Perhaps because we live ‘Down Under’, Australians have always been somewhat contrarian. We like our beer cold, for example, and play our favourite game of football with a pointy ball instead of a round one.
So while the past ten years have provided an interesting economic backdrop for players in the construction industry – with the world economy moving from boom to near bust to (hopefully) better times ahead – for most of those years Australia’s construction industry simply surged ahead, even during the global economic downturn of 2008/2009.
Nonetheless, changes in the economy did lead to changes in how projects are delivered in Australia. Which begs the question – how has project delivery evolved in Australia over the past decade and how will the abundance of upcoming construction work across the country be delivered going forward?
The short answer to the first part of that question is that owners and contractors have worked together to develop contracting models that are more sustainable for both parties, by considering movements in the economic climate and the best management of risk allocation.
Ten years ago, the contracting models used for projects were the ‘traditional’ form of contracts – an allocation of risk for an agreed fixed lump sum. Popular contract models included EPC, design and construct, and construct only contracts, with contractors being appointed following a competitive tender process.
This process was costly for all involved. In difficult times, contractors would accept a high level risk with only small contingencies, which led to a claims-focussed culture. In less difficult times, contractors would either accept a high level of risk (with a price tag to match) or a low level of risk and again revert to focusing on claims if any of the owner’s risks came to pass.
By 2003/2004 contractors had become more selective about the projects they bid for, and they began to avoid high risk delivery models. Owners were therefore forced to critically assess traditional procurement processes and to become innovative in order to attract the best contractors and engineering resources.
The most dramatic change to project delivery models came with the development in Australia of “alliancing”.
Alliances involve an owner and one or more service providers (designer, builder, supplier) coming together to work as an integrated team to deliver a specific project under a contractual framework where the commercial interests align with the actual project outcome.
One of the significant drivers for the parties to ensure the project is successful is that most risks and rewards are shared jointly. Put simply, in the first phase of an alliance, the parties work together to finalise a scope of work and prepare a target cost estimate (TCE) of the cost to complete the project. That TCE is locked in, and phase 2 (the actual construction) commences.
During phase 2 the parties endeavour to complete the project for less than the TCE. If they do so, they share in the savings. If they exceed the TCE, then they share in the cost overruns (although, typically, the service providers’ share of risk is capped at their profit, so they always receive their actual costs).
The use of alliances peaked in Australia in about 2006. They are particularly suited for project delivery where the risks are not known at the time the service providers are introduced to the project. In a heated market, however, they were used across a very wide range of projects.
One criticism of alliances, not necessarily well founded, is that TCEs have become ‘too high’ – that is, the parties have ensured that the TCE will never be exceeded. There was also concern that service providers are paid all of their direct costs, regardless of how well (or poorly) the project performs.
With the onset of the GFC in late 2008 the focus of owners shifted. What they looked for was cost certainty that did not involve significant contingencies but equally recognised that, in order to attract the best contractors and engineers, contractors needed to have sufficient involvement with the project to identify risks and price the works accurately.
This balancing act resulted in what is now described as the Early Contractor Involvement model (ECI).
ECI extended the first stage of alliancing from identifying risks and establishing a TCE for the project works to identifying the risks, allocating responsibility for those risks and determining an overall hard dollar figure for the project works based on that risk allocation.
ECI is seen as an appropriate middle ground. The ‘best of both worlds’, it uses a soft dollar approach to the first stage (avoiding some of the difficulties associated with a traditional D&C) and then a hard dollar approach with a traditional lump sum contract at the point where all risks can be accurately identified and priced, creating greater cost certainty through the fixing of the price (potentially with incentives).
In the last year of the decade, and as the market steadies from the effects of the GFC, we see increased use of the ECI model for all kinds of projects – small, medium and large. Like alliancing, it works well where a project needs to be fast tracked, or where the design is complex or where there is significant risk that cannot be quantified at the time of tender.
Although alliancing will remain important in project delivery in Australia, ECI is the way of the future.