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Out-Law Analysis 4 min. read

NEC4 Alliance Contract opens door to increased collaboration

ANALYSIS: The much-anticipated NEC4 Alliance Contract has now been published, allowing parties to construction projects to collaborate more closely and equally share in that project's risks and rewards.

The Alliance Contract is the last outstanding piece from the fourth edition of standard form New Engineering Contracts produced by the Institution of Civil Engineers, following the publication of the rest of the NEC4 suite in June 2017.

The contract was launched at the NEC Users Group Annual Conference with the support of Yorkshire Water, which intends to adopt it on its delivery programme for 2020-25 (AMP7). Given the interest shown by conference attendees, it is likely to see uptake on other long-term works programmes and on other major infrastructure projects, for example in the transport and energy sectors.

Success of the new contract will depend to a large extent on the behaviours and attitudes of the parties involved and the ethos that they adopt - and, in particular, whether the collaborative ethos will extend down the supply chain to tier 2 and below. If behaviours and ethos are in alignment, then there is every expectation that projects delivered under the new Alliance Contract will be delivered more successfully and profitably for all those involved.

How will the contract work?

The Alliance Contract is effectively a 'design and build' form, intended for the delivery of long-term, complex infrastructure programmes where the volume of work justifies full investment from the client in the processes and fostering the long-term relationships necessary to deliver a successful project. It could be used to deliver a single major project or a programme consisting of a number of relatively low value individual projects which combine to create a major programme.

It is a multi-party contract, under which the client and its main delivery partners (effectively the tier 1 supply chain, which potentially consists of works contractors, consultants and equipment suppliers) all sign up to a single set of terms. The members of the alliance are referred to by the contract as the 'Alliance Delivery Team', a single integrated delivery structure. The form is effectively a reimbursable contract, equivalent to NEC option E; overlaid with a performance regime which consists of targets for meeting alliance objectives set out in a performance table. A project budget is measured against the total alliance cost (similar in nature to the pain-gain approach of NEC option C) to determine the 'pain-gain' share. The critical difference is that the calculation of the budget and total alliance cost includes the client's costs, as the client is an integral part of the alliance. Similar to NEC option E, the alliance member's costs consists of the alliance member's defined cost plus fee.

How is risk apportioned?

One of the main selling points of the Alliance Contract at consultation stage has been that it places limited risk on the supply chain, with most risk being shared in agreed portions. Consequently, there are a limited number of compensation events, consisting of client reserved matters and prevention. The alliancing structure also means that compensation events are administered differently to other NEC forms.

The final contract does incorporate secondary option X4 for a parent company guarantee (PCG), but questions have been raised as to how necessary these provisions are likely to be in practice. Clients do, however, need to consider at the very least the likely risk of insolvency of alliance members, so robust recourse to banks and sureties or parent companies is likely to remain a key risk-mitigation issue.

The only risks intended to be carried by individual alliance members are wilful default, or deliberate acts, of that alliance member; breach of intellectual property rights; and death or bodily injury of the alliance member's own employees.

What are the project governance arrangements?

Under the Alliance Contract, the Alliance Board sets strategy, allocates work and appoints the alliance manager. All alliance members have an equal voice and voting rights except in a number of discrete areas, and decisions of the alliance members have to be unanimous.

Work is delivered by the Alliance Delivery Team consisting of all the alliance members, including the client.

Additionally, the client must define a clear set of alliance objectives (analogous to the client's requirements) and the performance regime. Getting this right from the outset will be critical to project success.

The client has a number of client duties, such as appointing alliance members, carrying out assurance on cost and quality and, of course, making payment. The client's role in appointing the alliance means that the client will have to review its selection criteria to ensure that adequate weight is given to those aspects of bids that demonstrate a collaborative aptitude to make alliancing a success.

There are also a limited number of reserved matters on which the client can make a unilateral decision, such as changes to the client's requirements.

Although the NEC suite discourages the use of bespoke 'Z clauses', it is likely that additional client-led provisions may be necessary. Provisions of the standard form may need clarification following further analysis, to ensure that they align with the commercial priorities of the alliance members.

Is early engagement possible?

As the equivalent of a design and build contract, the intention is that the Alliance Contract will be entered into at the same stage of project maturity as the NEC Engineering and Construction Contract (ECC). There is, however, an Early Alliance Involvement option X22 allowing for engagement between the parties at a much earlier stage - for example, allowing early design studies to be undertaken and the project budget to be developed. The client can add new schemes to the alliance using option X26.

What happens if things go wrong?

Successful alliancing will depend on all partners pulling their weight. The Alliance Contract therefore includes processes for where a partner is in breach, and allows other members to vote an offending partner out of the alliance. Breach of contract can ultimately lead to termination, as the contract also includes termination for fault provisions.

In keeping with the ethos of shared risk, the contract includes a 'no blame no claim' provision which encourages parties to avoid adopting adversarial positions. The Alliance Board is intended to play a key role in resolving disputes. An independent expert can be called on to give a non-binding opinion and senior representatives must play an active role, supported by mediation if agreed).

The contract recognises that the statutory right to adjudicate cannot be excluded but, unlike in other NEC forms, does not facilitate adjudication by way of any extended contractual provisions. The expectation is that the Scheme for Construction Contracts would apply.

Khalid Ramzan is a construction procurement expert at Pinsent Masons, the law firm behind Out-Law.com.

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