Collaborate or bust? Choosing the right contract model
Market Insights
One of the most important, yet frequently understated, elements of success in construction & infrastructure projects is selecting the right contract model. Although no one contract model is perfect for all projects, it is possible to select the best or most appropriate contract model to achieve desired project outcomes and manage project-specific risks.
This requires an understanding of the most important project drivers for the particular project, and an ability to understand and apply the right contract models to best deliver on those drivers.
Overview of contract models
There are a variety of contracting models available and we have provided an overview of some of these, and their key features, in the table below.
In considering contract models, it is also possible to “mix and match” payment approaches and blend between models where appropriate. For example, whilst ITC is listed as a separate model below, it is often simply a D&C Contract with an ITC payment regime (and some consequential adjustments to risk profile) and there are cost reimbursement features of ITC Contracts which are similar to those found in Managing Contractor Contracts.
| Construct only | D&C | Early Contractor Involvement (ECI) | Incentivised Target Cost (ITC) | Managing Contractor | Alliance | |
|---|---|---|---|---|---|---|
| Overview | Design is provided by the Principal and the Contractor constructs the works in accordance with that design. | Preliminary design (or no design) and a Design Brief / Project Requirements is provided by the Principal. Contractor undertakes design and construction (often in parallel). | Contractor is engaged earlier in the project timeline to provide input and design development (sometimes as part of a competitive process). Often, an ECI will end with the ECI Contractor making an offer to carry out the project (eg under a D&C Contract). | Collaborative payment model (open book basis). Costs incurred by the Contractor are reimbursed (plus margin) and there is a Target Outturn Cost (TOC). If the actual costs are less than the TOC, the parties share savings ("gain share"). If the actual costs are greater than the TOC, the parties share the loss ("pain share"). | Managing Contractor is engaged to manage the project, including managing the design, budget, program and subcontractors. The Managing Contractor is often reimbursed for subcontractor costs, but makes direct quality and time promises to the Principal. | A multi-party framework where all participants (owner and non-owner participants) work as one team to make decisions and deliver the project. Often liability is expressly minimised and a sharing of risk / reward on costs. |
| Use Cases | Principal requires high level of design control. Example projects: Office fit-out project; highly specialised works (eg secure facilities). | Functional outcome is sufficient (full design control less important) and time savings possible by overlapping design and construction activities. | Where early design input can save time and/or encourage innovation, including in a "smaller" contract. | Where the cost of the project is unknown and difficult to price (rather than seek to price a huge risk margin). | Where coordination of multiple subcontracts is required and Principal wants more cost control & management expertise with more transparency than D&C. Often coupled with a "best endeavours" time promise. | Where there are high project risks or complex and uncertain scope. Also used for long term contracting arrangements. |
| Payment | Lump sum (typical), but can be other methods. | Lump sum (typical), but can be other methods. | Lump sum (typical), but can be other methods (noting "services" based contract). | Cost reimbursable with gain share / pain share. | Fixed management fee; approved subcontractor costs; and options for incentive payments (eg for achieving cost / program targets). | Cost reimbursable plus fees with gain share / pain share and at-risk components. |
| Level of Collaboration | Reduced | Reduced | Moderate | Moderate | Moderate | High |
| Key advantages | High degree of control over design. | Single point accountability for design & construction. Design and construction can occur in parallel. Allows Contractor some design flexibility provided Design Brief outcomes are achieved. | Allows expert input on buildability and other issues early in project Can foster competition (if competitive ECI process). | Can avoid windfall gains and windfall losses (for both parties). Useful when scope is difficult to price, or potential for major risk issues to crystalise. | Combines single point accountability with flexibility and collaboration (open-book trade pricing provides transparency and accountability). | Encourages open communication and innovative problem-solving (can minimise traditional claims / disputes). |
| Key challenges | No single point accountability for project issues (can lead to finger pointing between design and construction). Rigidity of design - variations required to make any design adjustments. | Lower level of design control for Principal. Can result in issues if value engineering is too aggressive. | Can require additional costs for Principal at start / early stages of project Can be more intensive administration for Principal (particularly if competitive ECI). | Less cost certainty for Principal. Can be more intensive administration for Principal. | Less time certainty (often best endeavours). Can be more intensive administration for Principal. | Accountability for individual member performance. Complex governance structures. Requires actual, genuine collaboration from all parties to be effective. |
A word on complexity
As projects become more complex, quite often so do their contract structures and terms, running into 1,000s of pages of contract documents.
This is true across all contract models, not just “new” or “innovative” collaborative contracts.
As the construction & infrastructure industry examines and uses various models, it is worth keeping in mind that contract complexity can, of itself, introduce risk to a project. For example, risk of delay to transactions proceeding (lengthy negotiations) and the risk of misunderstood and mispriced risk profiles (which can lead to future disputes).
In considering contract models and terms, our view is that when using complex or innovative contract structures, there is often significant scope to streamline contract terms, which can help achieve better overall project outcomes for all parties. We understand clients have unique goals and drivers and we are highly experienced in assisting clients in selecting (or responding to) a range of contract models to achieve the desired outcomes.
This article was written by Simon Walsh, Partner, and Kaitlin Taylor, Solicitor.
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