Will the Delivery Partner Model deliver for the Brisbane 2032 Olympic Games?
Rumour has it that the Queensland Government may use the Delivery Partner Model to deliver venues required for the Brisbane 2032 Olympic Games. But will it deliver, and what do companies wishing to participate in these construction works need to know?
How does the Delivery Partner Model work?
The delivery partner model is best viewed as a sophisticated approach to engaging consultants to enhance the project owner’s project management capability.
It enables a project owner to:
supplement its internal project management capability, in order to achieve a project management capability that can procure and manage the general and specialist subcontractors needed to deliver major projects or programs like the Brisbane 2032 Olympic Games infrastructure; and
thereby avoid paying the premium that a tier 1 head contractor will charge to provide this capability.
The approach assumes that the owner will pay less to engage delivery partners to supplement its internal project management capability than it would have to pay a tier 1 head contractor for that project management capability. The likelihood of this increases if the market demand for tier 1 project management services is high relative to supply capacity, which will surely be the case in Brisbane as 2032 approaches.
Mandatory competitive subcontracting
To ensure value for money, the delivery partner(s) are required o competitively tender all construction work on behalf of the project owner, and are precluded from self-performing such work.
The project owner contracts directly with the general subcontractor(s) and specialist subcontractors that would otherwise be subcontractors to a tier 1 head contractor. The project owner will also need to contract in the design and construction capability that a tier 1 head contractor would bring to the project from its internal resources.
Remedy for defective work
Although the delivery partner(s) may enter into or administer these contracts on behalf of the project owner, the owner’s primary contractual remedies for poor performance by a subcontractor are against the relevant subcontractor, rather than the delivery partner(s).
Consequently, the integration risk that would be transferred to a head contractor under a traditional head contract is retained and managed by the project owner, with the assistance of its delivery partner(s).
The owner no longer has a ‘single point of accountability’ in the head contractor. If a poorly performing subcontractor blames the designer or another subcontractor for its poor performance, the burden of proving the respective fault of each falls on the project owner.
Each delivery partner shares this integration risk with the project owner, to the extent that its fee on account of profit margin and contribution to overheads is ‘at risk’ depending on project performance against agreed cost, time and other KPIs. Once each delivery partner reaches its painshare cap, it ceases to share the risk of poor performance against these KPIs.
Payment regime
Each delivery partner is paid according to the three-limb alliance style payment regime. Each delivery partner receives:
100% of its actual costs in performing the delivery partner activities;
a lump sum amount on account of profit and contribution to corporate overheads; and
a gainshare payment, or pays a painshare payment, based on how the project performs against agreed KPIs.
The KPIs are usually based on whole-of-project outcomes that deliver, or destroy, value for the project owner, such as a target cost, target completion date, operating performance/quality targets, sustainability targets, local industry participation and the like. The painshare payment is often capped at 100% of the limb 2 fee.
Remedy for late completion
While late completion will result in a painshare payment (or a reduction to the gainshare payment), the quantum of the painshare payment is not equivalent to the liquidated damages that the project owners would ordinarily obtain from a head contractor.
The project owner may recover liquidated damages under one or more of its contracts with the general and specialist subcontractors, but only to the extent it can prove the relevant subcontractor is solely responsible for the delay, if the subcontractor alleges another subcontractor delayed it.
Also, each subcontractor will seek to cap its liability for delays by reference to the contract price under its contract.
Key benefits
The key benefits of the model are:
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It enables the project owner to avoid having to engage a tier 1 contractor to provide the required project management capability, and provides an opportunity for the project owner to replicate this capability at a lower cost.
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It aligns the profit-making interests of the delivery partners with the project owner’s project objectives, via the gainshare/painshare regime. The delivery partners are incentivised to optimise project outcomes based on the agreed KPIs. Contrast this with:
the traditional hourly rates – where the consultant maximises its profit by maximising the number of hours work; or
lump sum fees for agreed tasks/milestones, where the consultant maximises profit by minimising its costs (i.e providing the bare minimum, even if doing more would generate better outcomes for the project owner).
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By engaging a contractor as a delivery partner, the owner can obtain early contractor involvement during the planning and design phases.
Key risks
The key risk of the model are:
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The project owner assumes integration risk – no single point of accountability for quality.
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The project owner won’t get a ‘wrapped’ time obligation from a single point of accountability, so recovering losses arising from late completion will be considerably more difficult.
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The project owner won’t know the ‘total contract price’ (or ‘total target price’, if the subcontracts use target costs) until all subcontracts have been tendered and awarded. With one (or more) head contracts, the contract price (or target price) is known when these head contracts are awarded, and the head contractor takes the risk of subcontract prices being higher than anticipated.
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Sometimes members of the project owner’s team don’t understand and support the model, and revert to adversarial approaches suited to more traditional models, such as approval rights in respect of every decision the delivery partner(s) wish to make. This behaviour can cause retaliatory behaviour (shading) by the delivery partner(s), undermining the alignment of interests the model seeks to achieve.
Team structure, governance and decision-making
The delivery partner(s)’ personnel are usually co-located with, and integrated into, the project owner’s project team. Because the delivery partner’s profit margin is tied to project performance against the agreed whole-of-project KPIs, it serves each delivery partner’s financial interests to ensure its employees put the interests of the project first. The delivery partner might achieve this by offering its employees a bonus, based on the profit the delivery partner makes on the project.
Because the delivery partner’s profit is tied to whole-of-project outcomes, it will want as much influence as it can get over decisions that will affect project outcomes. It will be especially concerned about the project owner making, or delaying, decisions that adversely affect the project’s performance against the agreed KPIs.
The desire of the project owner to retain control over certain decisions such as the award of subcontract packages or the review of detailed design can create tension between the project owner and the delivery partner(s).
But the alignment of interests achieved by the payment regime should enable the project owner to delegate authority to the delivery partner(s) with confidence, and thereby avoid such tension.
Comparison with other collaborative contracting models
At the end of this article is a link to a table that compares the delivery partner model with other collaborative contracting models
Track record, in Australia and globally
The label - ‘delivery partner model’ - is new, but the underlying concepts are not.
The delivery partner model is very similar to the EPCM model, construction management and (many) managing contractor models which have been used in Australia and globally for years.
The three-limb alliance style payment regime has been used in Australia since the early 1990s when Australian project alliance contracting was born. But in that context, it applies to all key project participants. If performance by a particular contractor is considered critical to the project's success, the relevant contractor would be made a participant in the alliance, rather than a subcontractor to it. Applying this regime to the delivery partners, but not key subcontractors, won’t generate the same results.
The ’delivery partner’ label was first applied to an Australian project on the Woolgoolga to Ballina Pacific Highway Upgrade, awarded in 2015.
The UK government applied the label to the construction of the London 2012 Olympic Games infrastructure including the velodrome, aquatics centre, media centre and Olympic village, as well as 2km of new sewers and 265 km of ducts for new utilities.
The model/label has since been used in Australia and globally on many projects and programmes, including:
in Australia, Sydney Water’s Lower South Creek Treatment Program, Sydney Metro’s City and South West project, and the Western Sydney Airport; and
globally, Lima 2019 Pan American and Parapan American Games, Expo 2020 Dubai, the NEOM project and California’s High-Speed Rail project.
The concepts have been deployed on many more projects, over many years. The results, of course, have been mixed, for a range of reasons, many unrelated to the choice of contract model.
Will it work for the Brisbane 2032 Olympics?
There’s no reason why, properly implemented, it shouldn’t work. But whether it will be properly implemented remains to be seen!
