Finance sector must embrace alliance partnering

While governments and the resources sector are increasingly recognising the benefits of alliance contracting, it seems that the finance sector is still wary of soft dollar contracts.

Ian Briggs, head of Minter Ellison's construction and infrastructure practice in Queensland, said there was a growing track record of successful and bankable projects being delivered using a soft dollar contract model.

“State governments and especially players in the resources sector, are more likely these days to turn to alliance partnering, to ensure that their projects not only to proceed more smoothly but are also delivered on time and within budget. The challenge is to get financiers to see that traditional project delivery methods aren't necessarily the only ones available, or necessarily the best,” Briggs said.

Under a soft dollar contract, the successful parties are chosen not on price, but on non-cost based criteria. There is a strong focus on developing and maintaining relationships between the contracting parties and risk is allocated equitably and managed collaboratively.

While direct costs are recovered, there is a transparent margin for overheads and profit and a mechanism for pain and gain based on performance against cost and non-cost criteria.

“Alliance contracting is the most pure version of these types of contract. Properly done, the target cost prepared by the alliance, provides a far better indicator of the final cost of the project, than any guaranteed maximum price or lump sum price tendered for via a more traditional contract.

“That is because all alliance participants, including the owner, debate and finalise allowances for project risks early in the piece, and generally agree that very few events will lead to an adjustment to the target cost as the project unfolds.

“That is very different to a conventional fixed price contract, where document discrepancies, latent conditions, council delays and owner decision-making delays will all lead to variations or price adjustments.

“Crudely put, a fixed price or guaranteed maximum price is anything but fixed or guaranteed. An alliance target cost is a much safer bet,” Briggs said.

In his paper, he noted that almost all completed alliances in Queensland have reported less than a 5% difference between target cost and the actual cost.

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