The paper explores how ‘Project Alliancing’, a commercial framework for delivering capital works projects, is increasingly being used by governments in Australia and its implications for developers, contractors and those servicing the construction sector.

 

“The central idea in project alliancing is that all participants share the responsibility for the project risks and the benefits of achieving or exceeding the project objectives,” said LIU Senior Vice President, Richard Head.

 

“All the decisions are made on a unanimous basis between the project owner and the non-owner participants.”

 

According to Mr Head, project alliance structures are now being chosen for a wide range of government infrastructure projects including roads, rail and water treatment.

 

“In an industry where projects are becoming increasingly complex and where it’s more difficult to see real returns, the construction industry is looking at new ways of sharing risks and avoiding litigation in an attempt to create a better return on investment.

 

“However, as project alliance structures become more commonplace, understanding their strengths and weaknesses is vital for all players in the construction industry,” he said.

 

This need has prompted LIU, which specialises in helping companies insure construction-related risks, to develop a detailed paper outlining the nature of the project alliance model and how it is changing the risk management landscape.

 

“It’s essentially about embracing and managing risks in a flexible environment. Instead of being concerned with allocating risks amongst participants, in a project alliance the participants will either win or lose depending on their collective performance against agreed project objectives.

 

“Ultimately, this means all participants are required to embrace a broader range of risks than they would normally accept. They are liable for risks over which they may have little or no control – such as the performance of another participant – leading to a range of new challenges, including how to insure such risks,” said Mr Head.

 

The LIU Project Alliancing White Paper also identifies the benefits and potential pitfalls of the project alliance model, providing guidance to prospective alliance participants to ensure they fully understand their responsibilities under an alliance agreement. 

 

One of the most serious issues faced by alliance participants is what happens if the project does not go according to plan as a result of an alliance team member failing to fulfill its professional obligations.

 

“While project alliancing creates a risk-sharing model that helps reduce disputes and litigation, there are risks in any construction project that are better protected via insurance,” said Mr Head.

 

“For example, an alliance agreement, with its typical ‘no-dispute’ clause, can make it very difficult to recover any loss sustained by the fault of another team member unless there is a specialised insurance policy in place.”

 

Mr Head believes that the project alliancing framework is a promising business strategy, provided that participants enter the arrangement “with their eyes wide open”.

 

“We prepared this White Paper to raise awareness of the growing trend for project alliances and to highlight some of the commercial, legal and insurance issues that arise from this model.

 

“Project alliancing can cut costs, promote innovation, save time and increase participant profits. With the right alliance, it is possible to have an integrated project team where there is sharing of resources and ideas in order to optimise project returns.”

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