate approvals , develop & agree target etc.

iPAA Period

Yes

No

30

Source: Jim Ross, Introduction to project alliancing, April 2003

Legal / Contractual Framework

Lawyers have an important role to play up-front in ensuring that the intention of the parties is enshrined in a properly structured & legally effective alliance agreement•Insurance- It is possible to get the insurance cover without any liability arising & without any right of subrogation against any of the alliance participants

31

References

• Evans & Peck, Australia• Relationship contracting, 1999, Australian Constructors Associations• Phillip Greenham, Minter Ellison Lawyers, Australia• Jim Ross, Introduction to project alliancing, April 2003

32

THANK YOU

33