may 2010drba1 experiences with dbs in relationship contracts in australia graeme peck 1 & alan...
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May 2010 DRBA 1
EXPERIENCES WITH DBS IN RELATIONSHIP CONTRACTS IN AUSTRALIA
Graeme Peck1 & Alan McLennan2
Presenter
Graeme Peck
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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
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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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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.
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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
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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.
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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.”
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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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May 2010 DRBA 9
Choice of Delivery System & Relationship Benefits
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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.
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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.
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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.
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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)
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May 2010 DRBA 14
SOME PROJECT EXAMPLES
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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.
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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.
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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.
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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.
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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
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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.
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May 2010 DRBA 21
Jan 2007 Feb 2010 Example 1: Contract value,
A$1.5 bn, awarded late
2006. All SPs met to date;
substantial compln ≈ 5
mths early.
Possible small over-run
on major vary to upgrade
much of S section from
6 to 8 lanes
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May 2010 DRBA 22
Some other examples
#5: Contract for the 3rd stage of a multi million dollar rolling stock upgrade for the Sydney city and suburban passenger rail network.
• 2 previous stages have proceeded under a traditional fixed price D&C contract; no partnering provisions, & no DB.
• Both stages have resulted in major disputes leading to substantial and costly arbitration proceedings.
• The Owner decided that the same philosophy could not be carried forward into Stage 3, which was modified to include formal relationship arrangements, an open book Target Cost arrangement, painshare/gainshare provisions, and a three party DB.
• underway for about 6 months. To date , is working well
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May 2010 DRBA 23
D&C Contract for new passenger trains for
Sydney area system.
Stage 3: 18 x 4 car trains, value ≈ A$ 300m,
Relationship principles, Target Cost,
painshare/gainshare & a DB
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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.