Project Alliance

By Sunil Shinde

TATA Realty and Infrastructure Limited

Vision To develop best-in-class Infrastructure and Real Estate projects which contribute to national economy and enhance the quality of life Sectors of Interest Real estate Internal group assets Available market opportunities Urban infrastructure SEZs (special economic zones) Bridges Logistics parks Ports
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Projects in Hand
Multi product SEZ at Chennai- Ramanujan city (>4 million square feet) IT SEZs for TCS at 8 locations in India Pune, Ahmedabad, Kolkata (ongoing) State of the art retail mall at New Amritsar City Centre for integrated development. Participating in development of world class bridges, roads, highways etc. Its subsidiary has won NHAI project on DBFOT model for Pune Solapur section in partnership with Atlanta S.p.a. Italy. Evaluating development of multi product Special Economic Zone (SEZs) in State of Orissa , Maharashtra and Andhra Pradesh The consortium lead by TRIL has qualified for RFP stage of development of Udaipur and Amritsar Airports. Value of the projects under execution is more than Rs.9000 Crore

TIDCO Project, Chennai

Mixed use Development of SEZ of 4.2Mn sq ft. comprising IT space convention centre retail, premium residential apartments and 100 Service apartments. Concept by international Architect : M/s. Skidmore, Owings & Merrill India, LLC (SOM) Project duration 36 months

Strategic Requirement of the Project

It was necessary to have the contractor on board in early stages to work with the design team as Contractor can add value during initial stage when project schedule & cost can be influenced most. Combined knowledge, expertise, innovative ideas of both Client & contractor can be tapped

Alternate Project Delivery Systems

Prevailing Project delivery systems those allow early introduction of Contractor are: a)Design & Build b)Cost plus c)Target contracts d)Build Operate & Transfer e)Partnering &

f)Project Alliance also called Relationship contracting

Why Project Alliance?

Due study was done of ongoing & completed contracts in Australia on Alliance concept & it was felt that a TATA Group company can adopt Alliance project delivery system & set an example for the Construction Industry Alliance project delivery is adopted for more than a decade in Australia Traditional master- servant relationship of project owner & contractor does not align the interests of the parties Many existing contractual relationships between clients & contractors lead to adversarial behavior between parties & this has a negative effect on project outcomes

Alliance Experience
More than 200 projects worth $67 Billion have been executed. The results were extra ordinary The projects were mostly through Government & Private partnerships Complex infrastructure projects were successfully executed by using this concept
Roads, Bridges & Expressways Railways Buildings (Museum) Water Desalination/Purification Plant Tunnels

Cost Performance
Variance between Final project cost & TOC (target outturn cost)
10.00

Percent difference from TOC

5.00 0.00 -5.00 -10.00 -15.00 -20.00 -25.00 -30.00 -35.00 Projects 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Source: RMIT - sample of 30 alliance projects

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Time Performance
Variance of actual program & Estimated program
60.00

Percent difference from Target duration

50.00 40.00 30.00 20.00 10.00 0.00 -10.00 -20.00 -30.00 -40.00 -50.00 Projects 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Source: RMIT - sample of 30 alliance projects

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Alliance in a Nutshell
Standard Contract Alliance Contract

Project

Project

Individual Interests

Common Objective

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Item rate contracting V/s Alliance contracting

6-8 weeks Concept stage Schematic stage Design development stage GFC stage Construction stage Foreign design architect Municipal architect Services consultants 8-10 weeks 10-14 weeks 12-14 weeks ~32-36 months

Structural consultant

Local architect, PMC

Introduction of contractor

Concept is finalized by architect. Value engineering Limited to finalized concept. Cost is an outcome of the finalized concept i.e. Cost is derived
6-8 weeks Concept stage Schematic stage Design development stage GFC stage Construction 8-10 weeks 10-14 weeks 4-6 weeks ~32-36 months

All consultants engaged upfront

Contractor introduced upfront

stage

Introduction of contractor

Concept is jointly evolved keeping Cost as a Target. Value Engineering over the entire process including constructability of the concepts

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Project Alliance
1. Project Alliance is where an owner & one or more service providers work as an integrated team to deliver a specific project under a contractual framework where their commercial interests are aligned with actual project interest# We have a project specific alliance for the Chennai project with a contractor, Local architect, MEP consultant & Structural consultant

2.

# Source: Jim Ross, Introduction to project alliancing, April 2003

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The Difference
Many companies & the client make an agreement to work together towards common goals - we are One Team Design & Construction teams working collaboratively The client is part of the team Pain/Gain sharing: When things go well all parties win. If not, we all lose Managing cost, being efficient & beating the schedule provides big benefits to all parties

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Project Alliance Board (PAB)

Provide governance Set policy and delegations Monitor performance of AMT High level leadership / support Resolve issues within alliance 1 or 2 from owner 1 or 2 from each of the NOPs ALL DECISIONS UNANIMOUS

Alliance Management Team (AMT) headed by Alliance Project Manager Deliver Project Objective Day to day management Provide leadership to the wider team try to resolve all alliance issues AMT comprises key project leaders with specific project functions, with at least one representative from each alliance participant

Wider Project Team

Clearly defined responsibilities & accountabilities within an integrated team organization
No person-marking No duplication of roles or systems

"IPT" Integrated Project Team All roles in the IPT will be filled by personnel drawn from the resources of the alliance participants on a "best-for-project" basis.

Source: Jim Ross, Introduction to project alliancing, April 2003

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Core Alliance Principles

Alignment of Objectives

Companies and client agree on desired project outcomes and objectives Participants focus on meeting and exceeding project objectives All decisions must be best for the project Individuals objectives aligned with project objectives
Reimbursement of 100% open book All participants win or all participants loose Equitable sharing of risk and reward Equitable sharing of Gain/Pain
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Commercial Alignment

Core Alliance Principles (Contd.)

Collective responsibility
No us and them The alliance participants (together) shall . A peer relationship where all participants will have an equal say Integrated project teams Full access to best resources from all participants

No Blame
All decisions of PAB/ALT must be unanimous Commitments to resolve issues within the alliance No recourse to litigation Personal accountability and no blame culture

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Core Alliance Principles (Contd.)

Exceeding Objectives
High performance teams Commitments to stretch targets Breakthrough thinking process Innovative culture Challenge the status quo there is always a better way

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Attitudes, Behaviors and Languages

Listening openly and without judgment Trust and mutual respect Encourage positively and constructively Open, honest and respectful communication No hidden agendas Visible and unconditional support from senior management Honour commitments Be accountable for your actions

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Structural features of a Project Alliance

1. Owner pays non owner participants for their services in accordance with A. Project costs & project specific overheads reimbursed at cost based on audited actual costs B. A fee to cover corporate overheads & normal profit C. An equitable share of the pain or gain depending on how actual project outcomes compare with the pre-agreed targets which the parties have jointly committed to achieve

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Structural features of a Project Alliance (contd.)

2. 3. Project is governed by joint body Project Alliance Board or Alliance Leadership Team where all the decisions must be unanimous. Day-to-day management of the project is by a seamless integrated project team where all members are assigned to the team on a best-for-project basis without regard to which party they are employed by. Parties agree to resolve issues within the alliance with no recourse to litigation except in the case of a very limited class of prescribed Events of Default

4.

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Development of Alliance
Selection: The owner to select the right partner and align on the overall framework and primary commercial parameters. iPAA: (interim Project Alliance agreement )The participants enter into a simple consultancy agreement whereby nonowners are reimbursed at cost to work in an integrated team on pre-construction activities. Incl. development of Target Outturn Cost (TOC), Target Schedule and non-cost targets. PAA: (Project Alliance Agreement) After agreeing on TOC and other targets and with owners wish to proceed with the alliance , the participants enter into a full agreement.

Source: Jim Ross, Introduction to project alliancing, April 2003

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Alliance Auditor
Owner engages an experienced financial auditor to validate that all payments under the alliance are fully open book & in accordance with the terms of compensation The auditor can also be used to validate that the corporate overhead and profit are business as usual rates

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Compensation under iPAA

Reimbursement is limited to recovery of actual costs( with no margin for corporate O.H. & Profit) If the participants proceed into PAA, then the non-owner participants recover a margin on the work they did during the iPAA If they do not enter into PAA then the non-owner participants may still receive a margin on the iPAA work depending on the reasons
not agreeing Target Cost & other targets no margin on iPAA work other reasons- margins paid

No pain: gain in this period though it is a period of very high innovation & value-adding

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Compensation under PAA

Crop Oheads

Limb 1: 100% of what they expand directly on the work inc. projectspecific overheads Limb 2: A fee to cover corporate overheads and profit. Limb 3: An equivalent sharing between all alliance participants of gain/pain depending on how actual outcome compare with pre-agreed targets in cost and various non-cost key result areas (KRAs) In our case we have restricted risk up to margins & capped it to maximum % gain

Outstanding performance & profit

Limb 2 is 100% at risk under the limb 3 risk:reward arrangements

Profit

Limb 2 (Fee)

Business as usual performance and profit

Direct Project Costs

Capped Painshare For NOPs Performance Adjustment

Recovery of costs under limb 1 is guaranteed irrespective of the outcome under the limb 3 risk:reward arrangement

Project- Specific Overheads

Limb 1 (Costs)

Source: Jim Ross, Introduction to project alliancing, April 2003

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TOC Gainshare/Painshare
NOP Share of Gainshare

NOP Share of Gainshare is capped Owner Share of Painshare

50% Gainshare to NOPs, 50% Gainshare to Owner Owner Share of Gainshare Target Outturn Cost

50% Painshare to NOPs, 50% Painshare to Owner

NOP share of Painshare is capped

NOP Share of Painshare 26

The Target Outturn Cost

During iPAA the participants jointly develop TOC TOC is used to determine limb 2 fee & as target against which the actual cost will be compared to determine the extent of under / overrun that is to be shared amongst the alliance participants The TOC is intended to be reasonable estimate of what it should take to deliver the agreed scope of work taking into account: delivery schedule, Quality, Performance in non cost areas such as health & safety, environment, community, innovation, etc

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Pain : Gain
The sharing of cost under/ overruns is usually the primary component of the pain: gain arrangements The cost overruns may be shared 5O-5O%. Generally there is a cap on pain share Under runs are also shared is the same way For better performance in non cost areas, Non Owner Participants gain additionally. It can be additional few % to NOPs

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Variations
The situations that would be treated as variations under a traditional contract are not variations under the alliance-rather they are just part & parcel of the delivery of the project If owner changes scope or changes fundamental or design requirements, then cost & other performance targets are adjusted

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Selection Process
Request for Proposal Panel recommends a preferred proponent Owner approves a prefered proponent

Receive / Evaluate written submissions

Financial auditor conducts Establishment Audits

Discussions with the prefered proponent to:

Nominate initial shortlist (3 to 6) 1/2 day interview / discussion with each shortlisted proponent to:

Discuss/ Clarify key issues Review/Discuss alliance model Assess alliance understanding / affinity Assess technical & resource capability Review expectations

Confirm direct cost framework Lock in on fee % (Profit + OH's) Agree risk:reward strucutre Finalise drafting of iPAA Agree kick-off Plan incl. budget for iPAA Agree on terms/strucutre for PAA

Nominate final shortlist of 2

Yes

Is everything agreed?

No

2 day workshop with each of the final shortlisted proponents to align on:

Owner / NOP's approval to proceed

Commitment to outstanding results Principles, mission & objectives Prospective PAB / ALT Alliance team structure / roles Compensation framework Process for development of TOC Alliance management system Project kick-off strategy

Executive iPAA
Project definition, Consultation, site /material investigation, strategic procurement , initiate approvals , develop & agree target etc.

iPAA Period
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Legal / Contractual Framework

Lawyers have an important role to play up-front in ensuring that the intention of the parties is enshrined in a properly structured & legally effective alliance agreement Insurance- It is possible to get the insurance cover without any liability arising & without any right of subrogation against any of the alliance participants

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References
Evans & Peck, Australia Relationship contracting, 1999, Australian Constructors Associations Phillip Greenham, Minter Ellison Lawyers, Australia Jim Ross, Introduction to project alliancing, April 2003

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THANK YOU

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