Transcript www.drb.org

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