Client, contractors and consultants all working together to deliver a project, with minimal disputes? Although it may sound like a fairytale, this article looks at some ‘relationship based’ procurement models that strive to make this a reality. We’ll also explore when and how these models can be used to achieve best-for-project outcomes.

What is Relationship Based Contracting?

Relationship based contracting (RBC) models encourage the parties in a construction project to focus on long-term project outcomes; a move away from traditional contracting arrangements (such as Build-only and Design-build) which are adversarial and often lead to confrontation and disputes between the parties.¹  

RBC promotes collaboration and sharing of risks between parties to try and achieve outcomes that are best-for-project, rather than solely in the interests of the respective parties. This differs from the traditional models that allocate risks to either the builder or the client, and where the commercial drivers lead parties to protect their own position to minimise their risk/loss, even if this is to the detriment of the project. Instead, RBC incentivises the parties to collaborate, innovate and share risks.   

Why should you think about this for your project?

The traditional model is often criticised for incentivising parties to do ‘no more than the minimum’. This is rarer under RBC contracts where best-for-project outcomes are incentivised and rewarded. Importantly, the flexibility of RBC allows whole of life costs for the project to be taken into account.  There is also potential for lower project delivery costs as parties are encouraged to highlight issues earlier and resolve them collaboratively.

RBC is typically adopted for complex, large-scale (and usually Government)² projects, but aspects of RBC can also be applied to smaller scale projects too. 

The benefit of incorporating RBC aspects into smaller and/or private sector projects has been recognised by the Standards New Zealand Review Committee in the current revision to the NZS 3910:2013 construction contract. The Committee has proposed amending the standard NZS 3910 ‘traditional model’ construction contract to add a target cost pricing mechanism. Target cost pricing is a key feature of alliancing aimed towards providing a fairer basis to allocate cost risk between the parties (we discuss this in more detail below).

We expect to see RBC, or aspects of RBC being more widely considered for use in the private sector as limitations with the traditional models continue to be recognised. 

Alliancing model

The alliancing model establishes the client, builder and consultants as joint ‘participants’ who share project risks and rewards. Alliancing promotes collaboration by having a pricing mechanism where the participants share in the ‘pain’ and the ‘gain’. This is usually achieved through a cost mechanism where a target cost is agreed at the outset of the project and the actual cost incurred on completion is then assessed against this target cost. Cost control is achieved through open-book auditing of all expenditure. 

Typically, the participants share in the ‘overs’ and ‘unders’ as against the target cost, with performance measured against agreed KPIs. Usually, the project owner will pay the participants’ actual costs, but the participants will contribute to any ‘overs’ up to the level of their profit margin. This provides an incentive for the participants to keep costs under control – otherwise they are in effect working for free. Bonuses are often payable to the participants for ‘unders’ – this is aimed at incentivising parties to achieve cost efficiencies. 

The KPI regime also allows other factors, such as the projects’ health and safety record and environmental and social outcomes to be incentivised and rewarded, or punished as the case may be. 

Alliancing allows parties to freely innovate by adopting a ‘no sue’ arrangement where they resolve their disputes internally, by unanimous decision-making (with some exceptions, such as for willful default). Parties are then free to innovate and drive efficiency through appropriate risk taking and developing solutions to increase productivity and output, without having to worry about whether that is a ‘tried and tested’ solution, to protect themselves in a future claim.  

One reason alliancing is not commonly used on smaller projects is because a project-specific management structure needs to be established to run alliance contracts. This can impose a high administrative burden, particularly on the owner as it will be heavily involved in the day-to-day project decision-making. However, as seen with the proposed target cost regime in the review of NZS3910, there are some key aspects of this model that can be considered and applied for smaller-scale complex projects.³ 

Alliancing has not typically been used in New Zealand in the private sector, or for large vertical projects. We can see no philosophical reason why alliancing would not be successful in a private sector context, particularly for a complex project, where the scope was not clear at the outset. Vertical projects typically have more complex and fragmented supply chain arrangements, which means that subcontracting arrangements would need to be carefully considered. For example, consider sub-alliance arrangements for key sub-trades to ensure that the alliance incentives are properly transferred to the supply chain.  

Enterprise model

As the name suggests, the enterprise model involves the client setting up an enterprise of industry players that work collaboratively to achieve long-term objectives. The model recognises that success in the infrastructure sector requires clients to take ownership of their projects and invest in long-term, direct relationships with their suppliers.

The rationale for using an enterprise model includes:

• Ongoing pipelines of work and long project durations require a long-term focus and the development of capability across the sector.
• Innovation and agility is required to deliver technically complex projects.
• The scale and complexity of some projects means that it may not be feasible for them to be undertaken by a single company.
• The broader social outcomes sought by many infrastructure projects mean that it is not appropriate to focus purely on budget. 
• The large number of stakeholders and interfaces across the sector requires the client to take a more ‘hands-on’ approach.

The most well-known model of this type internationally is ‘Project 13’, a creation of the Institute of Civil Engineers, the World Economic Forum and the Civil Engineering Contractors Association. A typical Project 13 project involves a sophisticated client who clearly defines the outcomes, manages stakeholders and works collaboratively with the enterprise members developing rules, processes and practices to govern the way they interact with suppliers and make decisions. A separate party known as the ‘integrator’ drives the enterprise members to deliver the agreed project outcomes. 

Not all Enterprise models are Project 13 models. In New Zealand, an enterprise model has been independently developed by Watercare to achieve its 40:20:20 ‘Build Better Infrastructure’ vision  (a 40% reduction in carbon emissions from construction by 2024; 20% reduction in cost of construction by 2024 and 20% year-on-year improvement in health, safety and wellbeing). The Watercare enterprise began as a 10 year partnership between Watercare, Fulton Hogan and Fletcher Construction, and has now grown to include a panel of consultants comprising Aurecon, Stantec, Beca and WSP.

Panel contract / framework agreement 

A panel contract, also known as a framework agreement, essentially consists of a group of suppliers that have been pre-approved by the client through an open tender process to procure the project. After suppliers are selected, goods and/or services are procured from them under the framework agreement. The main benefit of the model is that, once a panel of suppliers has been created, the client can directly source from the panel without openly advertising in the market. This is particularly beneficial where there is an ongoing need for a product or service. 

Framework agreements can help promote good long-term working relationships between clients. The parties agree a set of terms and conditions and pricing or rates (usually indexed) which will apply for an agreed period of time (potentially including renewals). This allows clients to reduce the up-front administrative, legal and procurement input for their projects, as the terms and conditions only need to be implemented once for the duration of the term.

Practical implications 

To achieve aligned goals under RBC, parties need to commit to acting collaboratively. This moves the focus away from each party protecting its own interests (as in the traditional model) and shifts focus towards the long-term interests of the project, and ultimately the asset. 

The use of RBC does need to be driven and led by the client’s procurement strategy. Repeat clients (such as property developers or the Government) should certainly be interested in the long-term benefits that can be achieved under RBC models.  

1. See our article published in March 2023 for more on these two models.↩
2. For example, City Rail Link (New Zealand’s largest transport infrastructure project), Waterview Tunnel, Central Motorway Junction, Victoria Park Tunnel and the Central Interceptor.↩
3. See proposed new clause 2.5 in DZ 3910:202X ‘Conditions of contract for building and civil engineering construction’ Standards New Zealand.↩