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Partnering, Alliances and inadequate contracts

October 1, 2012

Last week, I participated in a seminar run by the law firm Eversheds at their London offices. The topic was Contract Management and Disputes in the Energy Industry.

Having attracted around 100 attendees, there was clearly interest in the topic and the audience came from a varied functional background. The presentations reinforced IACCM’s conclusions that the importance of contracting is growing. The event had extensive input on ‘collaboration’, in particular the increased use of alliancing. However, it was evident that terms such as ‘alliancing’ and ‘partnering’ actually cover a range of contract structures or models. The real issue is that there is growing consensus about the need for a fairer balance of risk, that traditional turnkey projects are out of favor and that ‘multi-partner’ contracts are becoming the norm.

One presenter summarized alternative forms of contract to address these concerns. These were:

  • To incorporate partnering and collaborative working provisions as an overlay to existing forms of contract
  • Target cost contracts
  • Framework agreements (to address issues of continuity, expanded timeframes for the relationship)
  • Individual alliance agreements
  • Project alliances, with gain/pain share
  • Strategic alliance

There was also discussion about the challenges in moving to one of these models. Organizational culture was often mentioned as a potential inhibitor. Presenters also highlighted the fact that there are no contract models that fully address the industry environment (there is some use of FIDIC, LOGIC, BIMCO and the NEC model – with the NEC approach currently gaining ground due to its perceived flexibility). But whichever model is selected, multi-party contracting creates challenges:

  • Dealing with multiple interfaces
  • Negotiation and management of contracts
  • Maintaining alignment
  • Dealing with ‘known unknowns’, such as weather , supply constraints, regulatory changes etc.
  • Handling claims
  • Marginal project economics

In the end, a key point is that organizations must recognize the need to establish new and different governance and management behaviors if they want to develop truly collaborative relationships – and without these behaviors, collaboration will not work. This includes key issues such as senior management engagement, that both parties must commit interface resources, common methods for communication, accept accountability (eliminate blame) and work together for continuous improvement.

Like many other areas of business, the energy industry is undergoing transformation and has discovered that traditional ways of contracting are not suited to a world of rapid technological innovation, key supply shortages, regulatory uncertainty, challenges over funding and lack of clarity over roles and risk allocations. It was encouraging to see the number of people attending this event, anxious to learn and to share ideas. Given this need for change, it was disappointing to see how few of the audience came from the contracts or commercial management community; they of all people should be anxious to be at the forefront of ideas and innovation in contracting.

2 Comments
  1. Bob Spence permalink

    Thanks for this Tim. I am puzzled by what is driving sponsors to consider this form of contracting, especially since contractors (in general) don’t like it (their portion of the incentive pot being determined by the performance of other organisations within the alliance over which they have little or no influence). Is it because sponsor organisations have run out of ideas on how to improve the outcomes of major projects? Is it because they cannot staff internal project controls teams (commercial and technical) adequately that leads them to think that only contractors will be able to magick up the A teams necessary for successful execution? In my view, the line between allocation of and absolution from risk in alliance contracting is easily blurred, and that (currently) neither party’s management systems are mature enough to work this uncertainty (as your article points out).

    Edwin Merrow points out (with data) in his latest book a high degree of correlation between the use of alliance contracting and industrial megaproject failure (as measured by schedule and budget overrun, schedule and cost competitiveness, and production attainment). My concern is that alliance contracting becomes a fad within sponsor organisations and is applied inappropriately to projects without understanding the context in which this commercial approach has a better than 50% chance of producing desired outcomes. Perhaps we should we poke sticks in the wheels of the bandwagon to allow experience to catch up?
    Respectfully,
    Bob

  2. Bob, thanks for this. I broadly agree with your commetns and it would be a good idea to discuss and push back on some of the misguided enthusiasm!

    Clearly there is a case to be made for increased openness and collaboration. But this must be accompanied by substantive measures with regard to governance – systems, tools, resources. For example, I think there is evidence that joint working assists results, as do structured forums or procedures to address problems and to escalate issues.

    Some evidence suggests that there is too much readiness to brand somethign a ‘partnership’ or ‘alliance’ when it is really just a standard form of contract to which netiher party is making any substantive extra contribution. In those circumstances, the research certainly suggests a heightened failure rate.

    Tim

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