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Collaborative Contracts in Construction: What are they, and when should they be used?

Collaborative contracting is increasing in popularity for project delivery in Australia. So what does it actually mean, and when is a collaborative contract appropriate?

The idea behind collaborative contracts is to give all parties the incentive to see a project succeed.

In order to do this, they are designed to combat the negative commercial incentives which are ingrained in conventional or more traditional fixed-price contracts (such as lump sum, D&C and EPC contracts).[1,3] Collaborative contracting mechanisms are much more effective than “agree to cooperate” clauses and they help to improve project outcomes, develop relationships and encourage repeat business.[1,3]

Increasingly popular in Australia and the US, collaborative contracts often come in the form of “early contractor involvement” or “managing contractor” style arrangements.[1,3]

Flexibility

At the heart of the success of collaborative contracts is their flexibility. The level of collaboration involved can be tailored to suit a specific project or business relationship, with consequential adjustments to price and risk.[1]

For example, collaborative contracts can include any variation or combination of:

  • Joint Decision-Making Body, with representatives from all stakeholders
  • “No Blame” System where parties cannot be liable for some or all faults
    (the spectrum of faults covered by this mechanism varies significantly between contracts and projects, and usually still excludes things like wilful default)
  • a Contractor fee made up of direct cost, a fixed margin for profit, and importantly, an incentive payment which is linked to project outcomes or KPIs
    (meaning the parties can potentially share in the risk and reward across the project)
  • key shared risks, such as delay risk or rectification work
  • transparency through open-book accounting
  • substantial communication requirements to deal with emerging issues.[1,2]

The usual standard form contracts available in the Australian market are not collaborative in nature so projects looking towards collaborative contracts either develop bespoke arrangements or lean towards overseas models, such as the NEC contracts.

What are the advantages?

Collaborative contracts can provide an opportunity for significant savings for both Principal and Contractor parties. For example, direct costs replace contingency fees, and these can be reduced because the Contractor’s risk is lessened through the shared risk mechanisms.[1]

The non-adversarial arrangement can also reduce the time and costs that go into day-to-day contract administration and risk management.[1,2]

The shared liability framework allows parties to communicate more freely about various issues. This results in improved project outcomes and efficiencies, provides more room for innovation and experimentation for the benefit of the project, and reduces the likelihood of additional costs arising out of disputes.[1,2,3]

What are the disadvantages?

While there are, of course, disadvantages to a collaborative approach, most of these can be effectively managed if the correct framework is developed for a project.

Margins for a Contractor may be lower, but likely come with an opportunity for further profit tied to success of the project.[1] Costs may be higher in connection with tailoring and negotiating a collaborative contract, but these are generally reduced as corporate knowledge increases and as the approach becomes more commonplace.[1]

There may also be an increased time commitment required by collaborative mechanisms. For example, in developing and maintaining collaborative contract relationships during the life of a project, or in reaching decisions through a stakeholder led decision-making body.[1,3] However, these factors can be managed by tailoring the level of collaboration to fit the nature of the existing relationship between the parties.

What about the risks?

A key risk is that cost savings are not realised, and this is often the case in small-scale or short-term projects.[1] There is an increasing emphasis on using collaborative arrangements in such projects, but these can be difficult to achieve when there is no standardised contract or approach for collaborative contracting.

Parties also run the risk of wearing the cost of another party’s negligence, inefficiency, or defective work, with no right to seek a remedy. In addition, insurance may not respond to a claim in the context of a “no liability” regime. While customised insurance is available, it is expensive.[1]

So, when should you use it?

Collaborative contracting currently delivers best results in long-term, large-scale projects. Contracting models are, however, becoming increasignly accessible for smaller projects in Australia, for example through the increasing influence of the NEC suite of contracts.[1]

A project involving collaborative contracts should ideally be of a size or nature that justifies the cost of setting up the collaborative framework, and should be carried out in the context of an existing business relationship.[1,3]

In our experience, parties get the most out of collaborative contracting in projects that are difficult to price, have an unpredictable scope, or are ongoing, so that the benefits of innovation, experimentation and good working relationships can be fully realised.[1,2]

If you have any questions around how to develop or incorporate collaborative contracting on projects, please contact us at Morrissey Law + Advisory.

 

[1] Collaborative Contracting, March 2018, PricewaterhouseCoopers.
[2] Collaborative Contracting Better Practice Guide, September 2017, Australian Government Department of Defence.
[3] National Alliance Contracting Guidelines, Guidance Note 6, Early Contractor Involvement and Other Collaborative Procurement Methods, September 2015, Australian Government Department of Infrastructure and Regional Development.

Disclaimer: This publication by Morrissey Law & Advisory is for general information and commentary only and should not be considered or relied upon as legal advice. Formal legal advice should be sought in relation to any matters or transactions that may arise in relation with communication.