How NEC4 ALC differs from Australian practice

Sydney Water’s decision earlier this year to adopt NEC4 as its standard procurement route for construction works and services marks a watershed for greater public-sector use of NEC in Australia. It was driven by the need to develop a more collaborative relationship with the company’s over-stretched construction supply chain.

As I stated in the same issue, the overheated market on Australia’s eastern coast is encouraging contractors to price risk much more fully. The NEC4 suite, with its strong focus on risk allocation and management, should help to ensure a fairer deal for all parties as well as improved productivity, fewer disputes and better value for money.

Alliance contracting is also making a comeback for the same reasons. Australia has a long history of alliancing, meaning the NEC4 Alliance Contract (ALC) will be up against stiff competition from existing forms of alliance contract. It is therefore worthwhile looking at how the ALC differs from traditional Australian alliances and the potential benefits and challenges this may bring.

Achieving consensus

Under the ALC, decisions of the alliance board require unanimous agreement, so each member of the board has a right of veto. Decisions on which the alliance board cannot achieve consensus can be referred to an independent expert for a non-binding opinion to help resolve the matter. This approach has the advantage of forcing the parties to achieve consensus to move forward.

Australian owners may feel the absence of a deadlock-breaking mechanism potentially exposes them to the risk that part or all of the contract could become a legally unenforceable ‘agreement to agree’. This is why many Australian alliance contracts include a such a mechanism. They also frequently include decisions that are reserved for the owner alone, which can also be made in its own self-interest rather than in the interest of the project.

Sharing liabilities

ALC embraces the ‘no blame’ concept by treating all uninsured liabilities incurred by a participant as a result of claims brought against it as an alliance cost. The exception is liability to third parties arising from an intentional act or omission in breach of the contract, which is to be borne by the defaulting participant.

Unlike Australian alliances, ALC allows the owner or another participant to bring a claim against a participant for negligence; makes the resultant liability, to the extent it is not insured, an alliance cost that must be reimbursed by the owner; and shares the ‘pain’ of this additional alliance cost between all participants in accordance with the agreed gain/pain share regime.

An advantage of the ALC approach is it overcomes the need that arises under most Australian forms for a bespoke professional indemnity insurance policy. This has to cover an alliance loss caused by the professional negligence of an alliance participant despite the participant having no legal liability to the others for its negligence.

Fairer remuneration

ALC differs from the remuneration model found in most Australian alliances in that the fee is calculated by applying each non-owner participant’s stated ‘fee percentage’ to the actual direct costs incurred by that participant.

There is no mechanism for interim payments of gainshare or painshare in advance of final completion and, if alliance costs are less than the budget/target cost, the cost savings are shared, even if other alliance objectives are not achieved.

Furthermore, the liability of non-owner participants to share the pain of cost overruns is not necessarily capped at an amount equal to its fee, although there is the ability to achieve this result by utilising the optional limitation of liability clause.

Australian owners might see the ALC approach to calculating the fee as incentive for non-owner participants to maximise their direct costs to increase their fees. Care therefore needs to be taken to ensure that the painshare payment incurred by a non-owner participant due to a cost overrun arising from its inefficiency exceeds the resulting increase to its fee.

ALC also only allows the owner to terminate the alliance for convenience if all other participants agree. Australian owners may feel this compromises their ability to manage the risk of a major cost overrun, especially once the cap on the pain-share liability of the non-owner participants is reached.

Managing change

ALC treats every scope variation as a compensation event that entitles the non-owner participants to an adjustment to the budget, target completion date and/or other performance targets, even if it is a minor variation.

Australian alliance contracts only allow the budget and other targets or key performance indicators to be adjusted in very limited circumstances. In particular, variations to the scope of works do not result in an adjustment, unless all participants including the owner agree that the variation is a ‘major variation’. This has led to non-owner participants to make higher allowances for risk resulting in higher agreed budgets, though these are more likely to reflect the actual outturn cost.

Conclusion

ALC will almost certainly find a place in the Australian construction contracting scene. It embraces most of the key concepts that the Australian industry is looking for, as well as being shorter, simpler and easier to use than the forms of alliance contract presently used in Australia.

The differences will make it particularly appealing to non-owner participants, who are crying out for Australian governments and other project owners to adopt a more sustainable approach to the procurement of civil construction services.

But it also presents some challenges to owners, who may wish to retain greater control over their projects.