Written by Rabin Rabindran and Derek Firth 

In his opinion piece (NZ Herald 21 February 2024) Mayor Brown provides a number of reasons for these overruns.  They include an obsession with governance skills rather than a range of skills directly useful to the sector involved, no focus on value for money in order that when it is known the project can if necessary be shelved or reduced to match it and there is scope creep because people who aren’t paying for it want more than originally needed.

He gives alarming examples of this excessiveness.

We entirely agree and believe there are compelling reasons to support Mayor Brown’s view.

His frustration echoes that of Simon Wilson (NZ Herald 1 December 2023) when he claims that delivering our infrastructure requires a total reset.  He illustrates that our metro rail construction costs are the highest in the world.  Quoting Sean Sweeney (the Chief Executive of our City Rail Link) Mr Sweeney refers to three contributing causes – the wrongful loading of certain risks onto the contractor, not having a pipeline of projects to retain a skilled workforce and not having willing or knowledgeable project owners.

Derek Firth has earlier been scathing of draconian contract provisions (NZ Herald 30 September 2018).

Unfortunately, inexperienced directors and executives of procuring organisations, and lawyers and technical consultants who do not have the necessary experience, simply go off the rails by recommending or insisting on harsh contract provisions doomed to add unnecessarily to time and cost.  Ironically, the consultants who do this for fear of being replaced by more robust competitors are rightly concerned because their clients lack the skills to see the error of the alternatives.

We are of the view that any owner or adviser trying to stick the contractor on any job, let alone a major project with, for example, the risks of ground conditions or changes in legislation is acting irresponsibly and demonstrates a complete lack of successful major project experience.  But these practices, or attempts at them, seem to be rife in New Zealand and many contractors here advocate for alliancing as there is limited downside for them.

Not surprisingly, concern with unnecessary waste is similar in the United Kingdom where as recently as in January of this year Gareth Davies, the head of the National Audit Office there, has said that the United Kingdom is wasting tens of billions of pounds on badly run projects.

Alliancing is a problem.  It is a procurement option the common features of which are unanimous decision-making protocols, sharing of all project risks and rewards such that the parties commit to an all win or all lose regime, no recourse to dispute resolution with a no disputes/no blame system thereby (hopefully) eliminating disputes and adoption of what is best for the project principles.  It sounds good in theory but adds to time and cost in practice.

It seems to have become a fashion fad in some Australian states, particularly Victoria, and followed by Waka Kotahi NZTA.

In 2009 the Department of Treasury and Finance of the Victoria State Government published a study into alliancing in the Australia Public Sector.

Key Finding 3 was that non-owner participants (contractors in particular) have a strong preference for alliancing over other traditional delivery methods. Most contractors would privately agree this is a very naive justification.

An experienced British commentator has wisely described alliancing/partnering as having a very limited place for suitable technically complex projects of long duration to allow the project team to bend and move with unforeseen change where multifaceted and innovation is required.

The National Alliance Contracting Guidelines from the Australian Department of Infrastructure and Transport say that projects suitable for alliance contracting generally have one or more of the following characteristics:

  • The project has risk that cannot be adequately defined or measured in a business case or before tendering.
  • The cost of transferring risk is prohibitive.
  • The project needs to be started as early as possible before the risks can be fully identified and/or project(s) scope can be finalised, and the owner is prepared to take the commercial risk of a suboptimal price outcome.
  • The owner has superior knowledge, skills, and capacity to influence or participate in the development and delivery of the project.
  • A collective approach to assessing and managing risk will produce a better outcome.

How many of the projects in New Zealand where alliancing has been used will have the above-mentioned characteristics?  It is our considered opinion that probably only the Canterbury earthquake recovery would qualify.  Even in that case the Controller & Auditor General in providing assurance to our Parliament that public money was being spent in an effective and efficient way and the public entities involved are managing the risks of the rebuild said: “The entities recognised a need to reassess their procurement model after the second major earthquake and used an established methodology to select an approach that was suitable for the circumstances”.

We very much doubt that a major highway (however large) is within that category, and we believe that the significant time and cost overruns at Transmission Gully north of Wellington and the motorway extension north of Puhoi could have been reduced with traditional procurement.

On the whole there are many drawbacks of alliancing including but not limited to the cost of setting up and running alliances, the lack of risk transfer, weakness of governance arrangements to disguise poor development of specifications, poor project management and the like, time and budget uncertainties, the smoothing over of difficulties because of the no disputes/no blame system with no recourse to dispute resolution, the need for unanimity in decision making which is often difficult and sometimes used to achieve an ulterior commercial advantage, value for money issues etc.  Government agencies involved in alliancing often end up paying for a substantial part of contractors’ mistakes.  In short, alliancing can add significantly to the cost of a project with often no value for the client.   Alliances need very good commitment by all parties with a true desire that what’s best for the project is best for each individual party.  It has been well described as synchronised swimming with sharks.

Not surprisingly, as a result of substantial cost and time overruns major employers in Australia and New Zealand have now pulled back, emphasising in their current procurement policies the position of alliancing as only one of many suitable techniques.

Indeed, more recently with the substantial, difficult, and urgent remedial works required for SH25A at Coromandel, Waka Kotahi very successfully adopted a design build procurement approach with obvious time and cost efficiencies.

Alliancing and other forms of partnering are not the preferred form of contracting in Asia, Europe, the Middle East, the USA, South America and even only to a limited extent in the United Kingdom where there are seven standard forms for using them.

Rabin Rabindran recently returned from operating out of Singapore for three months and was amazed to note the speed of infrastructure development including the building of new MRT stations & public housing.  Design build and other traditional forms of contracting were common themes.  Alliancing was hardly heard of.  Their Public Sector Standard Conditions of Contract which is the most common for public sector contracts is not an alliancing contract.

The alternatives to alliancing are many and varied and have worked well for infrastructure projects around the world.

First, there is the traditional build to the owner’s design.  This is the most commonly used international form of contract.  It has the advantage that the contractor has to price only the design put in front of it, and changes are variations.  The scope for price loading is very limited.  But to be successfully applied, the design must be nearly completed before it is priced.  This is where it has fallen down many times in New Zealand.  Project owners “beat the gun” by committing to a contractor before the design is substantially complete.  Time and cost overruns then become unstoppable.

Secondly, design build.  The value of this approach can be maximised with early contractor involvement and tendered for competitive tension.  We understand that this was successfully used for the earlier procurement of the electric trains for Wellington and Auckland with additional provisions for long term maintenance.

We understand design build was used successfully by On-Track for the electrification of the Auckland railway network.

Thirdly, there are several other forms of procurement such as Incentivised Target Cost contracts where the Principal and Contractor share risk and reward around a target. This is popular in NSW; fixed price contracts but with risk sharing around specific elements, for example, cost escalation.

These alternatives can quickly fall into disrepute if unnecessary draconian clauses are included which place absurd obligations on the contractor such as risks over which it has no control.

In conclusion, there is little place for alliancing contracts in New Zealand except in the very limited circumstances described.  They have resulted in unnecessary additional time and cost.  The traditional forms of contract are to be preferred and there are a number of opportunities to cleverly improve upon them.

Three major causes of cost and time blowout are committing to a contractor before the design is sufficiently complete, adopting alliancing when not appropriate and including ridiculous conditions of contract which place upon the contractor risks over which it has no control.

 

Derek Firth & Rabin Rabindran are construction lawyers.  Between them they have worked on billions of dollars of infrastructure projects in New Zealand and in many other countries.

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