Strategic Long-term Collaboration Contracts: a critical tool for improved construction productivity and value
The challenge of poor construction productivity
Poor productivity is the single most important issue facing the construction industry. Consequently, project owners pay more for construction work than they should, and industry participants have not had the ability to convert productivity improvements into improved margins. Higher construction costs have been pushed onto users, via higher prices and higher taxes. The issue is not unique to Australia.
But the problem now has an additional element to it in Australia, as the Australian construction industry has reached capacity and is not able to deliver all the infrastructure and housing Australia needs to service our growing population. Continued inability to deliver all the infrastructure we require will slow our economic growth and reduce our living standards. Accordingly, improving construction productivity is not just an issue for the construction sector. It has become an issue requiring government leadership.
There is no shortage of suggested solutions to improving construction productivity – there are countless reports containing recommended solutions, including Latham, Egan, Wolstenholme, Farmer and, most recently, the Australian Constructor Association’s Nailing Construction Productivity report.
Sustained implementation of the solutions has proven difficult.
The deficiencies in the present system are largely a product of how the relationship between government and contractors has evolved. It is time for a major change in the way these relationships are managed. Collaborative contracting is an attempt to introduce some obvious common sense.
Too much short-term focus
A key theme that runs through the reports and recommendations is the industry’s myopic focus on short-term outcomes. Most project owners focus on optimising value for money on a project-by-project basis, with capital costs weighted heavily. Some consider whole-of-life cost, but again on a project-by-project basis only.
Responsibility for key decisions during the project planning and delivery phases (or for developing the recommendations to support upstream board decisions during these phases) often falls on the owner’s project director, whose performance will be assessed based on the project’s outcomes.
While this process can generate ‘best for project’ decisions, opportunities for the owner to optimise value for money on its capital works pipeline over the longer term don’t get the attention they deserve.
Low-hanging fruit, that will ripen with time
As such, perhaps the most effective way for many project owners to shift the dial on construction productivity moving forward is to remove the project-focused blinkers and expand their thinking to include initiatives that will improve value for money over their longer-term project portfolio.
There is growing evidence, both within Australia and internationally, that the best way for owners to do this is by putting long-term multi-party collaboration contracts in place with their preferred contractors and consultants that provide a framework, processes and incentives that encourage and reward the implementation of strategies that deliver improve value to the project owner beyond any single project. Some noteworthy examples are mentioned in the appendix.
In Europe, such contracts are referred to as framework alliance contracts. In the Australian context, strategic collaboration contract or strategic alliance contract is probably a more apt term to describe them.
Features of strategic collaboration contracts
The key features of these contracts are as follows:
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They endure beyond any single project. They are designed to incentivise investment in strategies that can deliver improved value to the owner over the longer term, such as greater digitisation, modern methods of construction and supply chain collaboration.
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Improved value can take many forms, including cost and/or time savings; improved cost and/or time certainty; improved quality; improved operational performance; improved maintenance; improved warranties; improved staff and other resources; improved health and safety; and/or improved sustainability.
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Strategic alliance contracts will not replace project contracts. Each project will continue to be delivered under project-specific contracts, as usual.
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Instead, strategic alliance contracts fill important gaps left by project contracts, for example:
providing a ‘route map’ for sustained long-term collaboration, by describing agreed processes for planning, risk management, problem-solving, shared learning and performance review at the portfolio level;
overcoming the ‘Groundhog Day of lost learning’ that occurs when good practices and innovations developed on one project are not easily transferrable to the next; and
providing incentives for non-owner participants to collaborate with each other, the owner and their respective supply chains to discover how their supply chain arrangements can be optimised to deliver better value for the project owner across the portfolio (without reducing supplier margins).
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They enable the owner to reward the non-owner participants for the improved value created. Potential rewards can include:
the allocation of profit-generating project work to non-owner participants without the cost and drain on resources associated with competitive tendering processes; and/or
incentive payments, that effectively share with the non-owner participants a portion of the improved value that they have enabled.
These reward arrangements can provide the basis for the business case of supply chain members to invest in value-creating initiatives, such as manufacturing facilities for modern methods of construction.
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Construction projects require coordinated input from multiple participants to be successful. The same is true of longer-term strategies to improve value across an owner’s project portfolio. Two-party contracts are a barrier to the communication needed for success. Multi-party contracts can overcome this barrier by creating the direct contractual links needed to facilitate the communication, information sharing and integration required to successfully implement long-term value improvement strategies.
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They provide the foundations for agreed activities that are needed to jointly develop strategies and build trust, to create and sustain a collaborative environment for the project owner’s portfolio of projects.
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Information sharing requires appropriate protection of confidentiality and intellectual property rights. Documenting these rights within chains/tiers of two-party contracts is clunky and leads to gaps that inhibit information sharing. It is easier to create the necessary network of confidentiality and intellectual property rights under a single multi-party contract to which all relevant participants are a party.
A standard form contract exists – no need to reinvent the wheel
A ‘gold standard’ standard-form framework alliance contract exists in FAC-1. More than £100 billion of construction work in the UK and other jurisdictions has been delivered under the umbrella of FAC-1, led by public and private sector clients. Many of the examples in the Appendix use FAC-1.
As already mentioned, project owners can continue to use their preferred forms of project contract. A FAC-1 strategic alliance contract would sit across the top, fill in the strategic gaps, and give way to the project contracts in the event of any inconsistency.
Conclusions and recommendations
The opportunities that strategic collaboration contracts offer to project owners to obtain continuous improvements in value over the long term are low-hanging fruit. Some astute project owners within Australia already recognise this.
Given the impact that low construction productivity is now having on the sector’s capacity to deliver all of the infrastructure that Australia needs, governments should show leadership by trialling the use of strategic collaboration contracts across their infrastructure project portfolios.
Such agreements could become a mechanism by which State agencies get their supply chains working towards enabling the State to achieve its performance targets under Commonwealth-State funding agreements. The reward for doing so could be the allocation of work flowing from any additional funding obtained.
Indeed, such agreements could also involve multiple owner organisations (eg the road authorities from multiple/all states/territories) to facilitate collaboration with supply chains across jurisdictions on sector targets.
It is recommended that we avoid reinventing the wheel and instead leverage the considerable learnings that have been developed internationally and reflected in the FAC-1 framework alliance contract. Governments and industry associations should facilitate this.
Opportunities also exist for astute contractors and consultants to take the initiative and present asset owners with frameworks and strategies for improving value over the asset owner’s project portfolio.
Appendix – Examples
Noteworthy international examples include:
The UK’s Crown Commercial Services use of framework alliance contracts for a wide range of construction services, on behalf of more than 300 project owners including Transport for London, Network Rail, National Highways and the Defence Infrastructure Organisation;
The Surrey County Council framework alliance with Kier Highways and others which used supply chain collaboration led by Kier to generate highway maintenance savings in excess of 12% over a 5 year period plus a number of other benefits;
Anglian Water’s @one alliance which created an integrator alliance that aligned long term supply chain relationships to Anglian Water’s desired customer outcomes;
Ministry of Justice Framework Alliances for the Cookham Wood, HMP Berwyn and Five Wells projects
The Connect Plus collaborative framework to deliver a £350m highways asset management programme using two-stage open book within the 30 year concession.
The multi-client schools framework alliance created by Hampshire County Council, Surrey County Council, Reading Borough Council and West Sussex County Council under which three contractors jointly engaged with tier 2 and 3 subcontractors and suppliers to identify pipeline opportunities available, allowing the supply chain to contribute cost efficiencies and other benefits through early engagement;
The multi-client, multi-contractor framework alliance created by Hackney Homes and Homes for Haringey (together SCMG) to deliver their £240m housing improvement programme using Two Stage Open Book with Early Supplier Involvement (ESI) through strategic supply chain collaboration.
Australian examples include:
The Victorian Government’s Level Crossing Removal Program which has been delivered under several long-term Program Alliance Contracts;
Sydney Water’s Partnering for Success program which is being delivered under three long-term program alliance contracts;
The MTIA’s Program Development Approach for the Victoria’s road building program,
albeit some don’t incorporate all of the features explained above.
Further details on the above examples can be found in the below-referenced publications by David Mosey.
References
Construction Leadership Council, Procuring for Value, 2018
Egan, Sir John, Rethinking Construction, 1998.
Farmer, Mark, Modernise or die: The Farmer Review of the UK construction labour model, 2016
HM Government, Construction Playbook: Government guidance on sourcing and contracting public works projects and programmes, 2020.
Latham, Sir Michael, Constructing the Team, 1994.
Mosey, David Constructing the Gold Standard - An Independent Review of Public Sector Construction Frameworks, Centre of Construction Law, Kings College London, 2021
Mosey, David, The FAC-1 Framework Alliance Contract: A Handbook, London Publishing Partnership, 2023
Wolstenholme, Andrew et al. Never waste a good crisis: a review of progress since Rethinking Construction and thoughts for our future, Constructing Excellence, 2009.
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