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

May 2010 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.

May 2010 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.

Source: Alliancing Association of Australasia, project data base

Growth in Relationship Contracting in Australia, Public & Private

May 2010 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.

May 2010 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.”

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

May 2010 DRBA 9

Choice of Delivery System & Relationship Benefits

May 2010 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.

May 2010 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.

May 2010 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.

May 2010 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)

May 2010 DRBA 14

SOME PROJECT EXAMPLES

May 2010 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.

May 2010 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.

May 2010 DRBA 17

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.

May 2010 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.

May 2010 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

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

May 2010 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.