New delivery models see uptick

An alliance of parties that delivers a project assumes less of the risk, and the contracts can include provisions intended to ensure there are no disputes

NEW infrastructure delivery models such as alliance contracting, as well as bidders looking for relief in time and money from COVID-19, are just two trends in procurement and contract structuring that lawyers who practise in the construction and infrastructure sectors are noticing.

Alliance contracting — akin to the integrated project delivery or progressive design-build infrastructure delivery models — involves a single contract between the project owner/financier/commissioner and an alliance of parties that delivers the project or service.

“There’s beginning to be a trickle of projects using the alliance model, sometimes called the IPD — integrated project delivery — or progressive design-build,” says Doug Younger, chairman of the Infrastructure Group at Aird & Berlis LLP in Toronto.

The model is best suited to projects with considerable and ascertainable risks and where multiple owners may be involved. An alliance of parties that delivers the project assumes less of the risk, and the contracts can include provisions intended to ensure there are no disputes.

Alliance contracting has been used in the United Kingdom and in particular in Australia, although it is still “very new to the Canadian marketplace,” says Younger, adding that the restoration of Toronto’s Union Station is currently the only project in Canada using it.

Union Station, a century-old building, is owned by the City of Toronto and province of Ontario. “You’ve got a complex ownership structure, and it would be very difficult to do a P3 [public-private partnership] bid and ask proponents to shoulder a whole lot of permitting risk, environmental risk, geotechnical risk and so on,” he says.

There is much overlap between IPD, progressive design-build, the construction manager/general contractor model in the U.S. and alliance contracting, Younger says, but “the essence of them is that they involve greater collaboration between the owner of the project — typically a government agency — and the design builder in the early phases of the project and a greater amount of risk sharing than you would see on a P3 project.”

A project such as Union Station’s restoration lends itself less well to a P3 model, he notes, because, in that model, governments typically establish value for money, or price, and attach it to the various elements of risk.

The private-sector party is being asked to shoulder “a huge amount of the project risk” in the P3 model, says Younger, but for a project such as the Union Station restoration, “it’s not easy during the procurement phase to ask proponents to go in and do their own due diligence. With an existing structure that’s been around for a long time, they can’t open up the walls [or] floors.” So, if proponents are asked to bid a fixed price on such a project, “they would likely build a massive contingency fee in to cover the risks of all of the unknowns,” including environmental and geotechnology issues, which would likely make the price unpalatable to the owner, he says. “That’s how Union Station came up with the alliance [model].”

The alliance contract is a trend, says Sharon Vogel of Singleton Urquhart Reynolds Vogel LLP in Toronto. In the late 1990s, P3 contracts were the flavour of the month, she says, but, in the past couple of years, parties have considered where the P3 model is working and whether it needs adjustments, including in relation to dispute resolution.

“Parties have looked to the alliance model as a potential alternative for larger infrastructure projects.”

However, Vogel says, “In Australia, the experience hasn’t been entirely positive.” There have been some projects that have not gone well, she says, including for a briquette factory that suffered “a huge loss” on the project. “No model is a panacea.”

In Saskatchewan, John Dipple, a partner at MLT Aikins LLP in Regina, says he is seeing “a willingness to use alternate contracting models to deliver the projects, whether they be P3 or IPD. There is growing recognition that they are tools to be used.”

The P3 model came late to Saskatchewan and was used aggressively for a time, but it involves a “significant project risk transfer,” and its time may have passed, says Dipple.

“P3s involve a significant project risk transfer for which there is a reasonable risk premium paid. But more importantly for a midsize market, the risk transfer model leaves out a lot of [the] local project participants. So, the consultants and contractors and tradespeople were only able to play supporting roles in the project delivery; they weren’t the main participants.”

Local construction participants have indicated to government that the P3 model “was not as good for them as it might have been for the Bay Street financiers and some of the large, out-of-province-based firms,” says Dipple. “IPD and some of the collaborative contracting is a way for the Main Street contractors and project participants to regain market share where the risk transfer is much less of an impediment for their participation.”

Because alliance contracting, or IPD, involves a less onerous risk transfer to the contracting parties, it’s more conducive to mid-size market participants, says Dipple.

The awareness of these models in Saskatchewan is increasing, and as the experience with them increases, they’ll become more prevalent, he says. From a contractor’s point of view, “the pursuit cost for securing the work is less, because they’re being selected in a procurement process based on experience” rather than bid price.

Smaller IPD projects, particularly in the social infrastructure space, may be contracted that way because owners want to be more involved than they normally are on typical design-build projects but are not comfortable with their level of expertise in managing the construction themselves, says Adam Lewinberg, a partner at Gowling WLG (Canada) LLP in Toronto. An IPD is “a way of having a high level of participation,” he says, and “a lot of those projects have ended well.”

Lewinberg says his firm’s offices in the U.K. have done a good deal of alliance contracting, which he calls very good for procurements, especially in the defence space.

“Alliance contracting there is [starting] to be used in a broader context, for delivery of health services in regions in the U.K.,” he says. “Alliance contracting allows you not to allocate all risks together, but you can be more dynamic in terms of how you deal with those and come up with different solutions.”

Risk structuring in contracts has seen a trend toward early contractor involvement, says Dipple, a procurement model that allows a builder to engage in a construction project and even start work before the design has been completed. It’s a benefit touted in the construction management model, in IPD and even design build, he adds. Early contractor involvement aims to “improve the constructability of a project and minimize design co-ordination claims. These are good things both from an owner and a contractor’s point of view.”

Aligning the interests of owners and contractors related to relief events is top of mind during the COVID-19 pandemic, and another trend in contract risk allocation is for owners to be more willing to compensate contractors for cost but not profit, says Dipple. 

“If the event happens, the contractor is not motivated to draw the event out; they’re motivated to solve it, to reduce the impact, because it’s not increasing their profit. It’s just extending the time they’re on the project.”

Owners are also assessing contracting parties against their needs to travel, due to interprovincial travel restrictions, as part of the evaluation process. “Having key people fly in, fly out, drive in and drive out is no longer seen as an essential or necessary part of the project.”

Project bidders are looking for relief in time and money, says Younger. If the pandemic continues, bidders want extra time on the basis of closure orders, supply chain disruptions, employees who are refusing to come to work or call in sick. And they want more money in order to implement social distancing and run more shifts, involving overtime.

Proponents want to be fully compensated and they want schedule relief. “Owners, on the other hand, are hoping that project co [project company, the term used in project agreements for the project entity responsible for the design, build, finance and delivery of the project] will retain some of the risk in order to incentivize project co to implement a workaround and deal with the problem.” So, owners may offer partial compensation and agree to pay senior debt service as long as the effects of the pandemic continue but not pay any further compensation.

“Typically, owners are prepared to provide schedule relief so long as project co can demonstrate that any delays have in fact been caused directly by the occurrence of the pandemic.”

The pandemic may also benefit the more flexible procurement models.

“The economic impetus in getting shovels in the ground — a reaction to [the] slowing economy and unemployment — is driving people toward thinking about more traditional procurement models, where you can turn projects around and get people working quite quickly, as opposed to some of the public-private partnerships where you need a lot more overhead [and a] much longer procurement period in order to get shovels in the ground,” says Lewinberg.