Industry Watch – Alliance Arrangement Models – What are They and How Do They Work

In a recent post we learned that the Specialist Engineering Contractors’ (SEC) Group is promoting “Alliance Agreements” to deal with procurement concerns.

Today I want to talk about how these arrangements work and discuss similar arrangements around the world that use the same strategy.

Virtual Organizations

One of the principle tenants of alliance agreement is the formation of a “Virtual Organization” between multiple parties.  This is a unique method of creating a legal entity that falls short of forming a Joint-Venture (JV) partnership yet goes further than typical construction agreements.

In a Virtual Organization the various parties associated with a project become co-signers to a mutual agreement.  The agreement defines the various responsibilities of each party.  By defining these duties under one agreement a form of partnership is created.

This scheme goes so far that even liability insurances are written in the name of the Virtual Organization.  Employees of each of the co-signers are also seconded to the alliance agreement therefore making each employee a virtual employee of the venture.

In alliance agreements, the parties share in the profits and the losses of a project.  Each party is paid for their direct costs.  All costs including labor are tracked in an open book fashion.  Non-Owner participants (the Architect and the GC) are paid their overhead and profit based on an audit of performance and the overall performance of the project.

Integrated Project Delivery

In a similar way the American Institute of Architects have been promoting Integrated Project Delivery (IPD) agreements.

IPD agreements do not go as far as Alliance Agreements but they take a similar approach.

The concept behind IPD agreements is simply that of a three way agreement between the Architect, the owner, and the General Contractor.  IPD agreements replace traditional two party agreements between the Owner and Architect and between the Owner and General Contractor.

The concept of IPD agreements is largely the same as the concept of Alliance Agreements. Turning adversarial relationships between Architects and General Contractors into partnerships is the objective.

IPD agreements share many of the same concepts as Alliance Agreements except that under IPD employees of the parties are not seconded to the Alliance and each party under an IPD still must hold their own insurances.

Birth of Alternative Agreements

Under each of these contracting schemes the running theme is the same.  Owners have long been plagued by the battle between Architects and Builders.  Despite the many benefits of our current “check and balance” system a more cooperative relationships desired.

For far too long Owner’s have been caught in the feud between two extremes.  Neither the sloppy back-of-the-napkin type builders who completely disregard details on Architect’s drawings nor the Activist Designers crafting lofty homages to world peace benefit their owners.  In it’s worst form the adversarial relationship between Architects and Builders causes delays, arguments, and cost over-runs.  At it’s best, the checks and balances between designers and builders gives Owner’s the best of all worlds ensuring that projects don’t lean too far one way or another.

These alternative forms of agreement are meant to bring all the parties together under a single unified agreement to ensure optimal cooperation and collaboration.

Closing

Since the AIA released it’s IPD method of project delivery (more than 10 years ago), very few IPD contracts have been written.  The industry continues to use traditional design-bid-build stipulated sum agreements with very few exceptions.

It’s not entirely clear why IPD has not gained more ground.  Alliance Agreements go way further than IPD and can be far more intrusive.  It is possible that the depth of Alliance Agreements will be embraced by all parties and that the lack of adoption of IPD is because it did not go far enough, but builders and architects may shun this model as well and the industry may simply go on using traditional models.

What do you think?  Will Alliance Agreements gain popularity?  Or will these arrangements flop the way IPD flopped?  Perhaps you have work under one of these agreements and can share your experience?  Tell me your stories.

Thanks for reading.  If you enjoyed this content, please feel free to browse my previous articles and please like, share, comment, and subscribe.  This helps promote my content and is greatly appreciated.

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